Given they use corporate finances to fund deficits, this means there are potentially more risk transfer opportunities in the next few years than trustees realise, says Hymans Robertson.
Key points:
- CFOs show they are willing to consider a plethora of de-risking solutions, in new research from Hymans Robertson
- CFOs are more open to reducing risk than most trustees realise. Indeed, CFOs are almost twice as likely to target buy-outs as trustees – and are eager to start working towards their goal this year
- A significant minority of CFOs (16%) are interested in self-sufficiency as their end goal rather than a buy-out
- There is scope for trustees and CFOs to collaborate more closely to achieve their de-risking goals
Over a quarter (29%) of CFOs are targeting an insurance buy-out as the ultimate goal for their defined benefit (DB) schemes. This is nearly double the 15% of trustees who are striving for the same goal. CFOs are also much more eager to get started straight away, with 63% prepared to start working towards buy-out this year, compared to a mere 9% of trustees.
CFOs stated a variety of end goals for their DB schemes. Not all are wedded to buy-out; 35% simply stated that “having a sustainable scheme” is their end goal, while 16% hope to achieve self-sufficiency by investing scheme assets in a similar way to how an insurer would.
CFOs are also more receptive to finding different ways to reduce risk than many trustees. While 92% of trustees ruled out the possibility of considering a medically underwritten buy-in over the next year, only 25% of CFOs would dismiss this option. Similarly, 78% of trustees ruled out a longevity swap in the next year, while only 25% of CFOs would. This indicates more open mindedness from CFOs to explore the options available.
Commenting on the survey findings, Jon Hatchett, Head of Corporate Consulting, Hymans Robertson said: "With one in seven CFOs considering their DB scheme to be one of the biggest risks to their business this year, it’s no surprise that solving the DB pensions problem is a key priority for CFOs. Brexit has only exacerbated the challenges most schemes face. The high profile pension problems at BHS, Halcrow and Tata Steel are raising this up the agenda and putting pressure on the industry to find solutions.”
“Our survey findings indicate that CFOs are perhaps more open to considering a variety of de-risking options than trustees may realise. Solving the DB pensions problem is an issue at the forefront of CFOs’ minds. Over a quarter (27%) say having a clear understanding of scheme risks and knowing when to de-risk is a key challenge.”
“Our survey shows that while half of CFOs feel that trustees share their objectives, a significant minority – 31% - do not.
This highlights the importance of shared, common objectives between CFOs and trustees, so that the work each does is aligned to the endpoint. Otherwise the chance of wasted time, cost and effort is high, leading to frustration for all. CFOs will have well developed thoughts on the risks they want to keep, or remove, from their balance sheet, as well as how they go about removing them.”
“Many DB schemes are tackling unwieldy deficits. For many trustees and CFOs, buyout may feel a long way off. Just one in five CFOs feel in a position to transfer risk now. But the good news is there are plenty of ways to chip away at DB liabilities whilst progressing towards the ultimate goal of buy-out. By taking slices of risk out of schemes through transactions like buy-ins and longevity swaps, schemes can become more resilient to risk.”
“There’s good news too for CFOs and trustees who are eager to get to grips with de-risking. The insurance market has developed significantly in recent years. There were just five buy-in providers at the start of 2013. Today, there are eight.
That 60% increase can only be good news for UK pension schemes, who are benefiting from more competitive pricing as well as new innovations. Historically there have only been a couple of longevity swap deals for pensioner liabilities below £500m, but the solutions have been simplified to make them much more widely accessible. These market opportunities make the prospect of chipping away at liabilities more realistic than ever before, so we’d urge schemes to consider their options.”
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