Changes to pension tax relief mean a typical director of a FTSE 100 company will, from 2011, pay more than £50,000 a year in additional tax until they retire.†
The changes, ratified in the Finance Act which received Royal Assent this week, mean tax relief on pensions for employees with an income of £150,000 or more tapered downwards, falling to 20% for those earning £180,000.
According to research conducted by Lane Clark and and Peacock (LCP) among 341 FTSE 100 executive directors, four out of five of this group are in pension arrangements that will be affected. The top rate of income tax is intended to be 50% when the new arrangements apply, so a typical FTSE 100 director would need extra pay of £100,000 a year to offset the extra tax of £50,000.
Mark Jackson, a partner at LCP, said: “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 HM Revenue and Customs. 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.”
The survey also revealed pensions provision accounted for £267,000 (15%) of the average director’s total remuneration package during 2008.
Defined benefit (DB) schemes are still the dominant form of pension provision, with more than half (52%) of directors receiving some or all of their pensions through a DB pension arrangement. Seventeen FTSE 100 companies, including BP, Next and Tesco, provide DB only pensions for all of their directors.
In contrast, three mining companies (Antofagasta, Kazakhmys and Randgold Resources) provide no pension compensation for their directors, while five companies (Marks and Spencer, Cable and Wireless, Compass Group, Invensys and Petrofac) offer cash in lieu of pensions to all their directors. Sixteen companies, including BSkyB, SABMiller and WPP, provided defined contribution (DC) benefits to all of their directors.
Jackson said: “While a number of FTSE100 companies have introduced a consistent pension offer for new hires, there is a melting pot of different pension arrangements out there for executive directors that have served in the business for a number of years. We believe the new tax could prompt remuneration committees to rationalise director pension arrangements across the entire board between now and April 2011.”