The UK Corporate Governance Code July 2018 (UKCGC)1 states that executive pension contribution rates should be aligned with those available to the workforce. In a climate where chief executives in the FTSE 100 have been enjoying pension contribution rates of around 25-30% while their employees receive around 9-10% 2, this highlights the need for change.


The exact UKCGC wording is: “Only basic salary should be pensionable. The pension contribution rates for executive directors, or payments in lieu, should be aligned with those available to the workforce. The pension consequences and associated costs of basic salary increases and any other changes in pensionable remuneration, or contribution rates, particularly for directors close to retirement, should be carefully considered when compared with workforce arrangements”.

Accompanying guidance on board effectiveness says that while it may not be practical to alter existing contractual commitments in this regard, remuneration committees will need to ensure future contractual arrangements comply. The Investment Association (IA) took a stronger stance in its February 20193 warning saying that:

• Any new executive director appointee whose pension contribution is above the level of the majority of the workforce will result in a ‘red top’ alert on the remuneration report.
• Any existing executive director receiving a pension contribution of 25% of salary or more will be ‘amber topped’ on the remuneration report.

A ’red top’ is the highest level of warning issued by the IA’s Institutional Voting Information Service (which aids shareholders in voting decisions). It is reserved for “companies where shareholders should have the most significant and serious concerns”.

The IA Principles of Remuneration make it clear that for new appointees this needs to be addressed now. Whilst, for others, it needs to be addressed over time such that the pension contributions are be reduced over time to equal the rate received by the majority of the workforce. Allowing time to resolve these issues is a sensible approach given the fact that amending an executive’s pension contribution would usually involve a contractual change exercise and requires consideration of the executive’s remuneration package and incentives as a whole.

The risk of not following the UKCGC and the IA Principles of Remuneration is the risk of a vote against the remuneration policy.

The House of Commons Business, Energy and Industrial Strategy (BEIS) Committee issued a report in March 2019 echoing these sentiments and also stating that it believes that the primary responsibility for changing the environment on executive pay “rests with the asset owners – the pension funds that invest our money for the long term”.

There is a certain irony in the fact that it may be pension schemes themselves, in their capacity as institutional investors, that are best placed to put pressure on remuneration committees around pension policy for executives.

1. Applies to companies with a premium listing and to accounting periods beginning from 1 January 2019.
2. Source: Business, Energy and Industrial Strategy Committee report “Executive Rewards: Paying for Success”.
3. https://www. theinvestmentassociation.org/ media-centre/press-releases/2019/ investors-to-target-pension-perksand-poor-diversity-in-2019-agmseason.html

Anthea Whitton

Partner – Eversheds

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