The boardroom and the rest: the real pensions divide
The pay gap between Britain’s boardrooms and the rest of the workforce is mirrored by an equally disturbing gulf in pensions provision, as shown in the TUC’s latest PensionsWatch report published today. The report looks at pension provision for directors in the FTSE 100.
For directors with defined benefit pensions, the average transfer value – the amount that would be taken out of the pension scheme if the director wanted to leave the scheme – is a massive £3.91 million. The average directors’ accrued pension – the amount that would be paid out each year on retirement based on current scheme membership – is £224,121 per year, over 23 times the average occupational pension. What is particularly shocking is that directors are frequently not in the same pension schemes as their own staff, and, despite their higher salaries, their pensions are often set up on much more generous terms.
So, still looking at defined benefit schemes, by far the most common accrual rate (the proportion of pay a person receives as pension for each year they have been in the scheme) for directors is 1/30ths , whereas accrual rates for employees are generally 1/60ths, or 1/80ths . What this means is that directors are accumulating pension entitlements much faster than ordinary workers, as well as benefiting from the fact that their pension will be based on their much higher rates of pay.
Many pension schemes for both private and public sector workers have moved to a normal retirement age or pension age of 65, and the Government has proposed a further extension of the normal pension age for public sector schemes. The most common retirement age for directors, however, is still 60.
Looking at defined contribution schemes, the average contribution rate for directors is 22%. This compares with an average for employees of 6.7%. The minimum employer contribution for employees covered by auto-enrolment will (eventually) be 3%. So, employees are waiting until 2017 until employers will be required to pay a minimum of 3% of pay into their pension schemes, while directors are currently receiving an average of 22% of their much larger pay packages in theirs.
Parts of the media and some business leaders are fond of referring to public sector pension schemes as ‘gold-plated’. In reality, the average (mean) public sector pension is £6,497 per year, making the ratio between average directors’ pension and the average public sector pension 34:1. In Local Government, the median pension is just over £3,000 per year (£3,048 to be precise), just 1/74th of the average directors’ pension. If this is ‘gold-plated’, what words should be used to describe directors’ pensions? Solid diamond? Or just unfair?
The gulf between the pensions of company directors and the rest of the workforce is the real pensions scandal. The TUC is calling for all directors to be members of the same pension schemes as their staff, on the same terms, and for better disclosure so that it is easier to compare directors’ pension provision with that of their own employees.