FTSE 250 Executive Pensions Survey

Emergency Budget Special July 2010 FTSE 250 Executive Pensions Survey Executive pensions will be reshaped to prepare for April 2011 Key findings 33,000 The new pension tax payable every year before retirement for a typical FTSE 250 executive director under proposals in the Emergency Budget of 22nd June 2010. The new tax will be well over 100,000 a year for some. 15% The median employer cost of defined contribution ( DC ) pensions for FTSE 250 executive directors. 36% The median cost of defined benefit ( DB ) pensions for FTSE 250 executive directors. 1 out of 10 Out of every 10 newly appointed FTSE 250 executive directors during the last year only one received a DB pension. Seven received a DC pension and two a cash alternative. Double The average contribution rate to provide a pension to a FTSE 100 director when measured against a FTSE 250 director. Executives face double taxation of part of their pension savings from April 2011. Employers and remuneration committees must review pension packages well before April 2011. Executive pensions will look very different in a year s time. Pension provision will accelerate its shift from DB to DC for executives. LCP opinions

The Emergency Budget - new tax on pension savings On 22nd June 2010 the Chancellor announced that he will work with employers and the pensions industry to develop proposals for use of an annual allowance, set somewhere between 30,000 and 45,000, to reduce the cost of tax relief on pension savings to the Treasury by at least 3.5 billion a year. The principle of the annual allowance is simple. Members of defined contribution ( DC ) schemes enjoy tax relief on employer and employee contributions up to a maximum of the annual allowance. Contributions that exceed the annual allowance are subject to a tax payable by the individual. Members of defined benefit ( DB ) schemes need to calculate the value of their pension savings during the year, but the same principle applies whereby the excess of this value above the annual allowance is subject to tax payable by the individual. How will the annual allowance work? Executive with DB pension Executive with DC pension DB pension earned during the year: 12,000 pa Employer and director contributions during the HMRC value 1 : 10 x 12,000 = 120,000 year: 120,000 Excess over annual allowance 2 = 75,000 Excess over annual allowance 2 = 75,000 Additional tax to pay 3 Additional tax to pay 3 30,000 30,000 40% x 75,000 40% x 75,000 1 assumes current HMRC valuation factor of 10:1 applies after April 2011. This factor is very likely to be higher. 2 assumes annual allowance is set at 45,000. 3 assumes current HMRC rate of 40% applies after April 2011. This is likely to change to marginal rate of income tax after April 2011. Who is at risk of paying the new tax charge? DB members at risk of tax charge assumes HMRC value factor=20 DC members at risk of tax charge Accrual Rate 30ths 60ths 80ths 100ths Total contribution rate (%) 45% 30% 15% 20 45 68 90 120 135 150 180 225 Pensionable salary ( 000s) 340 20 67 100 150 200 300 400 Pensionable salary ( 000s) Value over 45k Value of 30k-45k Value under 30k For example, if the annual allowance is set at 30,000: A DB scheme member earning a 60ths pension with a pensionable salary of 90,000 is at risk. A DC scheme member with total employer and employee contributions of 15% and a pensionable salary of 200,000 is at risk. The new tax will apply from April 2011. Confirmation of the detail, including the parameters illustrated in our examples above, are needed as soon as possible, so that employers can prepare for April 2011. Page 2

Analysis of FTSE 250 remuneration Our analysis covers the FTSE 250 constituents as at 1st June 2010. We have analysed published accounts with accounting years ending during 2009. We have included executive directors in office at the end of each company s accounting year. Total number of executive directors in survey: 644. The FTSE 250 index includes the 101st to 350th largest companies with their primary listing on the London Stock Exchange. Composition of total remuneration The chart below shows how the key components of remuneration vary by sector. Sector is a key differentiator for pension provision. For example, executives in the utilities sector usually have DB pensions and this is reflected in the relatively high value of pensions for this sector. Utilities 34% Basic Consumer Goods Industrials Consumer Services Oil & Gas 17% 16% 12% 10% Higher pension as % of total Other Pension Basic Materials 9% Health Care 9% Telecommunications 8% Financials Technology 8% 6% 6% 0 20 40 60 80 100 % Pension as a percentage of total remuneration Pensions continue to form a significant part of executive compensation, representing 87,000 per annum (12%) of the average executive s total remuneration package. In order to allow comparison between all FTSE 250 executives the following adjustments were made to published audited information: Basic 87,000 pa (12%) - Basic salary and cash supplements have been converted to full year equivalents for executive directors who were appointed part way through the accounting year. - Currency conversions to sterling have been undertaken at the exchange rate stated in the accounts or, where this information is not available, at the prevailing mid-market rate at the accounting year end. - Other includes items such as performance-related bonus, taxable benefits and non-cash emoluments received during the year. Other Pension 281,000 pa (40%) 341,000 pa (48%) Page 3

