FTSE 250 executive pension costs fall as tax limits drive companies to smaller, more flexible pensions
LCP has today published its annual FTSE 250 Executive Pensions Survey 2012. The survey provides a comprehensive analysis of FTSE 250 executive pensions, looking at how they have changed in format and size over the past two years.
The 2012 survey demonstrates that 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. The average pension cost is now £68,000, down from £87,000 in 2010.
The drop is largely attributed to the new tax limits on pension savings introduced in April 2011, which capped the annual pension allowance at £50,000 and lifetime allowance at £1.5million. 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% of executives, a figure that stood at just 3% 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; 1 in 3 executives has annual pensions savings in registered pension schemes that exceed the annual allowance of £50,000, risking sizeable tax payments.
Other key findings of the report include:
- 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 £225,000 per annum.
- Historically pension compensation within the FTSE 250 has varied markedly depending on sector. Two years ago it varied from 6% of total remuneration (financials sector) to 34% (industrials and consumer goods sector). In 2012 this gap has closed considerably. Pensions compensation by sector is flatter, ranging from 6% to 12% of total remuneration.
Mark Jackson, partner at LCP and author of the report, said "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 £35,000 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."
He added: "This year's survey shows that, irrespective of the tax changes, pensions remain a valuable part of the pay packet of any senior executive, with the knock-on desire for a tax efficient and practical solution. The defined benefit scheme is disappearing and flexible DC and cash, are winning through."