Top companies need to adopt best practice on executive pensions

A report from professional services organisation Deloitte reveals major inequalities in pension provision for executive directors across FTSE 350 companies, sometimes  within the same company.

Pensions can be worth anywhere between 20 per cent and 70 per cent of salary or more.

Deloitte’s research into trends in executive pension practice in FTSE 350 companies found that traditionally pensions have been the missing link in executive remuneration packages.

Pension provision has never really been considered an integral part of the package because of the difficulty of analysing and comparing them.

Bill Cohen, executive remuneration partner at Deloitte, said: “Since the mid 1990s 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. “

Balance required

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,” Cohen said.

“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.”

Pensions overlooked

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.

The Deloitte report, which benchmarks pension levels across FTSE 350 companies, also found that there is great variation in the type of pension provision for executive directors – 39 per cent of incumbent directors participate in defined contribution plans and 61 per cent participate in defined benefit plans.

But in 60 per cent of companies, new board members will only be offered participation in defined contribution plans.

Offers vary

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 per cent and 35 per cent 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 per cent and 55 per cent.

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 per cent and 25 per cent of salary, compared to a value ranging from 20 per cent to 60 per cent in the largest companies.

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