News analysis: Are bosses’ pensions fair?

The TUC’s PensionsWatch survey has revealed major disparities between directors’ pensions and those of other employees, says Tynan Barton

The issue of fairness around pensions provision within organisations came to the fore last month with the publication of the Trades Union Congress’ (TUC’s) ninth PensionsWatch survey.

It found that the average defined benefit (DB) pension pot for directors in FTSE 100 companies is £3.91 million, providing an average annual pension of £224,121. But it is generally accepted that directors are well paid and therefore accrue bigger pensions, so are these figures surprising? James Biggs, head of corporate pensions, workplace savings, at Lorica Employee Benefits, said: “A pension should only be a by-product of earnings, and therefore it does imply that those guys’ earnings have been excessively higher than for normal employees.”

The TUC also found that the most common accrual rate for directors is 1/30th, compared with typical rates of 1/60th to 1/80th for other staff. Tom Powdrill, spokesman for research and advisory consultancy Pirc, said: “We expect the people who run our companies to be well paid. Equally, because they have larger salaries, they are going to accrue larger pensions, or get bigger contributions as a percentage of salary. But there is no obvious reason why they should get this turbo charge as well, a rapid accrual rate in a DB scheme or a much higher contribution in a defined contribution (DC) scheme.”

Powdrill said company shareholders look for performance linkage in executive remuneration. They want to ensure directors’ reward is linked to the organisation’s performance. “In terms of pension provision, there is not much performance linkage, so it does not make sense to have more generous terms for directors than for other staff.”

Appropriate reward

Part of the issue is appropriate reward for different categories of staff, said David Marlow, development manager at Creative Benefits. “If an organisation needs to recruit someone, these are the sorts of benefit it needs to provide, and if that is the competitiveness of the market it operates in, you can see why it would make those available. But it is not going to resonate well with the bulk of the people.”

Providing different benefits for different groups within an organisation is common practice, but the TUC’s figures highlight startling disparities in pension provision. Nicola Smith, head of economics and social affairs at the TUC, said: “What might be surprising for many employees is the proportion of directors that are in DB schemes, 58%, far higher than staff in general. The contribution rates that directors in DC schemes receive from their employers average 22%, again far above the average for most employees. Our view is that employees and directors should be in the same pension scheme. We see no reason for providing directors with superior benefits.”

The cost of keeping a DB scheme open to future accrual may also impact on the profitability of a business when many organisations have recovery plans in place for these schemes. Keeping a DB scheme open can be a huge additional cost that could lead to less profit, which, in turn, can affect pay rises and bonuses for ordinary staff. “This will, ultimately, impact on their own pensions because they will have less disposable cash,” said Biggs.

Powdrill concludes that although there is a degree of transparency over directors’ pensions, more is needed. “I am certain that if it was disclosed in an easily understandable format, there would be pressure from within organisations, from other stakeholders, for bringing these things into line,” he said. “Our view is that people are relatively grown up about the need to pay people a lot of money to run organisations, but when you have one rule for one group and one rule for another, you understand why that might annoy people.”

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