KPMG UK finds that a fifth of so-called ‘zombie firms’ have defined benefit pension (DB) schemes which could put pension trustees and sponsors in a precarious position.
Further analysis from KPMG UK finds that a fifth of so-called ‘zombie firms’ have defined benefit pension (DB) schemes which could put pension trustees and sponsors in a precarious position.
Of the circa 21,000 UK private companies that KPMG analysed, up to one in twelve (8%) currently display three or more zombie-like symptoms – companies under sustained financial strain.
Out of this population we estimate that a fifth (or around 350 companies) will have DB pension schemes. In many of these cases adequately funding the pension scheme and turning round the business is a significant challenge.
Mike Smedley, Pensions Partner at KPMG said: “It’s clear that DB schemes that are less well-funded and attached to a zombie firm face challenges and will be more susceptible to external risks. Whether it’s change in the economic or political landscape or new regulation, companies and trustees need to avoid sleep walking into further danger.
“The health of pension schemes and sponsors in these situations are entwined, and there’s a real risk of a prisoner’s dilemma situation of second-guessing what others might do. Trustees, sponsors and their associated stakeholders and regulators need to work together to resolve these situations fairly.”
David Clarke, Restructuring Pensions Partner at KPMG said: “Zombie firms do pose a risk to the wider economy and difficulty in dealing with a large DB scheme deficit can be a crystallising event for the company.
“However, even in these difficult situations, there are always options if the parties engage early on in the process. Development of a joint company or trustee strategy will enable the company to take advantage of the flexibilities in the pensions system, whilst protecting scheme members and providing upside for scheme funding over the longer term. Whilst such solutions can be challenging to agree, they protect the company, jobs and members’ pension benefits.”
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About the research:
Using a third-party financial database of over 2.3m companies based in the UK, KPMG UK Economics first filtered to build the sample size using the following criteria; based in the United Kingdom (not Ireland or Overseas Territories); turnover above £10.2m for each of the last three years; net assets greater than £5.1m for each of the last three years; removing subsidiaries to prevent double-counting. This provided a sample of c. 21,000 companies.
From this, KPMG reviewed a number of financial metrics, setting up a range of flags; interest cover less than two (this was given additional weighting, such that a company with interest cover less than zero would collect three flags) for each of the last three years; turnover growth less than 1% for each of last three years; gross profit margin less than 5% for each of last three years; Net Profit Margin less than 3% for each of last three years; liquidity ratio less than one for each of last three years; net debt to EDITDA ratio greater than four; decreasing cash and cash equivalents in each of last three years.
Of the circa 21,000 private companies that KPMG analysed, 60% display one or more of the symptoms associated with zombies, while just 8% display three or more.
There are c. 6,000 DB pension schemes in the UK, the majority of which will be sponsored by the companies in our sample. Based on this and an analysis of the companies displaying zombie symptoms we estimate that around 20% of them sponsor a DB pension scheme.
KPMG LLP, a UK limited liability partnership, operates from 22 offices across the UK with approximately 16,300 partners and staff. The UK firm recorded a revenue of £2.338 billion in the year ended 30 September 2018. KPMG is a global network of professional firms providing Audit, Tax, and Advisory services. It operates in 154 countries and has 200,000 professionals working in member firms around the world. The independent member firms of the KPMG network are affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. Each KPMG firm is a legally distinct and separate entity and describes itself as such.