Pension Advisers Talk Like CFOs

Institutional investment services providers are ditching their jargon and talking about the influence of investment risk on financial measures like free cash flow and earnings per share.

CFOs have an edge if they can talk about finance in a way that’s meaningful to key stakeholders who aren’t finance people, like some board members and investors. And when they’re on the receiving end of communications they’re like anyone else: they’re more responsive when the communicators speak a language they understand.

That’s what is behind a push by institutional investment managers to address CFOs of their client pension-plan sponsors in the language of corporate finance rather than overuse investment-industry jargon, says Mike Thomas, chief investment officer for the Americas institutional business at Russell Investments.

“Investment folks like to talk about things like surplus VAR,” says Thomas, referring to “value at risk,” a statistical technique for quantifying the level of financial risk within a company or investment portfolio over a specific time frame. Corporate risk managers and CFOs are generally familiar with VAR, but “surplus VAR” is particular to defined-benefit pension plans. “It requires a shift from thinking about the volatility of assets to the volatility of the difference between assets and liabilities,” he says.

For example, where a VAR analysis might show that a plan risks losing $1 million, given its current investment allocations and economic conditions, surplus VAR might show that a $1 million loss may be fine because plan liabilities also could go down by that amount. “Boards and pension committees, even CFOs, don’t always know what we’re talking about,” Thomas says.

Russell, and the investment industry generally, he says, are in the midst of changing their ways. In Russell’s case, the firm is presenting client CFOs with a one-page analysis of risks related to pension assets and liabilities expressed in terms of the potential impact from pension-fund performance on common financial metrics like free cash flow and earnings per share. What will happen to such metrics if, say, a 10% drop in equity markets or a 40% increase in interest rates exerts a profound effect on pension-fund values? What if the global financial crisis were to reoccur?

The shift isn’t actually a response to specific requests from finance chiefs, says Thomas. Rather, it’s “a recognition on our part that what we were talking about before wasn’t resonating like it should have. We were saying, ‘Can’t you see what this is telling us? Can’t you see how important this is?’ But we weren’t getting through.” With the new approach, a CFO is more likely to say, “I get it, and that impact on our free cash flow can’t happen,” and adjust the level of investment risk accordingly.

Even for finance leaders who appreciate the new approach, it may have a shoe-on-the-other-foot feel. Boards, CEOs and business-unit leaders have beseeched them for years to provide more concise, plain-language financial analyses.

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