Pensions: Looking Under That Stone In The FTSE 100 Boardroom

Pensions are the cornerstone of corporate governance if you consider the importance of long-term investment in human capital and the retention of talent. Yet they have remained for too long as a silent stone in the corner of many a FTSE 100 boardroom. Increased scrutiny now in the UK on multiple fronts- from MPs, investors and regulators – is like lifting up that stone and finding something that looks very unpleasant underneath.

A steady decline in businesses providing any form of Defined Benefit (DB) pension benefit continues, with only 41% of the FTSE 100 now offering DB to existing UK employees. The overall construct of pensions and the corporate definition of their purpose -judging by the importance placed on the payment of dividends as opposed to pension contributions)- suggests a systemic flaw of the kind now being examined by the Institute of Fiscal Studies (IFS) in its Deaton Review on inequality. (I contributed a chapter on the pensions problem back in 2017 to this book published via the think tank Policy Network.)

In 2019 Britain, as we concern ourselves with raising the bar for better corporate governance around issues such as worker’s rights, gender equality and discrepancies in pay and look to more connected businesses and society around a sense of ‘fairness’, a report just published by actuarial consultants Lane Clark & Peacock offers an insight into much corporate thinking. The report’s spotlight on executive pay neatly brings all the concerns together at once.

Its analysis of the 2018 disclosed accounts of the FTSE 100 shows average CEO pension contributions of around 25%, typically paid as a cash supplement. As the chart below shows, the median pension contribution rate was four times higher for CEOs than the average contribution rate for employees.

Accounting for Pensions report, 2019 Lane, Clark & Peacock (LCP)

“Currently around half of the FTSE 100 pay CEO pension contributions of 25% or above and our analysis shows that currently only around 15% of the FTSE 100 companies pay CEO pension contributions or cash in line with their workforce” says LCP. The Business, Energy and Industrial Strategy (BEIS) parliamentary select committee has described the current position as “an unacceptable example of weak corporate governance and flagrant disregard for any notion of fairness”. The institutional investor community has also spoken out on this issue.

But, while LCP points to a developing trend of many large companies amending their remuneration policies to provide lower pension contribution rates for new executive appointments, it states that relatively few companies have reduced contribution rates for their current CEOs.

Surely we are not going to rely on generational change here too, as we appear to be doing when it comes to gender equality ? There is absolutely no incentive for those already entrenched in powerful positions to give up any of the accoutrements of power, and executive pay has become one of them, unchecked by boards and remuneration committees.

It is the legal enforcement of gender equality that has resulted in some high costs for the FTSE 100. LCP refers to a court ruling related to Lloyds Bank handed down on 26 October 2018, confirming that pension schemes need to remove the inequalities that arise between men and women because of iunequal “Guaranteed Minimum Pensions” (GMPs) earned between 1990 and 1991. The Lloyds Bank annual report for 2018 reveals its estimated cost of doing this to be over £100m.

“The judgement affects most companies with pension schemes, and five other FTSE 100 companies also revealed estimated costs of over £100m, with the total cost across the FTSE 100 estimated at around £1.3bn” says LCP.

Meanwhile, the CEOs of the same companies continue to reap their own personal economic benefits. It doesn’t make a lot of sense, frankly. We continue to play ‘catch-up’ with guidance, legislation and regulation and in the meantime, there is no benefit to the average worker’s daily life. No wonder there is a complete loss of trust in the UK regarding a fairer society.

On the payments of dividends versus pension contributions, nothing much has changed. Pension contributions remained steady, if you want to look for a positive headline. But more importantly, over 2018 the FTSE 100 paid around £90 billion in dividends, which is seven times the amount (£13 bn) paid into DB pension schemes. This is an increase from around six times in 2017, covered here on Board Talk.

This does not appear to be consistent with statements about valuing human capital in business, particularly at a time when the analysis around the use of automation and artificial intelligence suggests that it is the “human” soft skills that will become increasingly valuable.

As the issue of worker’s rights moves higher up on the agenda, pensions need to step firmly out from the hidden corner of business and regulation. There were changes last year to the UK Corporate Governance Code, and the report quotes the Investment Association (IA): “this is an issue of fairness and (executive) pension contributions should be aligned with the majority of the workforce.”

The Investment Association (IA) - whose members oversee assets of over £7 trillion, or roughly ten times the size of the combined FTSE 100 global pension schemes -is getting tougher in calling out the companies who appoint new directors from March 1 2019 whose rate of pension contributions exceeds those available for the majority of the workforce.

The IA’s voting service IVIS will also ‘red top’ companies that have no or only one women on their board. IVIS has said it will also issue an ‘amber-top’ (the second highest warning) to companies not on course to meet the requirements of the Hampton-Alexander review, for 33% of women on their board by 2020. IVIS will highlight any board with women representing 25% or less.

Let’s see how long it takes for business to act, rather than just listen. If the fight to date on gender equality is any guide, we could be waiting for some time yet for real change.

Image credit: Timon Studler on Unsplash