Cash for pensions
The TUC has today published the 2013 edition of PensionsWatch. Anyone familiar with previous editions in this series (which began in 2003, looking at directors’ pensions in FTSE 100 companies) will find its main results depressingly well-rehearsed, although alarming nonetheless.
However, this year’s report documents evidence that not only are directors of the UK’s biggest companies receiving far better terms than their employees when it comes to pension arrangements, but many are now opting out of pensions altogether in return for cash payments in lieu of employer pension contributions – showing a worrying lack of faith in the schemes their employees are currently being automatically enrolled into.
The report details the trend whereby a growing number of directors are being provided with cash payments instead of, or in some case in addition to, pension provision. The average payment of this type found in this year’s research is £169,679 while the average employer cash contribution to the director who received the highest payment in each company is £224,936.
Stephen Hester and Bruce Van Saun of the Royal Bank of Scotland received £420,000 and £408,000 respectively under these arrangements, in return for giving up pension contributions for a year, while the director with the largest cash payment was Myles Lee of CRH with £799,778. Directors receiving cash payments now get on average 29 per cent of their salary each year in lieu of pension entitlements – this has risen from around 23 per cent in 2010.
Of course, there are many FTSE100 directors that haven’t opted for cash, and still therefore enjoy very generous pensions. The average value of pensions for directors with defined benefit pensions was £4.73 million. For the directors with the largest entitlement at each company, the average value is £6.3 million. The average accrued defined benefit pension is more than £250,000 per year, over 25 times the national average for occupational pensions in payment.
For directors with defined contribution pensions, the average annual contribution by employers was £160,380, with an average contribution rate of 23 per cent – having risen steadily from 20 per cent when PensionsWatch started.
This compares to an average in trust-based schemes across the country of 6.6 per cent. We do not know the average rate for the more popular contract-based schemes, but do know that 30 per cent of contract-based scheme members have an employer contribution rate below 4 per cent, and a further 40 per cent have contributions between 4 per cent and 8 per cent.
As such, although we are seeing the same drift away from defined benefit provision among directors’ pensions as in the rest of the labour market, very generous defined contribution terms and the prevalence of alternative cash payments means that for directors this trend is not associated with the decline in occupational pensions provision in the same way that is has been for ordinary employees.
Reporting of pension arrangements for directors in FTSE100 countries needs to be improved – regulations on disclosure remain too relaxed, and many companies choose not to make public key aspects of their arrangements. (This means that the PensionsWatch dataset is actually incomplete – it seems likely that our findings are therefore underestimating the extent of pensions inequality in the UK’s biggest firms.) With the intense spotlight now on directors’ pay and bonuses, we may be seeing companies using pensions – even where provided in cash up front – as a way of evading public scrutiny of their remuneration practices.
Above all, we need to see directors and ordinary workers enrolled in pension schemes on the same terms. Pensions are not generally performance related, and there is no clear case for differential treatment. Vastly higher earnings means that, even with the same rates of contribution across the workforce, directors will still receive far higher levels of employer contributions.