03242017Fri
Last updateFri, 24 Mar 2017 12pm

 

Setting a pension strategy that lasts

 

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By Simon Taylor, Partner and Corporate Consulting, Barnett Waddingham LLP

The ultimate goal for most defined benefit (DB) scheme sponsors will involve removing as much risk as possible. The strategy for achieving this goal will differ depending on the particular circumstances, for example, depending on the maturity of the scheme and the affordability of ongoing support. All existing strategies will have been set to be 'future proof' – with the expectation that short-term changes in circumstances can be negotiated successfully.

The past 12 months has seen a 'once-in-a-generation' political change. As a sponsor of a DB pension scheme, you may have thought you had a pension strategy which lasts. However, can it survive Brexit? Can it cope with a potential 'Trump Dump', rather than the current 'Trump Bump'?

Given the economic and regulatory uncertainties that prevail, now is a good time to revisit your DB strategy to make sure it remains robust.

Tactical manoeuvres

Most finance directors will recognise that 'smaller is better' in DB pension terms. At the current time, government bond yields remain low and transfer values (TVs) are elevated, making it a more attractive option for members. This may provide an opportunity for a transfer exercise in the near term, focusing on members over the age of 55 who are able to access their benefits immediately. Meanwhile, the government is developing plans to facilitate employer-led and member-led pension advice, the aim is to improve member outcomes in the new 'freedom and choice' landscape.

Another option to manage risk is to look at the buy-in market. Despite the volatility since the EU referendum, this remains attractive for schemes looking to exchange gilts as part of a full or partial pensioner transaction. The potential to 'top slice' your DB obligation by targeting large liability members is also worth investigating. The latter would be an effective way to mitigate any concentrations of longevity risk.
The above constitutes short-term steps which can turn unfavourable circumstances, in this case, elevated gilt prices and corresponding low yields, into opportunities. The next step is to focus on longer-term actions to manage the liabilities which remain.

Formulating a longer-term strategy

Once the 'quick wins' are identified and acted upon, the asset-side of the equation will become clearer. The resulting shape of the liabilities represents the benefit cashflows expected to crystallise in due course. However, there should still be allowance made for routine liability settlement exercises in the future, including flexible options at retirement offered, as standard.

With growth assets performing well, there is some potential to lock-in recent gains. Rather than de-risking in the sense of swapping such gains into matching assets, it might be preferable to use the gains to pay down liabilities, such as paying higher transfer values or purchasing a bulk annuity.

It is also important to make allowance for ongoing de-risking activities as part of the triennial valuation process. Although scheme-funding liabilities are calculated with an emphasis on prudence, there is greater focus on realistic expectations when setting the recovery plan. As such, it is important to account for ongoing exercises, for example, building flexibilities relating to liability settlement into the recovery plan, in addition to other typical best-estimate assumptions.

There is an onus on scheme sponsors to be proactive, recognising likely future risks. The tone of the government's recent Green Paper would suggest there is unlikely to be a material change in the DB regulatory regime although it is important to consider potential opportunities that might arise.

A pension strategy that is future proof should help DB sponsors continue to make progress towards their ultimate goal, at least until the next 'once-in-a-generation' event. This advocates ongoing monitoring that enables rapid responses where and when it is appropriate.

 


Expert view: What makes a great CFO

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Stacey Nicholl on why FDs require credibility and engagement both inside and outside the organisation

The CFO of today is a far cry from the rigid, number crunching executive of old. No longer a square peg, a great CFO is a rounded leader who can add value beyond the finance function and deliver business results.

ALLY AND EQUAL TO THE CEO

From a headhunter's perspective, the ability to influence and collaborate with the CEO emerges as the #1 skill for any CFO. Like the CEO, the CFO is instrumental in defining company strategy and needs to have the vision, determination and communication skills to gain buy-in and drive the agenda forward. Nobody is better placed to ensure that strategic decisions are based on a combination of solid financial rationale and business context. The CEO wants a business partner who can help grow the business, turn financial data into actionable intelligence and identify new potential revenue streams such as new geographies, new markets or potential acquisitions. In EY's study, The DNA of the CFO, 73% of CFOs surveyed saw their role as a destination in its own right and only 10% harboured an ambition to be CEO. Whether or not the CFO wants to be CEO, the qualities sought by the headhunter are very similar.

