The majority (70 per cent) of chief financial officers (CFOs) are uncertain about the ultimate objective of their defined benefit (DB) pension schemes, with particular uncertainty around the potential use of DB surpluses, research from Cardano Advisory has revealed.

The survey found that of those CFOs that were unsure, more than half (51 per cent) were seeking external advice to determine the endgame for their schemes, but a fifth (19 per cent) said they are not seeking advice.

According to the research, nearly three quarters (72 per cent) of CFOs said that their DB pension scheme is in good financial health, with 56 per cent of this subset confirming that their scheme is above its long-term funding target and 16 per cent are close to, or in, a buyout surplus.

However, 89 per cent of CFOs said they were unclear on whether their company has the potential to access a future pension surplus, while a further 51 per cent were entirely unsure how a potential surplus would impact their future objective for the scheme.

The research also found that recent funding improvements have not been universal, highlighting a "tale of two crises”.

In particular, Cardano found that small schemes were especially badly hit by the market turbulence of autumn 2022, with 61 per cent of CFOs of small schemes reporting 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 per cent of all CFOs said the crisis had delivered a positive impact on funding at the time, with larger schemes more positive about the impact of the crisis on liquidity as 19 per cent saw a positive impact on funding with no liquidity issues compared to 6 per cent of small schemes.

Overall, 22 per cent 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, compared to 12 per cent of larger schemes.

This has also prompted a divergence in scheme strategy for well-funded schemes, as the research found that CFOs of well-funded large schemes are favouring buyout, with 56 per cent fast-tracking plans, while 33 per cent are de-risking the investment strategy to lock in funding gains and 7 per cent are running-off.

However, the opposite was true for smaller well-funded schemes, as 50 per cent of these CFOs are continuing their run-off strategy, while 19 per cent are de-risking their investment strategy to lock in funding gains, and only 8 per cent were looking to accelerate to buyout.

Commenting on the findings, Cardano Advisory head of corporate advisory services, Sinead Leahy, stated: “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.”

Despite the lack of uncertainty around scheme options, the research found that CFOs were keen to become more hands on, with a number of CFOs raising concerns over the level of influence they currently held over their DB scheme's investment strategy.

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 Advisory senior director, Nick Gibson, 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.”

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