Align directors' pensions to workforce by 2022 or face dissent, shareholders tell companies

Friday 27 September 2019

Companies must set a credible plan to pay all executive directors the same pension contributions as the majority of their workforce by the end of 2022 or risk further shareholder dissent, the Investment Association (IA) has warned. Under new guidelines published today ahead of next year’s AGM season, companies with existing directors who are paid more than 25% of salary as a pension contribution will be given a ‘red top’ - the highest level of warning by the IA’s Institutional Voting Information Service (IVIS) - unless they have set out a credible action plan to bring their contributions in line with the workforce by the end of 2022.

This new guidance by the IA, which represents over 250 UK investment management firms who manage over £7.7 trillion of assets, follows changes to the UK Corporate Governance Code and the IA’s Principles of Remuneration last year to align executive pension contributions with the workforce. In February 2019 the IA’s guidance set out investors’ expectations to see executive directors paid pension contributions in line with the majority of the workforce, and this latest set of guidelines represent the next step in shareholder expectations on listed companies.

IA members consider aligning pension contributions for executives with the majority of the workforce as a point of fairness, in order to foster good employee relations. Executive remuneration, of which pensions contributions are one part, continues to be a growing reputational issue for companies with potential adverse impacts on their long-term value.

Executive pensions came under increasing shareholder scrutiny in the 2019 AGM season, and as a result of shareholder pressure, over one third (33) of companies in the FTSE 100 made significant changes to their executive directors’ pension contributions, including one quarter (25) of companies pledging to pay all new directors pensions in line with the majority of the workforce.

For companies with year-ends starting on or after 31 December 2019, the IA’s IVIS will from the start of the 2020 AGM season:

• ‘Amber top’ any company with an existing director who has a pension contribution 25% of salary or more, as long as they have set out a credible plan to reduce that pension to the level of the majority of the workforce by the end of 2022.
• ‘Red top’ any company with an existing director who has a pension contribution 25% of salary or more, and has not set out a credible plan to reduce that contribution to the level of the majority of the workforce by the end of 2022.
• ‘Red top’ any company who appoints a new executive director or a director changes role with a pension contribution out of line with the majority of the workforce, or seeks approval for a new remuneration policy which does not explicitly state that any new director will have their pension contribution set in line with the majority of the workforce.

Andrew Ninian, Director of Stewardship and Corporate Governance at the Investment Association, said:

“Providing directors the same pension contributions as the rest of the workforce is fundamentally an issue of fairness, and we welcome the strong progress a number of companies have made towards bringing executive pension contributions in line with their workforce. We are particularly pleased that some companies have used this shareholder scrutiny as an opportunity to assess whether their broader workforce contribution rates are appropriate.

“Shareholders want to see that progress continue, with the aim of pension payments for executives being in line with the majority of the workforce by the end of 2022. Our new guidelines require companies to show they are serious about that ambition and set out a credible action plan to deliver it. Companies with high executive pension payments who don’t provide that plan risk facing further shareholder rebellions in their 2020 AGMs.”

Companies will now also be asked to publish the pension contributions they pay to the majority of their workforce, and review those contributions to all employees to ensure they provide an appropriate pension provision for all.

The executive pension contribution is only part of an executive’s wider pay package which shareholders take into account. The IA will publishing its updated Principles of Remuneration in October, which will cover IA members' expectations on other areas of the remuneration structure.