Banking News

CFOs Seek Greater Influence Over Pension Strategy

(5 November 2023 - United Kingdom) Cardano, the investment management and advisory business, reveals in a new report that a majority of Chief Financial Officers (CFOs) are uncertain about the ultimate objective of their Defined Benefit (DB) pension schemes, with half seeking external advice to determine the endgame for their schemes.

The report, New World, New Decisions, which can be viewed in full here, was commissioned by Cardano with research conducted by East & Partners.

Key findings also included

• Funding improved, but direction unclear: 72% of UK CFOs report their defined benefit (DB) pension scheme is in good financial health; of these 56% are above their long-term funding target and 16% of CFOs say their scheme is close to, or in, a buyout surplus. Surprisingly, 70% of CFOs are uncertain about the ultimate objective for their scheme. And, 89% of CFOs are unsure on whether the company has the potential to access a future surplus.
• A tale of two crises: Notwithstanding the improvement in funding caused largely by rising yields in the last year, there was a difference in scheme outcome as a result of the gilts crisis, depending on the scheme size. 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, owing to the loss of hedges at the wrong time. This compares to 25% of CFOs with large schemes.
• Scheme strategy diverging: Due to the recent macroeconomic challenges, 56% of CFOs with well-funded large schemes are fast-tracking plans to buyout, with only 7% planning to run-off. The opposite is true for smaller well-funded schemes – 50% of these CFOs are continuing the scheme’s run-off strategy compared to only 8% accelerating plans to buyout.
• A key stakeholder during corporate activity: Pension schemes continue to be a big stakeholder for businesses when it comes to corporate activity. Over a third (37%) of CFOs consider the scheme to be a key stakeholder that could be a potential blocker to corporate activity. This sits in the context that, more broadly, CFOs said they would like more influence on their scheme’s funding and investment strategies. This was particularly the case for those with small DB schemes. Changing UK pensions regulation has also meant an increased need for company engagement with trustees according to CFOs.
• ESG misalignment is the norm: Fewer than two in five (37%) of CFOs see clear alignment between their scheme’s and business’ ESG agenda. While 39% of all CFOs are working with trustees to address this, half of CFOs with small schemes (51%) do not see this as a priority. 80% of CFOs think that trustee boards should be held to the same account on DEI issues as have corporate boards.
• Conflicting views over government support: Almost half of CFOs (47%) want continuity in the Pension Protection Fund’s (PPF) current role, yet one in five (20%) of CFOs with small schemes argue the PPF's role should be expanded to help drive consolidation at the smaller end of the spectrum. CFOs are also divided on the optimum role for Government in the corporate DB market.

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.”

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.”