Subscribe / Unsubscribe Enewsletters | Login | Register

Pencil Banner

The jolt when CFOs take the fall for pension risk

Ed Zwirn | March 29, 2012
When it comes to pension funds, some CFOs see the complexity and ongoing nature of the risk management process as less important than, say, shooting for a particular rate of return. Meet the mark, their logic goes, and you avoid funding shortfalls that could operationally impact the sponsoring company.

When it comes to pension funds, some CFOs see the complexity and ongoing nature of the risk management process as less important than, say, shooting for a particular rate of return. Meet the mark, their logic goes, and you avoid funding shortfalls that could operationally impact the sponsoring company.

But recent market volatility has made it much harder to avoid adopting some type of pro-active risk control strategy, Susan Mangiero, a managing director at FTI Consulting, writes in a paper appearing in the Journal of Corporate Treasury Management.

"At a time of great uncertainty, CFOs are increasingly being asked to shoulder the burden of making pension-related funding decisions that have the potential to materially and adversely affect plan participants, shareholders and creditors," writes Mangiero. "As a result, the CFO is exposed to fiduciary liability, career risk and the economic consequences of an outcome with enterprise impact."

Mangiero reports "an emerging sentiment" that failure to even minimally consider some type of hedging program could result in charges of fiduciary breach. In the corporate legal realm, "one case affirmed culpability for not having hedged commodity price risk, despite the recommendation of outside advisers."

Pension problems are also "increasingly wreaking havoc with merger, acquisition or spin-off deals," she writes. Companies with large pension liabilities tend to acquire fewer companies and themselves make "less attractive takeover targets."

In the U.S., certain types of corporate finance transactions trigger what is known as "successor liability," Mangiero points out. "When this occurs, the acquirer could end up with a nasty surprise in the form of a multi-billion dollar bill to top the defined benefit plan(s) or make a matching contribution to an existing 401(k) plan."

But whether considering the due diligence of a merger deal or the impact of a pension mishap on the bottom line, the onus for managing the situation falls largely on the CFO.

"Free cash that is used to fund employee IOUs is otherwise not available to grow the business," she writes. "Therein lies the rub that has the issue of employee benefit economics landing squarely on the desks of CFOs everywhere, forcing them to balance legal obligations owed to retirees with performance expectations on the part of shareholders and lenders."

 

Sign up for MIS Asia eNewsletters.