Finance chiefs disagree on pension surpluses

New findings from the Independent Governance Group reveal disagreement among top executives on how best to allocate surpluses in defined benefit (DB) pension plans. The survey, conducted by the professional trustee firm among 100 CEOs, CFOs, and other senior finance leaders, highlights differing opinions on surplus management strategies.

Almost a quarter (23%) of respondents believed excess capital should benefit members in some form, while 21% thought surplus refunds should be paid to the sponsoring employer.

Among those who said members should benefit, 11% thought a surplus should primarily benefit members, and 12% favored a sharing arrangement between members and the sponsoring employer.

The research also showed a lack of consensus about the primary value of a fully funded DB scheme. Just under a fifth (19%) selected the ability to run on and generate a potential surplus, while 18% cited the ability to improve member outcomes.

Louise Davey, head of policy and external affairs at Independent Governance Group, said: “Trustees are no longer solely focused on closing deficits and securing member benefits. Instead, the effective governance of surplus is becoming the new priority as decision-makers work through the increasingly varied options that surplus creates. This requires a completely different mindset.

“Surplus isn’t spare capital. It is the product of an investment strategy that must continue to deliver over the long term. Decisions should begin from this logical starting point. Every scheme will have a subtle picture of how its surplus was generated, so there is no one-size-fits-all approach.

“While market conditions have improved, CFOs shouldn’t become complacent. Surplus can quickly disappear if we aren’t diligent guardians and don’t make decisions that preserve the scheme’s health and long-term value. Good governance is the only way to ensure all potential value is realised for sponsors and members.”

Louise Davey is speaking on surplus use and DB endgame options at the forthcoming Pensions Expert Annual Conference, taking place on 9-10 November at the Fairmont Windsor Hotel. For more information, including the latest agenda and registration, visit our dedicated conference website.