Cardano reveals in a new report – New world, new decisions – that a majority (70%) of Chief Financial Officers (CFOs) are uncertain about the ultimate objective of their Defined Benefit (DB) pension schemes. In that, half (51%) are seeking external advice to determine the endgame for their schemes but a fifth (19%) said they are not seeking advice.
The report findings, which cover the views of 227 UK CFOs and senior executives with responsibility for their company’s DB scheme (across small, medium-sized and large schemes), come as improved funding positions and burgeoning pension surpluses create a new set of dilemmas for corporates.
Funding position
72% of CFOs state their DB pension scheme is in good financial health. Within that 56% state their scheme is above its long-term funding target and 16% are close to, or in, a buyout surplus.
Yet despite stronger funding positions, 89% of CFOs are unclear on whether their company has the potential to access a future pension surplus. Within that, half (51%) are entirely unsure how a potential surplus would impact their future objective for the scheme. This was reflected across the board for CFOs with small, medium and large schemes.
A tale of two crises
One year on from the market turbulence of Autumn 2022, a tale of two crises has emerged. CFOs of small schemes said they were particularly badly hit. 61% of CFOs of small schemes reported an adverse impact on the funding of their scheme at the time, owing to the loss of hedges at the wrong time.
In contrast, 56% of all CFOs said the crisis had delivered a positive impact on funding at the time. Larger schemes were more positive about the impact of the crisis on liquidity as 19% saw a positive impact on funding with no liquidity issues compared to only 6% of small schemes. Overall, 22% of CFOs with smaller schemes that maintained their hedges felt a liquidity crunch as they either had to sell assets or seek sponsor support to maintain positions. This was true of only 12% of larger schemes.
As a result, we have seen a divergence in scheme strategy for well-funded schemes. CFOs of well-funded large schemes are favouring buyout, with 56% fast-tracking plans. Whereas 33% are de-risking the investment strategy to lock in funding gains and 7% are running-off. The opposite is true for smaller well-funded schemes – 50% of these CFOs are continuing their run-off strategy, 19% de-risking their investment strategy to lock in funding gains, and only 8% accelerating to buyout.
Commenting on these findings, Sinead Leahy, Head of Corporate Advisory Services, Cardano Advisory, said: “We are surprised by the level of uncertainty expressed by CFOs in our report. The findings clearly show a wide range of outcomes playing out a year after the crisis causing many to pause and think about their future pension strategy.
“While it is great to report the majority of schemes are in good financial health, many corporate sponsors clearly would welcome more support in determining the right endgame. There is a lot to think about and the market continues to evolve. Even those considering buyout need to manage this carefully in view of a key consequence of the crisis which is the imbalance which still exists between liquid and illiquid assets in pension scheme portfolios.”
CFOs looking to be more hands on
The findings also highlight a concern among CFOs over their lack of influence on scheme funding and investment strategies.
Asked to assess their influence on schemes’ funding and investment strategies on a scale of one (strong) to five (weak), the average CFO rated their influence at 2.76. Those with large schemes feel the most empowered (2.05), while those with oversight of small schemes have the least influence (3.97).
As big decisions loom over growing surpluses and schemes’ ultimate objectives, Cardano’s research shows CFOs are keen for greater input into decisions. While those with small schemes face the biggest influence gap, CFOs of small, medium and large schemes are united by the desire for more influence than they currently enjoy.
Nick Gibson, Senior Director, Cardano Advisory, commented: “Sponsors and their DB pension schemes have undergone unprecedented change over the last 12 months. From decades of deficits, we are now seeing an increasing number of schemes finding themselves in surplus, or at least on track with their long-term funding targets.
“However, our findings show that for the most part, CFOs are unsure about what this new world means for their pension schemes. There is a clear sense of wanting to exercise greater influence over their schemes. The relationship between CFOs and their schemes is about to become a lot closer as the endgames become more defined and their conclusions near.”
|
