FTSE 100 directors received cash in place of pensions worth more than a quarter of their salary in 2013, according to the latest report on executive compensation from Incomes Data Services (IDS), part of Thomson Reuters and the leading UK information and research service on employment issues.
IDS Executive Compensation Reviewreveals that FTSE 100 directors received cash worth an average of 27 percent of their salary in lieu of membership of a formal retirement scheme last year.Directors of AIM companies received an annual cash-in-lieu payment equal to a fifth (18 percent) of their salary. According to IDS, lead executives of FTSE 100 companies received an average of £225,580 in pension cash supplements in 2013, compared to AIM lead executives that received an average of £46,570.IDS explains that taxable cash payments of this kind are paid instead of a pension contribution when the total retirement pot has reached its tax beneficial limit. The lifetime allowance for a personal pension was lowered by HMRC in April 2014, to £1.25million.
As a result of the tightening restrictions on pensions tax relief, directors are increasingly turning away from membership of formal retirement schemes and instead taking cash. “The benefit of receiving pension cash supplements is that directors are then free to spend or invest the cash as they see fit,” comments Steve Tatton, editor of IDS’s Executive Compensation Review.”Many directors are opting to take cash in place of pension contributions because of tighter rules on pensions. In the top companies these cash supplements can be substantial.”
Stand-alone direct contribution (DC) and direct benefit (DB) pension schemes are no longer in favour with directors of FTSE 100 companies. Consequently directors’ pension plans now consist of a mix of arrangements rather than a single scheme, says IDS, with 55 percent of FTSE 100 directors using a combination of DC and DB schemes and cash supplements. The next most popular arrangement, with a quarter (24.7 percent) of FTSE 100 directors signed up, is a combination of DC schemes and cash supplements. “Many directors of FTSE 100 companies are opting for a combination of pension schemes. The schemes can be complex and are often tailored to suit the requirements of the individual,” says Steve Tatton.
IDS points out that in April 2014 the Government reduced the amount of pension savings that benefits from tax relief, from £50,000 to £40,000. “The new restriction on annual pension contributions has meant that directors are more willing to use a mixture of pension schemes. Consequently directors are able to make the most out of tax reliefs and receive cash in hand, which gives them more freedom over their pension investments,” concludes Steve Tatton.
