Connected Research

Union policy research in the 21st century

Executive pensions revealed

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Actuarial and benefits consultancy firm Lane Clark & Peacock has produced a new version of its Executive Benefit Survey (registration required to view).

The prompt for the report is clearly the changes announced in the April budget to the system of tax relief applying to the pension contributions of those who earn more than £150,000  (blogged about here) – about which more later.

The basis for the report is the published 2008 annual report and accounts data of the entire FTSE100 as at the end of June 2009, covering the pensions arrangements of the 341 directors in office at the end of their company’s accounting year. So, in terms of coverage, it’s as comprehensive a review of executive pension arrangements as we’re likely to get. The headline news is, perhaps, not terribly surprising but it’s no less staggering for all that:

– more than one-half of directors have some defined benefit provision as a part of their pensions arrangements, while for 35% defined benefit is the only form of provision

– the median cost of directors’ DB provision is 51% of salary: the mean cost (inflated by some very large figures) is 70%

– across the board, average pension contributions (including in DC schemes) amount to 46% of basic salary (15% of total remuneration)

– less than 5% of directors have no pension provision at all (a figure inflated by three mining companies none of which offer a pension)

– 15% of directors receive cash in lieu of a pension, where the median pay-out is 29% of basic salary

– 28% of directors have pensions provision based solely on DC schemes, where the median contribution is 20% of basic salary.

It must also be pointed out – though not mentioned in the survey – that accrual rates in defined benefit schemes tend to be much more attractive at executive director level – frequently being 1/40 or even 1/30, rather than the 1/80 which increasingly guides accrual for everyone else. Where directors are appointed from within this, together with the massive increases in salary that guide executive remuneration, mean that pensions provision for promoted directors becomes extremely expensive. New directors hired from outside the company were, it must be said, only exceptionally given DB provision.

The concern prompting the report is the Budget-based limitation of tax relief for people earning more than £150,000 a year to the basic, rather than the marginal, rate of tax – a move which, at average levels, Lane Clark & Peacock said would lead to directors paying £50,000 a year more in tax. The solution? Well, the report helpfully indicates that, at 50% tax rates, this is equivalent to a £100,000 hike in salary. Alternatively, Lane Clark & Peacock suggests that we might well see a return to the use of unapproved schemes which do not benefit from the same system of tax reliefs but which have no limits on the amount of pension that can be provided. 31 of the companies in the survey already offer some form of unapproved pension scheme to top-up existing provision but their more widespread use in the future is predicated on the assumption that the 2009 Budget changes won’t apply to unapproved schemes.

I’m not convinced that a move to unapproved pension arrangements for directors is really in tune with these times, either with the notion that executive pay needs somehow to be controlled, with the notion that we all need to exercise restraint given the economic situation, or with the the requirement for increased transparency. Sometimes, it seems, they just don’t get it. Or perhaps it’s me.

Mark Jackson, Partner in Lane Clark & Peacock, said that:

Remuneration committees have reached a cross-roads on pensions for their executive directors. If they carry straight on, their directors face a new tax, so they need to consider alternative routes such as paying cash instead, no pension at all, or pensions that are not tax-registered with the HMRC. Whichever route they take it will be lined with spectators from shareholder groups and the media, so the route needs to be chosen with care.

I just love the wording of that second sentence – in particular, its presumption that companies will indeed find a way for their executives to avoid the increase in taxation.

Meanwhile, the routes they take will be attentively watched from the blogosphere, too.

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Written by Calvin

23/07/2009 at 5:56 pm

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