Pensions can be worth anywhere between 20% and 70% of salary for finance executives across FTSE 350 companies, according to a report by Deloitte.
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’.
Commenting on the issue, Bill Cohen, executive remuneration partner at Deloitte says: ?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. While companies with the highest salaries tend to have the most generous pension and the highest bonus and share awards.
l There is great variation in the type of pension provision for executive directors. 39% of incumbent directors participate in defined contribution plans and 61% participate in defined benefit plans. But in 60% of companies, new board members will only be offered participation in defined contribution plans.
l 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% and 35% 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% and 55%.
l 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% and 25% of salary compared to a value ranging from 20% to 60% in the largest companies.
Cohen adds: ?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. Although it is generally accepted that the value of a defined contribution plan is less than a defined benefit plan, it may surprise companies to know that in some cases the contributions to a defined contribution plan are worth only half as much as those to a defined benefit plan.
?The new pension legislation which comes into effect next year provides an ideal opportunity for companies to develop a policy which considers pension in the same way as other elements of the remuneration package. This will be particularly important as the disparity in arrangements becomes clearer to executives and shareholders.
?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.?
Other key findings:
l 76% of directors in FTSE 100 and 55% of directors in FTSE 250 companies participate in a defined benefit plan.
l Only 23% of directors in FTSE 250 companies have uncapped defined benefit arrangements compared to 41% of directors in FTSE 100 companies.
l 61% of FTSE 100 companies operating defined benefit plans require the employee to contribute to the plan, compared to 69% of FTSE 250 companies.
l Employee pension contributions range from less than 3% of salary to over 10% with a median of 5% in FTSE 100 and 6% in FTSE 250 companies.