DEEP COMMERCIAL ROOTS

A strong commercial mindset enables a CFO to go from good to great. The best CFOs are naturally curious and take a wide-angled view on what makes a business tick and drives financial performance. They tend to have a broad education, including an MBA, and not all CFOs come from the traditional accountancy background. The key string to the CFO's bow is direct experience. While climbing the ladder, some finance executives acquire valuable experience in other functions - such as Operations, IT or Risk Management – where their forensic, problem solving and reporting skills can be put to good use. Having a genuine empathy with other functions, and an appreciation of the customer, equips the CFO to provide relevant data and insights as well as to make prudent decisions on the use of assets and resources.

STRONG BACKBONE AND SOFT SKILLS

Much has been written about the need for EQ as well as IQ among C-suite executives and this definitely applies to the CFO. A great CFO must be a persuasive influencer and an attentive listener. They must display strong values, cultural maturity and adaptability to change. To truly partner and challenge the CEO, the CFO requires credibility and engagement both inside and outside the organisation. This involves building strong trusted relationships with investors and opinion leaders, as well as the other members of the CEO's leadership team. The CFO must also be tough enough to push back on the CEO, to cope with pressure from regulators, investors and the media, and to stand by difficult decisions such as redundancies and cutbacks. It's a question of balance.

NEW DOG, NEW TRICKS

Many CEOs are hired for their track record in business turnaround and transformation. In KPMG's The View from the Top report, CEOs also cite this as a vital skill in their CFO. Referring to the 'Renaissance CFO', the report states that the modern CFO has to manage 'a vast ecosystem of expanding complexity with the goal of achieving competitive advantage' but, alarmingly, concludes that almost one out of three CEOs feel their current CFO is not up to the challenge. Of course, the traditional core skills of the CFO are still important and the headhunter will need to seek evidence of effective cost cutting, cash management, financial controls, reporting and compliance. The candidate, however, must demonstrate an understanding of the commercial context within which these standard requirements have been met and a desire not just to safeguard the company but to promote innovation and stimulate growth. The best CFOs are as focused on outward looking KPIs, like market share as a percentage of market potential, as they are on inward indicators such as EBIT.

BUILDING THE TEAM

An essential skill possessed by the greatest CFOs is the ability to mentor and nurture talent. Whilst the CFO's role is to coach the CEO and underpin the CEO's strategy through financial planning, the CFO should also be a leader who can develop, inspire and mentor his or her own team beneath. Given that a CFO's typical tenure is around five years, a greater focus on succession planning is needed. By knowing what makes a successful CFO, the incumbent can nurture a shadow CFO by ensuring that the team below gains all the requisite experience of other functions, benefits from learning & development progammes and masters new technologies. In KPMG's report, almost all CEOs said that attracting and retaining top-notch finance talent was the most important or equally important contributing factor to improving the finance function, yet only 33% of CEOs gave their current CFO a thumbs-up in that respect.

IT SAVVY

Headhunters are placing increasing emphasis on CFOs having a penchant for technology. By harnessing cloud-based ERP systems, for example, the finance function can be more agile and scalable and can empower senior management across the business with real-time data they can react to quickly. The CFO does not need to be an IT wizard, but needs to understand that clever application of technology allows the finance team to spend more time analysing and interpreting data, instead of preparing it. The use of predictive analytics will only help this further. The role of the CFO has evolved beyond recognition. Exit the stereotypical bean counter and enter the three-dimensional CFO, aligned with the entire business and cut from the same cloth as the CEO. A great CFO who can stand alongside the CEO and have what it takes to transform a company's fortunes is not easy to find. Gone are the days when swapping the same names around the FTSE 100 will do the job. It's about time that headhunters changed too. 

Stacey Nicholl is a Senior Consultant at Marlin Hawk, a leadership advisory and executive search firm with offices in London, New York, San Francisco, Hong Kong and Singapore. www.marlinhawk. com |

Flexible work: how the gig economy benefits some more than others

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By Julie Davies, HR Subject Group Leader, and Mark Horan, Senior Lecturer Human Resource Management, University of Huddersfield

Self-employment is on the rise in the UK. The latest government statistics put it at 4.79m, which represents 15% of all people in work. And, in recognition of this changing nature of employment, the prime minister has commissioned a review of workers' rights. One of its chief tasks is to address concerns that millions are stuck in insecure and stressful work.

Flexible working and self-employment are inevitable solutions to the growing "gig economy", in order to best manage projects and fluctuating work flows. A flexible lifestyle may be desirable for the highly paid IT consultant. But for the call centre worker on a zero-hours contract, it means a pension, mortgage and income protection are all illusory.

In Tim Ferriss' book The 4-Hour Work Week, creative freelancers live the dream. They work anywhere, anytime, provided they deliver agreed outputs. And, as social scientist Richard Florida suggests in his view of the "Creative Class", high-tech workers, artists and musicians typically gravitate to dynamic and open urban regions, with good schools, sporting and shopping facilities. These high-earning creative types then generate jobs for contingent workers whose rights must be protected from abuse. The challenge for urban planners is to attract such talent at both ends of the flexible working spectrum.

