Pension cuts for FTSE directors moving at snail’s pace

From April next year, regulations around directors’ pay transparency come into play, with large listed companies having to disclose and explain the gap between their chief executives’ pay and that for their average employee. 

According to the Chartered Institute of Personnel and Development, the disparity is huge, with the average FTSE 100 CEO receiving a salary of £3.46m a year, which is more than 117 times the average pay for a UK full-time worker, earning £29,574.

Pension perks are a particularly thorny issue: the average director’s pension contribution was 20 per cent in 2019, while most employees get just 8 per cent from their companies.

Seventy-four per cent of pension scheme investors said that executive pay levels for UK-listed companies were too high

Caroline Escott, Pensions and Lifetime Savings Association

Investors are weary

According to Caroline Escott, policy lead for investment and stewardship at the Pensions and Lifetime Savings Association, “investors have been increasingly vocal on executive remuneration practices, with our review of 2018 [annual meetings] showing almost a 300 per cent increase in remuneration-related dissent”.

She notes: “Seventy-four per cent of pension scheme investors said that executive pay levels for UK-listed companies were too high.”

Scrutiny by the governance community on “the appropriateness of executive pay has been simmering since the financial crisis”, adds Jessica Norton, Great Britain executive compensation practice leader at Willis Towers Watson.

Yet, as recently as in August, analysis from the Investment Association shows only three in 10 FTSE 100 companies have pledged to cut their pension payments for their directors.

Willis Towers Watson research published in September indicates that while median FTSE 100 contributions to new CEOs’ pensions had dropped to 12 per cent of salary from 25 per cent, incumbent executives were reluctant to take a cut. The average pension contribution for CEOs decreased by just 5 per cent of salary to 20 per cent from 2018 to 2019.

Analysis by LCP published earlier this year backs these findings: “Relatively few companies have reduced contribution rates for their CEOs. Standard Chartered and Lloyds did undertake changes, but faced a significant amount of negative publicity and shareholder disquiet as the moves were seen as tokenistic.”

Phil Cuddeford, partner at LCP, told Pensions Expert: “Around 30 FTSE 100 companies have already announced changes to their contribution rates for executive directors – mostly to reduce rates for future appointments – in order to fall into line with guidance issued by the IA for 2020.”

According to reports from the Financial Times, British Land boss Chris Grigg, who received a 35 per cent pensions allowance in 2018, is taking a 5 percentage point cut each year until he is down to 15 per cent.

The UK’s five high street banks have also taken steps in this direction, and plan to lower their CEOs’ pensions allowance by next year.

Lloyds Banking Group, for example, is planning to cut the pensions allowance of its CEO by more than £220,000, while planning to give staff an annual pension contribution of up to 15 per cent of their base salary from next year, an increase from the current 13 per cent.

Shocking disparity

CIPD’s and think tank High Pay Centre’s annual assessment of FTSE 100 pay packages shows CEOs received a pension contribution worth 25 per cent in 2018 as a percentage of base salary. By contrast, employees get a contribution worth 8 per cent of their wages.

However, according to LCP’s analysis, only around 15 per cent of FTSE 100 companies pay executive pension contributions in line with their workforce.

CIPD’s and High Pay Centre’s annual assessment of pay packages shows that the average pension payment for a CEO of these companies amounted to £207,000 in 2018.

Nevertheless, Mr Cuddeford believes things are set to change. “Companies will now have to focus on their current executive directors, without providing any compensation for the resulting reduction,” he says.

“Remuneration committees are expected to set out a credible action plan to reduce pension contributions for current executive directors by the end of 2022 to the level applying to the majority of the workforce. They will also need to disclose the pension contribution level provided to the majority of the workforce, and how this has been derived.”

Companies should consider flat contribution rate

Mr Cuddeford adds that companies will also need to consider other groups of managers or directors who are currently receiving higher contribution levels than the majority of their workforces.

“If the pension rate of the CEO and the chief financial officer are to reduce, should companies consider reducing these higher tiers as well? We could see a flat contribution scale applying across entire organisations, exactly what Lloyds now plans to do,” he says.

Yet there is a long way to go, as Luke Hildyard, director at High Pay Centre, says: “CEOs’ pension terms should be the same as their colleagues throughout the organisation.

“With average salaries of more than £900,000 for an average FTSE 100 [company] – and median total pay of £3.6m – these individuals are clearly going to be more than comfortable in retirement. Boards should show a bit of fortitude and enforce equal pension treatment for workers of all levels.”