Pension types Only a third of executives in the FTSE 250 still have some DB pension as part of their remuneration package. This compares to over half of FTSE 100 executives analysed in our 2009 Executive Pensions Survey. % of executives with each type of pension provision 8% 3% DC only 13% DB/Cash 41% DB only Cash in lieu of pension 15% No pension compensation DC/Cash 20% New appointments The decline in DB pension provision is set to continue - only one out of every 10 newly appointed executives during the year was provided with a DB pension. Seven were given DC pensions and two were given either a cash alternative or were left to make their own arrangements. DC pension DB pension Cash in lieu of pension Pension compensation levels in FTSE 250 We have considered the costs of each type of pension compensation separately. Many companies provide a mix of pension types but we comment where companies provide a uniform pension type to their executives. No pension compensation 8 companies provide no explicit pension compensation for all executive directors. BlueBay Asset Management Daejan Holdings Fidessa group Helical Bar PartyGaming rightmove Sports Direct International Xchanging Page 4

Cash in lieu of pension 12 companies provide cash in lieu of pension to all their executives. Our survey shows that where companies offer cash in lieu of pension, the contribution tends to be higher than an equivalent contribution to a DC pension. 888 Holdings Drax Group Bellway Gem Diamonds Cable & Wireless Genus Communications Catlin Group Hays Cookson Group Salamander Energy Dimension Data Holdings Tomkins Lower quartile Median Upper quartile % of basic salary 15% 20% 25% 30% 35% Defined Contribution pensions 55 companies provide defined contribution pensions to all their executives. Lower quartile Median Upper quartile Companies include: Aegis Group Big Yellow Group Booker Group Computacenter Connaught Dana Petroleum Domino s Pizza UK & IRL easyjet Great Portland Estates Halfords Group Intermediate Capital Group J D Wetherspoon McBride Misys Mondi Group Pace Punch Taverns Stobart Group % of basic salary 10% 15% 20% 25% 30% Defined Benefit pensions As an objective measure, and for the purpose of this report, we use each company s own calculation of pension value as disclosed in their remuneration report to estimate cost of the benefit. Only 10 companies provide defined benefit pensions to all their executives. Arriva AVEVA Group Britvic Chemring Group De La Rue Northern Foods Northumbrian Water Group Provident Financial Senior SIG Lower quartile Median Upper quartile % of basic salary 10% 20% 30% 40% 50% 60% 70% 80% 90% Benchmark your executives pension promises Our database contains a wealth of information on pension promises offered to executives of FTSE 100 and FTSE 250 companies. We can benchmark your executives pension arrangements against any or all of the following: The FTSE 100 group. The FTSE 250 group. An industry sector. A peer group of companies of your choice. Page 5

FTSE 250 versus FTSE 100 pensions Our 2009 Executive Pensions Survey analysed the pension arrangements of FTSE 100 executive directors. The chart below shows that the average employer cost (as a percentage of basic salary) for a FTSE 250 executive s pension is around half the cost for a FTSE 100 executive. Average employer cost 70% 60% 50% 45% 40% FTSE 100 average DC only DB only Cash in lieu of pension DB/Cash % of basic salary 35% 30% 25% 20% FTSE 250 average DB cost is based on: Increase in pension (net of inflation) Pension at end of year x Transfer value at end of year 15% 10% 5% 0% FTSE 100 FTSE 250 The Emergency Budget - impact on FTSE 250 The impact of the proposed tax on the executives in our survey will be significant. If HMRC sets the annual allowance at 45,000, continues with the current 40% charge for exceeding the annual allowance and the 10:1 DB value factor (see examples on page 2) then the average FTSE 250 executive will pay additional tax of 15,000 on pension savings each year before they retire if they carry on with their current pension arrangements. If, for example, HMRC increases the 40% charge to 50% (in line with the marginal income tax rate) and increases the DB value factor from 10 to 20 then the average tax charge will more than double to 33,000 on pensions savings each year. Tax charge for FTSE 250 executives by basic salary Average tax charge ( '000) pa 120 100 80 60 40 HMRC factor = 10 Tax charge at 40% HMRC factor = 20 Tax charge at marginal rate Assumes annual allowance set at 45,000 20 0 less than 250k 250k to 500k 500k to 750k more than 750k Basic Salary Page 6

April 2011 and beyond - a new landscape for executive pensions Annual pension savings that exceed the annual allowance will be subject to a new tax. Bearing in mind that pensions are subject to income tax when paid in retirement, pension savings above the annual allowance are being taxed twice. Employers and remuneration committees must review the pension packages for all employees, not just executives, to ensure that pensions are delivered tax efficiently. Limits on tax-efficient pension savings have been tinkered with for decades by successive Governments. As a consequence, a number of legacy pension promises remain in place which makes a review in advance of April 2011 all the more important. For example, 24 companies in our survey have provided unapproved pension arrangements to top-up pensions above HMRC limits. Range of vehicles used for annual pension savings UURBS FURBS EFRBS SIPP AVCs DC pension DB pension April 2011 Other compensation Annual allowance Total value of annual pension savings Many companies are taking the opportunity to simplify pension packages as part of a pre-april 2011 review. All companies need to review their pension promises well before April 2011 to ensure the following: Pensions are delivered through a tax approved pension scheme up to the annual allowance each year. To the extent that pension compensation is needed beyond the annual allowance, it is delivered in a practical and tax-efficient way. Communication of the new tax and its consequences for employees. Where employees have decisions to make, they are given plenty of time to consider their options. LCP viewpoint Page 7