Flexibility in self-employment, however, presents a quite different scenario for those with zero-hours contracts. These are increasingly common employment contracts where employers do not guarantee the individual any work and the individual is not obliged to accept any work offered. They are a hot topic for debate, with significant polarisation of views.

The recent investigation into Sports Direct's use of zero-hours contracts showed them in a particularly negative light and there is talk of the company moving to fixed hours. New Zealand banned these types of contracts in April. And an employment tribunal in London recently ruled that Uber drivers should be classed as workers, rather than self-employed. Yet for some – students, for example – a zero-hours contract is better than no contract at all.

Despite the latest outrages over zero-hours contracts, theories of workplace flexibility have been around for many years. The academic John Atkinson put forward a well-known model for the "flexible firm" in 1984. It advocated that companies retain a core group of workers and use a flexible workforce that is determined by and responsive to business demand.

The model also distinguishes between functional and numerical flexibility. This has long been the operating model in the entertainment industry where the supply of staff is driven by business demand. It is a continuing theme in discussions about employment trends in the fourth industrial revolution.

The high-profile coverage of zero-hours contracts might give the impression that they are one of the dominant forms of employment contract in the UK. But, government statistics show that 903,000 people were employed on them during April to June 2016 – this is just 2.9% of all people in employment. They are most likely to be young, part-time, women, or in full-time education. Typically they work 25-hours per week and a third say they would prefer more hours in their current jobs.

Zero-hours contracts, however, are actually less prevalent than other forms of flexible and non-standard employment such as shift work, annualised hours and temporary contracts. And they are only slightly more common than agency work.

In effect, they can be seen as equivalent to the long-established position of a casual contract, something which has been the staple of the business model in the leisure, entertainment and culture industry for years. When work is seasonal, margins are narrow and covering the minimum wage is a challenge for employers, many of whom simply cannot afford surplus staff.

One sector that experiences significant fluctuation in demand is the entertainment business. Blackpool, a seaside resort on the north-west English coast, whose main industry is tourism, is a good example of how difficult it is to get this right. There is a seasonal and school holiday cycle, which introduces one level of fluctuation. Then there are other unpredictable factors that affects the need for staff.

The famously variable British weather affects the relative popularity of indoor and outdoor attractions. And the city is host to a number of events, ranging from major darts competitions, musical acts and theatre productions, to small weddings and functions. The skills required varies significantly too. Whether it's the annual British Homing Pigeon World Show (January), the world ballroom dancing championships (May), or the annual Rebellion punk reunion festival (August). Flexibility is a daily challenge for many businesses in similar situations.

So, in a world of increasing flexibility and insecurity, we will watch with interest to see the outcome of the government's review of modern employment. Matthew Taylor who is running it has a wide remit that includes security, pay and rights; progression and training; finding the appropriate balance of rights and responsibilities for new models; representation; opportunities for under-represented groups; new business models. Taylor has said that "most part-time workers, and even most zero-hours workers, say they have chosen to work this way". Let's see whether the evidence really bears this out.

This article first appeared on The Conversation - http://theconversation.com/uk

Why the corporate world is waking up to the importance of sleep

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By Dr Guy Meadows, sleep physiologist

Despite business leaders such as Twitter's Jack Dorsey and Yahoo's Marissa Meyer famously claiming that their minimalist approach to sleep was a key factor in their success, there is a new sleep revolution sweeping across the corporate world, turning the maxim that the less you sleep the better, on its head.

In the last few years we have experienced this first hand, with an increasing demand for our corporate sleep programme from HRs needing a solution for exhausted and run-down teams. Whether a breaking point has finally arrived thanks to smartphone technology and its 'always-on' hangover, or whether it reflects a commitment to science-informed wellness programmes, businesses finally have an appetite for a well-rested workforce...and it can't have come soon enough.

A survey of three FTSE 100 companies reported that 64% of employees regularly wake up feeling either 'not very refreshed' or 'not at all refreshed' and 23% reported that poor sleep and tiredness impacted their ability to do their job either 'very much so' or 'a lot'.(1) And with a national survey of UK working adults reporting that 46% regularly slept only 5-6 hours a night instead of the recommended 7-8 hours, it is clear to see why.

For years, sleep has often been labelled as 'the most powerful performance enhancer known to humankind' but it is not until now, after decades of scientific research, that the weight of this claim can be fully understood. And corporates are firmly picking up the baton.

