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FTSE 250 executive pension costs fall as companies move to smaller, flexible pensions

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The cost of pensions within the average remuneration package of a FTSE 250 executive has fallen by a fifth since the survey was last carried out in 2010, according to a new survey by LCP.



The average pension cost is now GBP68,000, down from GBP87,000 in 2010.

The FTSE 250 Executive Pensions Survey 2012 reveals that the drop is largely attributed to the new tax limits on pension savings introduced in April 2011, which capped the annual pension allowance at GBP50,000 and lifetime allowance at GBP1.5m. 

The new tax environment has led companies to move away from higher-value final salary pensions and to offer smaller, more flexible pension compensation, which includes an element of defined contribution (DC) alongside cash supplements. Across the FTSE 250 this type of flexible pension compensation is now in place for 20 per cent of executives, a figure that stood at just three per cent two years ago.

The survey also shows that this increased flexibility has increased the burden on executives to plan carefully and make annual decisions relating to their pension savings in order to avoid unexpected tax bills or miss out on tax relief; one in three executives has annual pensions savings in registered pension schemes that exceed the annual allowance of GBP50,000, risking sizeable tax payments.

Stark differences between the pension compensation of FTSE 100 and FTSE 250 executives remain. The pension cost to the employer for the average FTSE 100 executive is three times that of his FTSE 250 peer, standing at GBP225,000 per annum.

Historically pension compensation within the FTSE 250 has varied markedly depending on sector. Two years ago it varied from six per cent of total remuneration (financials sector) to 34 per cent (industrials and consumer goods sector). In 2012 this gap has closed considerably.  Pensions compensation by sector is flatter, ranging from six per cent to 12 per cent of total remuneration.

Mark Jackson, partner at LCP and author of the report, says: “The Treasury has achieved its aim – in the old days executives got tax relief on all their pension compensation, but now they are actually paying tax on it. A FTSE 250 executive who cannot shoehorn their pension savings into the new limits is paying GBP35,000 a year in tax. The changes we have seen in this year’s survey highlight the need for careful – and annual – pensions planning and decision making by companies and their senior leaders. The executive who carries on regardless will suffer tax surprises and could miss out on valuable tax relief.”
 

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