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COVID impact on corporate pension schemes scrutinised

The level of employer support for FTSE 350 companies’ defined benefit (DB) pension schemes dropped to a three-year low as a result of COVID-19, before rebounding as lockdown restrictions were eased in the summer, a study released by PwC shows.

The PwC Pensions Support Index (PSI) 2020 shows that in March this year the overall PSI score dropped to 81, the lowest since mid 2017, wiping out almost half of the gains made since the financial crisis and impacting companies’ ability to support their scheme members’ retirement benefits. However, by the end of June, the index had recovered to 87, only one point lower than the same time last year but below the pre-crisis score of 90. The second lockdown and further restrictions through the winter means the outlook remains uncertain. 

The PSI tracks the relationship between the financial strength of the FTSE 350 companies and their DB pension obligations, indicating the overall level of employer support offered to these pension schemes. Rather than just looking at the absolute size of the obligations, it compares the deficit number to the cash generation, profitability and assets of companies supporting their schemes.

Industry sector variations

Unsurprisingly, the PSI score for the consumer discretionary sector, which includes industries such as travel, leisure, hospitality and retail has been hardest hit. In contrast, the employer schemes for companies in both technology and telecommunications sectors have held up well as a greater number of people relied on technology providers as they worked from home. 

“The onset of the pandemic led to substantial falls to the value of pension scheme assets due to adverse market movements and material increases in scheme deficits," said Stephen Soper, partner and senior pensions adviser at PwC. “The severe challenges facing the consumer discretionary sector, not just during the Covid-19 crisis but also in recent years, has meant that many companies operating in this sector have limited or reduced ability to support their pension schemes. In addition, pension schemes may also have held direct or indirect holdings in retail or travel and leisure businesses as part of their asset mix, making them susceptible to fluctuations in the value of these businesses.”

Improved data to work with

While the outlook remains uncertain, scenario planning has improved in recent months. At the start of the crisis, management teams felt uncomfortable sharing forecasts that could significantly change at short notice, meaning that trustees lacked detailed financial information from sponsors. While the ongoing disruption and prospect of increased restrictions means the PSI score is likely to remain volatile in the coming months, there is an increase in the amount of financial information that scheme sponsors are now sharing with trustees. 

“It’s been eight months since the first lockdown, and despite the continued uncertainty, management teams are becoming increasingly comfortable sharing their best view of how their business is expected to perform over the short to medium term with trustees," commented Minesh Rana, pension director at PwC. "In many cases companies have outperformed their forecasts from earlier this year and I have seen growing confidence from management teams in the achievability of forecasts being shared now. In a number of cases we’ve also found it effective to plan for a number of scenarios, rather than waiting to see which scenario would play out. This is going to become particularly important during the second lockdown as it will mean trustees can have an informed voice in the discussions with other key stakeholders whilst they are taking place, rather than being notified of what has happened later down the line, when all meaningful decisions have been taken.” 

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