One such discovery is the fact that our prefrontal cortex, the area of the brain responsible for our advanced cognitive and emotional performance, is most vulnerable to sleep deprivation. The prefrontal cortex, or frontal lobe, is the brain's business powerhouse. In charge of abstract thinking and thought analysis, it is the area of the brain responsible for delivering our most advanced cognitive work – not to mention setting its groundwork through focus and concentration. Research shows that if you regularly experience poor sleep you are three times as likely to lack concentration during the working day and struggle to 'get things done'(2).

The vulnerability of our pre-frontal cortex to lack of sleep also explains why we feel more stressed after a night of poor sleep. Neuroimaging studies reveal that a sleep deprived brain spends more time in the amygdala, the primitive threat detecting part of our brain. The net result is that we tend to view ourselves, others and the world around us in a more negative light, something which results in us over reacting to emotional events and experiencing more negative emotions (3)

For savvy HRs, the critical connection between sleep and daytime performance, as well as how well we handle stress, is clear. Employees who make their sleep a priority will perform better at work and it is something which can be improved relatively simply with the right know-how and departmental analysis. HRs looking to make a big difference to their company's bottom line could do worse than investing in some team shut-eye – it could prove to be the business' biggest asset.

Key insights from the Sleep To Perform programme

1 Sleep and stress – they are more connected than you think

The intimate connection between sleep and stress is not widely understood. Although it is obvious that the stress of the day is likely to keep you awake at night, it is also the case that if you sleep less you will feel and act more stressed. This means a vicious cycle of stress and sleeplessness can easily take hold, with employees not realising that if they break this and get some sleep they will have a stronger emotional resilience to daytime stressors. Companies spending thousands in solutions for employee stress often see immediate benefits when their workforce is getting sufficient sleep at night.

2 'Always on' means you can't turn off

One of the practical skills we give employees on our programme is the capacity to fall asleep more quickly and easily. Key to this is setting boundaries around using work phones or logging onto laptops too close to bedtime. Blue light emitted from screens mimics daylight, tricking our brains into a state of alertness and blocking our body's natural signals to get ready for sleep with the onset of night.

3 You might survive on five hours sleep but you won't perform or feel at your best

In a sleep deprivation study, 480 store managers from Bensons for Beds were challenged to work at their best when they were deliberately forced to sleep less. After just four nights of 25% less sleep (e.g. 8hrs to 6hrs) cognitive and emotional performance was significantly reduced in the performance of the managers with 38% showing a decrease in problem solving skills, 29% with worse communication and 28% experiencing a decrease in memory recall. The biggest impact however, was on the managers' moods, with a collective 281% increase in negative mood.

4 Sunday night insomnia, the battle which can be won by not trying

Sunday night is by far the most common evening for people to struggle with insomnia. This is largely due to the pressures and worries which mount up for the week ahead and the thought that you 'must' sleep so you can cope with work in the morning. This can result in a big struggle during the night to get off to sleep, and the more you fight not sleeping, the less likely you will be able to fall asleep. On Sleep To Perform, employees are given practical insights into how to overcome this deadlock, allowing them to drop-off easily, even when the pressure to get off to sleep is at its most strong eg: before a big presentation or during a period of increased pressure.

For more information, or to book a Sleep To Perform programme, visit https://www.sleeptoperform.uk/

McGregor-Smith to step down at Mitie

Ruby McGregor-Smith CEO of Mitie Group plc

Ruby McGregor-Smith is stepping down as chief executive of Mitie to be replaced by Phil Bentley from Cable and Wireless. McGregor-Smith, pictured above,  has been a director of Mitie since December 2002 and has served as chief executive since April 2007. She has led the business for nearly a decade, steering it through significant industry and company transformation. 

Bentley brings a wide range of executive and leadership experience from across industry, including most recently at Cable and Wireless Communications PLC, where he served as Group Chief Executive Officer, until its acquisition by John Malone's Liberty Global. He previously ran British Gas, the UK's leading energy and home services provider, for seven years. Prior to that, he held a range of senior management and finance roles at Centrica and Diageo. Much of his early finance career in BP was spent overseas. He is a qualified accountant and holds an MBA from Insead.

McGregor-Smith said: "It has been a real honour to serve on the Board of Mitie and in particular to hold the role of chief executive. I am delighted that we are now in a position to appoint a new chief executive for Mitie and I wish Phil a successful future with the group."

Bentley said: "Although it is a challenging time for the sector, we have a strong platform from which I am certain we can now prosper. I am really looking forward to working with my new colleagues, delivering world-class services to our customers and creating sustainable shareholder value."


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