LCP has today published its annual Executive Pensions Survey. This year’s survey provides a comprehensive analysis of FTSE 100 executive pensions, looking at how they have changed in structure and size since the previous survey in 2011.
In spite of the continued move away from defined benefit (DB) pensions, which has prompted a decline in headline pension cost in LCP’s previous annual surveys, this year’s study reports a rise in the average value of a FTSE 100 executive’s pension provision – from £225k to £242k. This has expressed itself most noticeably in the median compensation for cash in lieu of pension which has risen from 25% to 30% of basic salary. This measure is used by companies and remuneration committees to benchmark their pension compensation for their own executives.
The 2013 report also shows that regulatory changes are having an impact on executive pension provision, finding that:
? Pensions will become a key component of single figure remuneration disclosure from October this year. 45 of the FTSE 100 have already provided advance disclosures in the spirit of the new requirements. However, many of those with DB schemes will need to amend their approach now that final regulations have been laid.
? The new, lower tax allowances are delivering for the taxman and will deliver even more from April next year. The amount of tax paid by UK-based FTSE 100 executives who cannot fit their pension savings into the annual or lifetime allowances averages £91,000 a year.
Mark Jackson, LCP partner and author of the report said: “30% is the new 25% for pension compensation at this level. The benchmark for a cash alternative to pension has risen by 5% of basic salary since 2011 and this, in turn, has prompted an increase in the headline cost of executive pensions to the country’s largest companies.”
Other key findings of the report include:
- Companies have responded to the lower annual and lifetime allowances on tax-relievable pension savings for the highest levels of UK management. A combination of DC and cash, or cash alone, is provided to more than half of executives, allowing maximum flexibility to remain within the new allowances.
- 30% of the FTSE 100 have some DB pension as part of their remuneration (a fall from 43% in 2011, and from 52% in 2009). Nevertheless DB pensions continue to be more valuable and costly to provide than other pension options. The cost of a DB pension has on average increased from 60% in 2011 of annual basic salary to 66% in 2013.
- Companies will disclose a lower DB pension value than currently for 2 out of 3 executives under the new single figure remuneration disclosure. The new regime will not reveal the underlying cost of defined benefit pensions. For example, a pension paid from age 55 will be shown as having the same value as a pension paid from age 65.
- From April 2014 the Annual Allowance will drop from £50,000 to £40,000. One in two executives with benefits in a tax-registered pension scheme will therefore face an annual charge. The Lifetime Allowance will drop from £1.5million to £1.25 million. 55% of executives in registered DB pension schemes already have a total pension pot in excess of £1.25m and will face an increase in their tax burden unless they can put appropriate protection in place.
Mark Jackson concluded: “There are striking pension challenges to come for UK companies and their executives. We will see new disclosure requirements in company accounts from October 2013, moving pension costs for executives out of the small print and into the spotlight, not to mention the next round of Annual and Lifetime Allowance reductions from April 2014. There is plenty for companies to do in reviewing their pension compensation packages and for executives in monitoring their savings – both present and future – against their new allowances.”
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