CFOs pushed to increase focus on DB schemes

Recent high-profile events involving DB schemes have highlighted problems around funding that CFOs cannot afford to ignore.

The British Steel Pension Scheme's struggle to avoid falling into the Pension Protection Fund, and the Work and Pensions Committee inquiry into British Home Stores and the fate of its pension scheme, together with market volatility since the EU referendum, have pushed DB funding up the agenda.

Both CFOs and trustees need to recognise their interests are aligned around avoiding a situation where the pension scheme deficit becomes unaffordable

Jon Hatchett, Hymans Robertson

Brexit will increase pressure on CFOs by forcing them to divide their attention between their company’s core business and the increasing deficit of its DB scheme, the report by Hymans Robertson said, due to uncertain market conditions and increased pension costs because of factors including low gilt yields.

Fifty-nine per cent of CFOs recognised they needed to spend more time on DB scheme management, while 67 per cent said they were confident their trustees had the matter in hand and it was not a pressing concern.

Another 31 per cent, however, said they thought trustees’ objectives for the company’s DB scheme did not align with their own.

Hymans Robertson’s Jon Hatchett, partner and head of the corporate consulting practice, said it will now become more important than ever for CFOs and scheme trustees to “pool their different perspectives and expertise” to ensure both the sponsor’s core business and the scheme remain secure and sustainable.

“Both CFOs and trustees need to recognise their interests are aligned around avoiding a situation where the pension scheme deficit becomes unaffordable,” he said.

It’s companies’ money at risk

Hatchett pointed out that the survey was conducted before the referendum outcome, so is indicative of a pre-existing concern. However, Brexit may have heightened it, as “funding has been hit” particularly hard for schemes that were not well-hedged.

He acknowledged there are legal limits to how involved CFOs can be in the administration of a company’s pension scheme, but insisted: “It’s ultimately companies’ money at risk... they should have an important seat at the table.” He added that this is what is seen in many healthy schemes anyway.

Hatchett said a more “hands-off” approach might work in specific cases but many CFOs are saying that in hindsight, they wish they had been more involved in schemes’ risk management in particular.

He noted that while some companies have pensions committees which trustees can attend, trustees do not often go to company meetings.

Also, while CFOs might sometimes attend trustee board meetings, a more common forum is a good idea, such as quarterly meetings between CFOs and trustees, he said. This “might help improve channels of communication and relationship building”.

Pull in the same direction, at the same time

Richard Butcher, managing director at professional trustee company PTL, said in response to the findings that while misalignment of trustees’ and CFOs’ scheme objectives is “true of some cases”, most trustees work with CFOs to reach a common goal of paying out benefits as quickly as possible at the lowest cost to the sponsor.

However, “in the short term we can have differences of opinion”, he admitted, largely because trustees have longer time-horizons than CFOs.

He emphasised that there are limits to how engaged CFOs can be with scheme management, and it is the trustees’ legal obligation to manage a scheme. What CFOs could do, he added, is to “wade in and understand the issues, and keep in touch”.

It is essential “to pull together at the same time, not just in the same direction” when tackling the reconciliation of business and scheme strength, Butcher stressed, saying better day-to-day communication is essential.

Butcher expressed his concern that there is “an emerging inconsistency”. Regulators want to make conditions safer for both employers and scheme members, but these goals are “mutually incompatible: you either put in more money or you don’t”.

Have focussed discussions

Sebastian Schulze, director of investment consulting at Redington, said “what you want is a situation where all stakeholders are comfortable with a pension scheme’s strategy”.

It is important “not to build an antagonistic relationship” by not understanding what the other side wants, especially when negotiating contributions, he advised.

He pointed out that since the 2008 financial crisis, employer contributions have not improved schemes’ funding positions in most cases, and this was because neither party took the interest rate exposure into account. This could probably have been avoided if trustees and CFOs had engaged more closely, he said.

Schulze agreed that there is an inherent incompatibility within the DB model between the company’s and the scheme’s needs. However, it is important to remember that “companies are also genuinely interested in doing well by their former employees”.

Schulze advised that it is paramount that a pension scheme can clearly formulate its objectives first of all, and that it then engages with the sponsor about them. Most CFOs receive these approaches positively, he said, and “appreciate being asked for their input”.

More communication will only help if it entails practical discussion, he stressed: “More [contact] time won’t matter if the parties can’t have a focussed discussion.”