23 April 2019
Executive pension benefits and cash allowances in lieu of pension are coming under intense scrutiny. We’re expecting increased shareholder pressure and more companies reacting over 2019, following companies that have already announced measures.
Recently we have seen key industry bodies putting the spotlight on executive pension contributions advocating that executives should receive the same pension contribution rates as the general workforce. The House of Commons Business, Energy and Industrial Strategy Committee, the Financial Reporting Council and the Investment Association have all issued statements around the need for greater alignment of executive pension contributions with the wider workforce.
The Investment Association, the trade body that represents over 200 UK investment managers managing £7.7 trillion of assets, have gone further and will “amber top” or “red top” companies where they have particular concerns:
- “Amber top” where current executives have a pension contribution of 25% of salary or more;
- “Red top” where new executives have a higher pension contribution rate than the majority of the workforce OR where the remuneration policy doesn’t state that new appointments will provide pension benefits in line with the majority of the workforce
Companies marked as amber or red are likely to find increased shareholder interest and questions being asked as this issue rises up the agenda.
Many companies – including more than 40 of the FTSE100 - provide contribution rates of more than 25% of basic salary to their executives.
Reducing these to the same as the majority of the general workforce is an enormous change - especially for companies where the auto-enrolment minimum of 5% employee and 3% employer is the standard pension benefit provided.
Reducing executive contribution rates to the level of the majority of the workforce could still leave other senior employees receiving more generous pension contributions than the majority. While these anomalies won’t be one for shareholder activism, it could lead to increasing pressure for general levelling of contributions across the board over time.
What are companies doing?
There’s a trend developing with many large companies amending their remuneration policies to provide lower pension contribution rates for new executive appointments. Where these remain higher than the general workforce, further reductions may be appropriate.
Relatively few companies have reduced contribution rates for their current CEOs. Standard Chartered and Lloyds did undertake changes but faced a significant amount of negative publicity and shareholder disquiet as the moves were seen as tokenistic. If the decision has been taken to reduce contributions, then this should be undertaken transparently and thoroughly. Otherwise companies are open to the charge that it is just a PR exercise.
There is certainly more change to come and the impact has started to filter through to medium and smaller sized companies.
What should you do?
We recommend immediate action is taken to consider options where:
- Executives have a contribution tier with a pension rate of 25% or higher;
- Your Executive Remuneration policy doesn’t state that pension will be set in line with the majority of the workforce for future appointments;
- You are about to hire an executive on a higher rate than the general workforce;
Boards and Remuneration Committees should be aware of this issue and carefully think through whether they need to take action.