SIMON LAMBERT: Look after the boss’s pension or they won’t look after yours – how squeezing high-earners backfired
Look after the boss’s pension and they should look after yours.
At a time when executive pay has soared compared to the average worker, it might seem odd to be worried about those at the top’s remuneration.
Yet, among the unintended consequences of squeezing the highest earners’ pensions is that they have less incentive to look after ours.
When the time comes to decide whether to keep the final salary scheme open – or how much to top up workers’ defined contribution pensions by – having the executives benefit from the same thing helps.
Their vested interest pays off for the rest of us.
Taking away high earner’s pension breaks has been sold as targeting the rich, but it has dented ordinary worker’s retirement plans too
The problem is, however, that the lifetime and annual allowances have been squeezing them out of company pensions.
When the directors’ pension pots hit just over £1million, or their annual payments in hit £40,000, they end up with a tax headache that means there is little point in them remaining in the company retirement scheme.
This has been exacerbated by the tapering of the annual allowance for those paid more than £150,000, which ultimately drags it down to £10,000 at £210,000 or more.
‘Rich folks’ problems and certainly not mine’, I hear you say.
Yet, a report on Investment Association research this week highlighted a symptom of this: top bosses getting huge special cash ‘pension contributions’ rather than the standard company payment into their retirement pot that normal workers get.
These can be worth hundreds of thousands of pounds and became increasingly common as those in this rarefied atmosphere stopped seeing the benefit of being in company pension schemes.
Things have got worse thanks to the lifetime allowance diving from £1.8million to £1million and the annual allowance being pared back too from £255,000.
Had these executives not been squeezed out of their company pensions, they would have a much greater incentive to improve things for workers.
Special pension contributions for some of the top FTSE bosses are eye-watering, including Lloyds’ Antonio Horta-Osorio, pictured
A separate report from Warwick Business School highlights the benefit of self-interest and says ideally you want the top dogs in the same pension scheme as the riffraff.
It looked at all the 322 publicly listed UK companies that offered a defined benefit pension scheme between 1999 and 2013 and found that CEOs were 77 per cent less likely to close one if they were also a member of the plan – even if it was in deficit.
Life for final salary and other defined benefit pension schemes has got worse since 2013, with the low interest rate world after the financial crisis instrumental in more closures, but bundling executives out with a punitive tax regime is likely to have exacerbated the problem.
I asked Professor Joanne Horton, of the Warwick Business School study, about this and she said: ‘Due to the changes in the tax threshold for pensions the incentives of these executives is likely to change, as they will probably have hit their lifetime allowance so the incentive generated from the DB plan is not likely to be very strong, and therefore we predict that more DB plans will close as the executive self-interest incentives have reduced.’
She argues that getting executives into the same schemes as workers could be the most effective way of protecting salary-related pensions and preventing Carillion or BHS-style collapses.
Following that logic, even if a firm’s final salary scheme is long gone, having bosses in the defined contribution scheme – rather than bumping them out to pick up payments in lieu of pension – will also benefit workers.
Taking away high earner’s pension breaks may sound like targeting the rich, but it has backfired and while they pick up big payouts our retirement prospects suffer.