New recruits and senior execs are losing out on final salary pensions

The majority of UK companies that have closed final salary pension schemes to new recruits have now also closed them to senior executives.

According to Watson Wyatt, which advises more than 50 per cent of the UK’s 100 largest corporate pension schemes, while 29 per cent of companies that have closed their final salary plans to new entrants are still providing final salary benefits to new executives, the majority have ended this option. Instead, they are providing executives with defined contribution (DC) pensions.

Four in five FTSE 100 companies now provide a defined contribution pension for at least some of their employees.

“Initially, many companies kept their final salary schemes open to their most senior employees to keep their executive pay packages competitive,” said John Ball, head of executive reward consulting at Watson Wyatt.

“But increasingly, companies are realising that not only is it becoming less palatable to have different pension structures for executives and the majority of the workforce, but they are also questioning the higher and less predictable costs associated with running a final salary plan for their highest paid employees.”

According to Watson Wyatt, typical contribution rates for executive DC pensions are around 15 to 20 per cent of salary.

“While this is higher than for an average employee – perhaps as much as double – it is significantly less than the cost of a traditional executive final salary pension promise, which could often require a company contribution rate of 30 to 40 per cent of salary, or even more if there were significant salary rises close to retirement,” said Ball.

“This has broader implications for a company’s executive remuneration policy. If executives can no longer rely on their company pension to provide them with a comfortable retirement, they will increasingly be looking for their long-term incentive arrangements, such as performance shares and share options, to provide this wealth accumulation.”

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