A majority of chief finanical officers (CFOs) are uncertain about the ultimate objective of their defined benefit (DB) pension schemes, according to a survey by Cardano.
This is the case for 70% of CFOs out of which 51% are seeking external advice to determine the endgame for their schemes, the consultancy said.
The survey found that while 72% of CFOs believed their DB pension scheme to be in good financial health, 56% stated their scheme was above their long-term funding target and 16% stated they were close to, or in, a buyout surplus.
However, 89% of CFOs were unclear on whether their company had the potential to access a future pension surplus. Among those CFOs, 51% were entirely unsure how a potential surplus would impact their future objectives for the scheme.
This was reflected across the board for CFOs at small, medium and large schemes, the research showed.
Cardano said that market volatility last autumn affected schemes in two ways. CFOs of small schemes said they were particularly badly hit. Furthermore, 61% of CFOs of small schemes reported an adverse impact on the funding of their schemes 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, Cardano said there was a “divergence” in scheme strategy for well-funded schemes.
CFOs of well-funded large schemes are favouring buyout, it said, with 56% fast-tracking plans, whereas 33% are de-risking their investment strategies to lock in funding gains and 7% are running-off.
The opposite is true for smaller well-funded schemes, it said, with 50% of these CFOs continuing their run-off strategy, 19% de-risking their investment strategies to lock in funding gains, and only 8% accelerating to buyout.
Sinead Leahy, head of corporate advisory services at 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.”
Leahy added that many corporate sponsors would “clearly” welcome more support in determining the right endgame.
She continued: “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.”
The survey also found that CFOs want to be more hands on. 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).
Cardano said that its research showed that CFOs were keen for greater input into decisions.
It said that while those with small schemes face the biggest influence gap, CFOs of small, medium and large schemes were united by the desire for more influence than they currently enjoy.
Nick Gibson, senior director at Cardano Advisory, said: “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, he said that Cardano’s findings show that for the most part, CFOs are unsure about what this new world means for their pension schemes.
He added that 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.
Read the digital edition of IPE’s latest magazine