Executive pension pots continue to spiral, but calls for greater disclosure could be distracted by tax changes for high earners, says Nicola Sullivan
The immense value of executive directors’ retirement savings has prompted calls for greater transparency around their pension arrangements. According to the Trades Union Congress’ (TUC) annual PensionsWatch survey, which looked at the pension arrangements of 329 directors at 102 of the UK’s top companies, the average transfer value of a director’s pension now stands at £3.8 million – up £40,000 since last year. This equates to an average annual pension of £227,726.
The survey also shows the highest-paid directors have pension pots worth £5.26 million, providing an average annual pension of £298,503. TUC general secretary Brendan Barber said: “Top bosses justify their pensions, pay and bonuses as rewards for success. Yet many companies refuse to disclose these lavish arrangements.”
In their annual report and accounts, employers are broadly required to identify what a director’s defined contribution (DC) pension is worth or, if they are in a defined benefit (DB) scheme, what the increase in accrued pension is year on year. But they are not required to reveal the accrual rate. Bill Cohen, executive remuneration partner at Deloitte, said: “There is never enough information on DB pensions to see the value of the individual pension. Employers do not have to give that much disclosure. Some disclose everything, but some do less.”
According to the National Association of Pension Funds (NAPF), employers should disclose accrual rates in DB plans, as well as any employer-paid contributions and payments in lieu of pension. They should also disclose normal retirement age and any early retirement provision. Joanne Segars, chief executive of the NAPF, said: “It is worrying that directors’ pensions are not usually linked to performance. This could mean bosses are rewarded in their retirement despite failing in the job.”
This practice could have ramifications for an employer’s entire workforce. Staff earning much lower pensions will be vexed to see multi-million-pound pension pots given to executives at a time when financial performance is falling and other benefits are being cut.
Back-door remuneration
Henry Dene, principal at Punter Southall Financial Management, said: “If the pension is seen as back-door remuneration, that is not good, particularly when people feel that directors get really good pay and what is put into their pension is a sweetener.”
Pensions have sometimes been used like bonuses, with directors receiving bigger pots resulting from how other parts of their reward are managed, said Graham Cooke, senior consultant at JLT. “Quoted companies’ directors are required to reveal their emoluments, but many senior executives have had their pensions increased, typically by agreeing to a consolidation of bonus or getting hikes in salary late in their career.”
“In the past, companies have not appreciated the real cost of giving executives above-inflation pay rises and the knock-on effect that this has on pensions.”
But the report Executive directors’ remuneration, published by Deloitte in September, shows the number of directors in DB plans is falling. Some 40% of directors in FTSE 100 companies currently take part in such an arrangement, compared with 45% last year.
This, combined with the pension tax changes for high earners, could take the spotlight off from the issue of disclosure, said Deloitte’s Cohen. If government plans to reduce the annual allowance for this group go ahead, employers may offer executive directors alternatives to pensions. “The cash alternative will be the most common solution and that will be transparent because it will be in the company report and accounts,” said Cohen.
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