Executive pay to rise as penions get squeezed

2002

A new report by Mercer HR Consulting has found that more than 40 per cent of companies expect to review the pension arrangements of senior executives in the near future. In return, 46 per cent of senior executives expect a big increase in pay to compensate them for the change.

According to the research, more than 40 per cent of employers surveyed intend to review their policies on executive pensions in the near future, and three-quarters expect to see an increase in defined contribution approaches for those executives affected by the Earnings Cap. According to the survey, the main drivers for change are cost control and cost reduction.

"Executive pensions are under increasing scrutiny, particularly from shareholders who are now taking a greater interest in them," said Charles Cowling, Worldwide Partner at Mercer.

"New regulations, due to come into effect soon, will increase the need for information to be disclosed in company accounts, and this will highlight the real value of executive final salary pensions."

Of the companies surveyed, 46 per cent expect to see increased use of additional salary in lieu of pensions, while 22 per cent favour funded unapproved retirement benefit schemes (FURBS) which are mainly defined-contribution based. In contrast, just 8 per cent see an increase in the use of unfunded unapproved retirement benefits schemes (UURBS), which are the traditional method used to mirror final salary benefits for high earners.

"Up to now, executives have often been able to negotiate their own pension promise when joining a new employer. The expected move to lower-value benefits will come as a shock to many of them in the future," said Mr Cowling.

"Companies are starting to recognise the high cost of good-quality final salary pension promises” Cowling added. “In future, it’s likely that any cutbacks on pension costs will apply equally to executives as to the rest of the workforce. "Employers now realise the need to focus on performance-related pay, and the comfort blanket of a generous pension does not deliver improved performance," he added.

Unions immediately reacted with hostility to the findings of the report. Roger Lyons, joint general secretary of Amicus, the union for skilled and professional workers, described the findings as “yet another example of double standards from the boardroom.”

“While directors’ pensions are going down,” he continued, “their wages are going up. Workers would be less unhappy about cuts in their pensions if they had massive pay rises, too.”

More information is available at www.mercerhr.co.uk/knowledgecenter/reportsummary.jhtml?idContent=1077580