How do you go about aligning pension contribution/allowance rates to ensure compliance with the new UK Corporate Governance Code?
27 September 2018
The 2018 UK Corporate Governance Code (“Code”) includes a number of new Provisions (against which UK listed companies must comply or explain) on remuneration design that are intended to improve stakeholder alignment, whether with shareholders or employees.
On paper, these appear relatively straightforward, but it is the practical implementation of the Provisions that may well cause a few headaches.
A good example is the Provision that encourages companies to align executive directors’ pension benefits (i.e. pension contribution rates or allowances as a percentage of salary) with those available to the wider workforce. At first glance, this appears benign and sensible; but what does the Provision really mean and what are the ramifications of putting this into practice?
An obvious question immediately arises: What does ‘workforce’ mean? Is it enough to align executive directors’ pension rates with those of the next tier of management? It could be argued that these individuals form part of the workforce, but this doesn’t feel within the spirit of the Code. Does it mean that an average rate has to be determined for the workforce as a whole and the executive directors’ pension rates aligned with that? Or should all employees be moved to a new company-wide pension contribution/allowance rate?
Moving executive directors to a new pension rate that is aligned with most of the workforce sounds as though it could result in a massive haircut for the few most senior people in the organisation. For example, a CEO who earns an annual salary of £1m, and is currently benefiting from a 25% pension allowance, could see a reduction of around £200,000 per annum if his or her pension contributions are aligned with a workforce rate of 5%. That said, this is probably exactly what the Code is aiming for - pension allowances could well be seen as extra salary by another name. Also, any recompense for lower pension elsewhere in the package is likely to be impossible to implement, given the lack of wiggle room in most companies’ approved policies and the current investor attitude to increasing director salaries or incentive potential.
Although the Board Effectiveness Guidance offers a let-out for current incumbents, whose pension allowances are enshrined in service contracts, this only provides a breathing space until the next executive director is appointed. In the meantime, companies will need to decide how to tackle the problem of being unable to offer a remuneration package to prospective candidates that is consistent with either that of the previous role-holder or market norms.