As many as 70% of chief financial officers are unsure about the ultimate objective of their firm’s defined benefit pension scheme, and 89% are unclear if they could even access pension surplus, a new survey shows, despite high levels of funding and DB surplus as a result of higher gilt yields. 

 

The report, ‘New world, new decisions’ by investment and advisory firm Cardano, reveals a surprising level of uncertainty among the CFOs of companies with a DB scheme. Seven in 10 are unclear about their fund’s endgame, and nearly 9 in 10 are uncertain about whether they would have a call on any surplus, according to the survey, with half (51%) also uncertain what the impact of a surplus on their scheme’s future strategy would be.  

 

Uncertainty over surplus and its impact was distributed across the CFOs looking after small, medium and large schemes. This is despite the differing impact of last year’s gilts crisis on larger and smaller schemes, with 61% of CFOs of small schemes saying the crisis had an adverse impact on the funding of their scheme at the time because they lost hedges at the wrong time.  

 

The figures, from the views of 227 UK CFOs and senior executives with responsibility for a DB scheme, come as more than half (56%) of schemes above their long-term funding target and 16% close to or already fully funded on a buyout basis, Cardano said. 

 

Sinead Leahy, who heads up Cardano’s corporate advisory services, 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 the majority of schemes are in good financial health, many corporate sponsors would welcome more support in determining the right endgame, she believes. 

 

“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,” Leahy pointed out. 

  

Cardano finds there is now a divergence in scheme strategies a year after the crisis. It found that CFOs of well-funded large schemes favour buyout, with 56% fast-tracking plans, while for smaller well-funded schemes, 50% of CFOs said they are continuing their run-off strategy, with just 8% accelerating a buyout. 

 

As the levels of uncertainty are high, some CFOs are looking to the government for solutions. Those of small schemes are more likely to want more support from government with one in five (20%) saying the role of the Pension Protection Fund should be expanded to help drive consolidation at the smaller end of the spectrum. 

  

The report also found CFOs were concerned about a lack of influence over scheme funding and investment strategies, with influence rated to be lower by CFOs of small schemes.  

 

Cardano identified a desire to take greater control among CFOs across all scheme sizes, with one respondent saying they have “been pushing for a while to increase the say we have in how the scheme is run” and are “slowly getting there in terms of better alignment with our business values and goals”. 

 

Alignment might be one of several reasons for seeking more influence. For example, just 37% of CFOs say they see clear alignment between the environmental, social and governance agendas of their schemes and the sponsoring company, and 39% are working to address this, although half (51%) of CFOs with small schemes do not see this as a priority. 

 

Nick Gibson, a senior director at Cardano, said the findings show that for the most part, CFOs are unsure about what the current environment 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,” he said. 

 

Is your sponsor’s CFO seeking to work more closely with the DB scheme?