A new survey reveals that despite improved market performance, the negative impact of pension plans on profitability and the financial health of America's corporations continues to worsen.
More than three-quarters (76%) of CFOs surveyed said pension plans are negatively impacting corporate finances, up 15% from a year ago. At the same time, that trend appears to be worsening, as an overwhelming majority of CFOs (86%) lack a sufficient level of control over the impact their defined benefit plan has on their company's corporate finances.
The survey, conducted among 100 CFOs from North American organizations with an average of $344 million in defined benefit or cash balance plan assets, is the second in an annual series from SEI Investments (Nasdaq: SEIC), a leading global provider of asset management and investment technology solutions.
Impact on Corporate Finance Worsens
Survey responses point to several key areas of concern. Specifically, 62% noted that pension plans have lowered corporate profitability and 29% reported a negative impact on cash flow (almost double last year's results). The number of CFOs reporting a decreased credit rating due to pension impact increased tenfold from 2003 to 2004. Most experts believe these issues are further complicated by heightened disclosure requirements and increased scrutiny around pension related accounting practices.
"This has become an acute pain that is now spreading well beyond the traditional pension spectrum," said Jim Morris, Senior Vice President of SEI's Retirement Solutions. "Credit analysts, equity analysts and bankers are becoming keenly aware of how pension plan decisions are impacting corporate finance and they want to know that companies have a strategy to control this impact."
The survey shows that CFOs are spending more time on their pension plans today as compared to two years ago and 41% of those surveyed admit that their company's plan is distracting them from running the business.
Rate of Return vs. Volatility of Contributions
More than three-quarters (78%) of CFOs believe that volatile and unpredictable contributions are the biggest burdens in maintaining their defined benefit plans. At the same time more than two-thirds (69%) of those surveyed say rate of return continues to be the most important measurement of success, despite the fact that it is beyond their control and represents only one factor in managing contributions.
A majority of the CFOs (60%) say they have adjusted their investment strategies this year, as opposed to just over half (54%) that took that same action last year. The majority (54%) of under-funded CFOs said they would take no additional action if their plan were fully funded. However, given the current conditions, more than a third (34%) of the CFOs said they plan to close their plans to new entrants within the next year.
Pension Impact Needs to Be Controlled
Almost all (96%) of CFOs surveyed believe it would be helpful to always have the ability to measure the long-term impact of their pension decisions on their company's corporate finance-prior to making those decisions. Only 31% say that pension planning is more integrated with corporate finance today than it was five years ago.
"It's clear that CFOs want greater visibility and control of pensions and their impact on corporate finances," said Morris. "But to get that control companies must look at things differently and adopt new management strategies.
With new tools and techniques, CFOs can improve the health of their pensions, protect the well-being of their businesses and give employees new hope that their retirement plan will be secure."
To obtain a complete copy of the results of this survey, please call toll-free at 866-686-7565 or email [email protected].