Shareholder pressure to curb excessive pensions for top bosses

Listed companies are under pressure to align executive pension contributions with the workforce, after the Investment Association (IA) said it will give a ‘red top’, its highest level of warning, to any companies with existing directors who are paid more than 25% of salary as a pension contribution

Under new guidelines published ahead of next year’s AGM season, the IA says it will be looking to companies to set a credible plan to pay all executive directors the same pension contributions as the majority of their workforce by the end of 2022 or risk further shareholder dissent.

The new guidance by the IA, which represents over 250 UK investment management firms, follows changes to the UK corporate governance code and the IA’s principles of remuneration last year to align executive pension contributions with the workforce.

Executive pensions came under increasing shareholder scrutiny in the 2019 AGM season, and as a result of shareholder pressure, over one third (33) of companies in the FTSE 100 made significant changes to their executive directors’ pension contributions, including one quarter (25) of companies pledging to pay all new directors pensions in line with the majority of the workforce.

For companies with year-ends starting on or after 31 December 2019, the IA’s pensions warnings will from the start of the 2020 AGM season. The association will give an ‘amber top’ to any company with an existing director who has a pension contribution over 25% of salary, as long as they have set out a credible plan to reduce that pension to the level of the majority of the workforce by the end of 2022.

‘Red top’ warnings will be given to any company with an existing director who has a pension contribution over 25% of salary, and has not set out a credible plan to reduce that contribution to the level of the majority of the workforce by the end of 2022.

There will also be a ‘red top’  for any company who appoints a new executive director or a director changes role with a pension contribution out of line with the majority of the workforce, or seeks approval for a new remuneration policy which does not explicitly state that any new director will have their pension contribution set in line with the majority of the workforce.

Andrew Ninian, director of stewardship and corporate governance at the IA, said: ‘Providing directors the same pension contributions as the rest of the workforce is fundamentally an issue of fairness, and we welcome the strong progress a number of companies have made towards bringing executive pension contributions in line with their workforce.

‘Shareholders want to see that progress continue, with the aim of pension payments for executives being in line with the majority of the workforce by the end of 2022. Our new guidelines require companies to show they are serious about that ambition and set out a credible action plan to deliver it. Companies with high executive pension payments who don’t provide that plan risk facing further shareholder rebellions in their 2020 AGMs.’

Companies will now also be asked to publish the pension contributions they pay to the majority of their workforce, and review those contributions to all employees to ensure they provide an appropriate pension provision for all.

The IA says executive pension contribution is only part of an executive’s wider pay package which shareholders take into account. It will be publishing its updated principles of remuneration in October, which will cover IA members' expectations on other areas of the remuneration structure.

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