About LCP Lane Clark & Peacock LLP (LCP) is a limited liability partnership and offers a full range of actuarial, benefit consultancy and risk services to clients in the UK and internationally through LCP Trustee Consulting, LCP Corporate Consulting, LCP Business Analytics, LCP Insurance Consulting and LCP Investment Consulting. LCP can help you to: To find out more Benchmark your executives pensions against a peer group Assess the impact of the 2010 Budget Identify appropriate pension compensation in the new era Assist in the transition of executives pension arrangements To find out more, please call your usual LCP partner, or contact: Mark Jackson Partner +44(0)207 439 2266 mark.jackson@lcp.uk.com Nick Westwell Partner +44(0)207 439 2266 nick.westwell@lcp.uk.com For further information about our services in this area please contact Mark Jackson or Nick Westwell, or the partner who normally advises you, on +44 (0)20 7439 2266 or visit our website at www.lcp.uk.com. This survey may be reproduced in whole or in part, without permission, provided prominent acknowledgement of the source is given. Although every effort is made to ensure that the information in this survey is accurate, Lane Clark & Peacock LLP accepts no responsibility whatsoever for any errors, or the actions of third parties. The purpose of the survey is to highlight the recent changes and developments within executive pension provision. This survey and the information it contains should not be relied upon as advice from LCP or a recommendation as to the appropriateness of executives pension arrangements. Specific professional advice should be sought to reflect an individual executive s/company s circumstances. This survey is based on Budget proposals and legislation at 1st July 2010. UK UK Belgium Ireland Jersey Netherlands Lane Clark & Peacock LLP 30 Old Burlington Street London W1S 3NN Tel: +44 (0)20 7439 2266 Fax: +44 (0)20 7439 0183 Lane Clark & Peacock LLP St Paul s House St Paul s Hill Winchester Hampshire SO22 5AB Tel: +44 (0)1962 870 060 Fax: +44 (0)1962 849 802 Lane Clark & Peacock Belgium CVBA Marcel Thirylaan 200 Avenue Marcel Thiry 200 B-1200 Brussel Bruxelles, Belgium Tel: +32 (0)2 761 45 45 Fax: +32 (0)2 761 45 46 Lane Clark & Peacock Ireland Limited Office 2 Grand Canal Wharf South Dock Road Dublin 4 Ireland Tel: +353 (0)1 614 43 93 Fax: +353 (0)1 668 63 03 Lane Clark & Peacock LLP * Oriel House York Lane, St Helier Jersey JE2 4YH Tel: +44 (0)1534 887 600 Fax: +44 (0)1534 837 888 Lane Clark & Peacock Netherlands B.V. Galghenwert (9th floor) Herculesplein 40 3584 AA Utrecht Netherlands Tel: +31 (0)30 256 76 30 Fax: +31 (0)30 256 76 31 LCP Libera AG Stockerstrasse 34 Postfach CH-8022 Zürich Tel: +41 (0)43 817 73 00 Fax: +41 (0)43 817 73 99 LCP Libera AG Aeschengraben 10 Postfach CH-4010 Basel Tel: +41 (0)61 205 74 00 Fax: +41 (0)61 205 74 99 LCP Asalis AG Stockerstrasse 34 Postfach CH-8022 Zürich Tel: +41 (0)43 344 42 10 Fax: +41 (0)43 344 42 11 All rights to this document are reserved to Lane Clark & Peacock LLP. This document may not be copied or used in any way without prior permission from Lane Clark & Peacock LLP. LCP is part of the Alexander Forbes Group, a leading independent provider of financial and risk services. Lane Clark & Peacock LLP is a limited liability partnership registered in England and Wales with registered number OC301436. LCP is a registered trademark in the UK (Regd. TM No 2315442) and in the EU (Regd. TM No 002935583). All partners are members of Lane Clark & Peacock LLP. A list of members names is available for inspection at 30 Old Burlington Street W1S 3NN, the firm s principal place of business and registered office. The firm is regulated by the Institute of Actuaries in respect of a range of investment business activities. * No regulated business is carried out from this office Lane Clark & Peacock LLP www.lcp.uk.com www.lcpeurope.com A member of the Multinational Group of Actuaries & Consultants. www.mgac.org Main offices in: AFRICA ASIA EUROPE NORTH AND SOUTH AMERICA UK c0710/0710