Despite many defined benefit pension schemes being in surplus, many CFOs still see them as a historic burden that drains resources and are a barrier to growth. However, the narrative is slowly shifting and CFOs should rethink their strategic role. Karen Parker from Isio outlines how CFOs can unlock more value from their defined benefit pension schemes.
Where do CFOs often miss opportunities when managing their schemes?
Now that we’ve moved into a world of surplus, it’s fair to say that some CFOs are taking a breath and thinking, ‘Okay, that’s good. I don’t have to deal with that issue so much anymore’. By leaving the trustees of the pension scheme to manage a scheme that’s in surplus, CFOs may not be as engaged as they could be in thinking about the value in that pension scheme that could benefit the business or members.
What mechanisms are available to CFOs to extract surplus from DB schemes and how can that be done in a way that benefits the business and its members?
Historically, companies have used surplus to secure the benefits with an insurer. That will continue to some extent, especially as insurance has never been more affordable. But there are other uses of surplus, and we’re already seeing a few schemes taking steps in that direction. Some schemes are using defined benefits surplus to fund defined contribution schemes. In that situation, you have surplus that can be used for the benefit of the existing workforce, but without extra cost to the business.
The other potential use of surplus is releasing it back to the business. At the moment, the bar is quite high in terms of the level of scheme funding needed to extract surplus, and it can also depend on what your historic scheme rules say about whether you can or cannot release surplus back to an employer. So it’s a bit of a rules lottery.
We are expecting the Pensions Bill to level the playing field for accessing surplus and to lower the level of funding you need to release surplus from a scheme. I think we’ll see more companies and schemes looking at that mechanism of gradual release of surplus from the pension scheme back to the employer so they can use it in the business. Most likely that will include sharing some of that surplus with members by enhancing their benefits, for example.
On the journey to insurance, CFOs should be actively engaged in that process
What does that journey to insurance involve, and how far ahead should CFOs be planning?
I still think this will be a great option and a likely end game for a lot of schemes, whether that’s insuring as soon as it’s affordable or running the scheme on for a while to generate surplus and then insuring at a later stage.
On the journey to insurance, CFOs should be actively engaged in that process. For example, is the investment strategy optimising the journey to the end goal? How are the risks being managed? Are there flexibilities that could be introduced for members that might help accelerate that journey to insurance?
And finally, I’d encourage CFOs to keep an eye on insurer pricing and how market developments like new insurance players are impacting the market.
When it comes to the insurance transaction itself, the most common delays we see are data issues and illiquid assets. We often find that schemes get to the point where they are able to transact quicker than anticipated so early preparation is key. We’ve also developed our own solution, i-FLO, to help arrange to sell illiquid assets in the secondary market.
CFOs should also consider the accounting impact of an insurance transaction, how that flows through to business metrics and any other implications. Managing the trustees and internal approvals is also crucial.
How can consolidation support business goals and what situations is that best suited for?
There will be a small subset of schemes where there’ll be less opportunity to extract surplus and where insurance is more likely. As smaller schemes run on, benefits are paid and assets get smaller, running costs become a much bigger part of the overall picture. Operational consolidation can help with that journey to insurance by improving the efficiency of the scheme’s operations and reducing those running costs. That means you can potentially get to insurance sooner or you might be able to run on for a bit longer and generate some value. We have our own consolidation vehicles and we’re seeing a lot of companies using those to help with their journey to an end goal.
To find out more, please visit isio.com/pensions or email [email protected]
Despite many defined benefit pension schemes being in surplus, many CFOs still see them as a historic burden that drains resources and are a barrier to growth. However, the narrative is slowly shifting and CFOs should rethink their strategic role. Karen Parker from Isio outlines how CFOs can unlock more value from their defined benefit pension schemes.
On the journey to insurance, CFOs should be actively engaged in that process
To find out more, please visit isio.com/pensions or email [email protected]
