Pensions 'the missing link' in executive remuneration

2005

A new report has revealed major inequalities in pension provisions for executive directors across FTSE 350 companies, and sometimes even within the same company.

According to professional services firm Deloitte, pensions can be worth anywhere between 20 per cent and 70 per cent of salary and in some cases more.

Deloitte’s research into trends in executive pension practice in FTSE 350 companies finds that traditionally pensions have been the missing link in executive remuneration. Difficult to analyse and compare, pensions have never really been considered an integral ‘part of the package’.

But according to Bill Cohen, executive remuneration partner at Deloitte: “Since the mid 90s there has been much talk about taking a new approach to executive remuneration, which in reality has often included everything but pensions, thereby leaving out a significant element of remuneration.

"Given the substantial values involved, increased interest from shareholders and the impact of the new pension legislation, this omission cannot continue.”

“A good remuneration policy should balance salary, pension and performance linked awards in a way which supports the business strategy and culture of the company. For example it may be appropriate for a company to pay lower salaries but have more generous pension arrangements."

Or they might have less generous pensions but make higher potential awards linked to performance from which, if company performance is good, an individual can fund his or her own retirement,” says Cohen.

However, Deloitte’s research suggests that many companies do not have pension policies that balance the remuneration packages.

Companies with the lowest salaries generally have less generous pension plans and less generous bonus and share awards. Companies with the highest salaries tend to have the most generous pension and the highest bonus and share awards.

The Deloitte report, which benchmarks pension levels across FTSE 350 companies found great variation in the type of pension provision for executive directors.

Four out of 10 incumbent directors participate in defined contribution plans and six out of 10 in defined benefit plans. But in six out of 10 companies, new board members will only be offered participation in defined contribution plans.

The value of the pension provided to executive directors also varies significantly depending on whether it is a defined benefit or defined contribution plan. A FTSE 100 director participating in a defined contribution plan typically receives between 10 per cent and 35 per cent of salary a year in pension contribution compared to a director in a defined benefit plan where the annual value of the pension is more likely to be between 30 per cent and 55 per cent.

The value of the pension is also likely to be higher in larger companies than smaller ones, whether participating in a defined benefit or defined contribution plan. In the smallest FTSE 350 companies the annual pension value is typically between 10 per cent and 25 per cent of salary compared to a value ranging from 20 per cent to 60 per cent in the largest companies.

Moreover, only 23 per cent of directors in FTSE 250 companies have uncapped defined benefit arrangements compared to 41 per cent of directors in FTSE 100 companies.

"Many remuneration committee members and individual directors will not be aware of the difference in value of pension arrangements between companies, and indeed within the same company," Bill Cohen said.

“Remuneration committees should consider the ongoing role of pension provision within the total remuneration framework and will want to ensure that going forward there is a coherent policy which addresses the needs of the individuals and the expectations of the shareholders.”