LCP has published its annual Executive Pensions Survey that this year focuses on executives in FTSE 100 companies. It follows the Chancellor’s Summer 2015 Budget that announced yet more significant cuts to tax relief on pension savings.
The survey confirmed the continued move towards flexible forms of pension compensation in response to progressive reductions in the annual and lifetime allowances. Seven out of ten FTSE 100 executives in the survey receive a flexible combination of defined contribution and salary supplement of cash, or cash alone. It found only one out of ten still has a defined benefit (“DB”) pension.
Mark Jackson, LCP partner and author of the report, said: “The 2015 Budget simply accelerates this switch to cash in lieu of pension.”
From April 2016, the lifetime allowance will reduce from £1.25m to £1m. The lifetime allowance was £1.8m in 2010 and has been subject to repeated cuts since then.
April 2016 will also see the introduction of a ‘tapered’ annual allowance whereby tax relieved pension savings reduce from £40k to £10k as ‘adjusted income’ increases from £150k to £210k. ‘Adjusted income’ includes the value of employer and employee pension savings each year, and the test is triggered for employees with income of £110k or more.
Jackson added: “This signals the end of the road as we know it for DB and DC pensions for the executives in our report.”
The Treasury estimate that successive cuts to the pension allowances have saved £6bn a year. The LCP report states that the impact of the Budget will be felt well beyond the executives studied in the report, noting that employers need to test the impact on all employees with earnings of £110k of more.
Jackson commented “Employers are preparing now for a system where the annual allowance for pension savings is a moving target for each employee, where the target doesn’t stop moving until after the end of the tax year.
“Employers don’t want their senior employees to pay tax twice – first on their pension savings, and second on the pension when they receive it – so they are now busy identifying who is affected and what to offer instead of pension.”
LCP’s survey also revealed median pension compensation for FTSE 100 executives remained at the 2013 benchmark of 30% of base salary.