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Mercer proposes standard pension calculation

UK – Mercer Human Resource Consulting has proposed a standardised method of calculating the cost to a company of executive pension provision.

The proposal is part of efforts to make executive pay more transparent.

A working party of institutional shareholders, companies and the media, put together by pay and pensions advisor Mercer, has spent six months working on an approach to executive pay valuation that will remove inconsistencies in disclosure and result in transparency. It is hoped that the methodology will become the standard.

Explains Simon Patterson, worldwide partner at Mercer: “"Different companies use a range of approaches when valuing pay and long-term incentives, and in setting performance conditions for their executives.

“A further complication is that most executives have several overlapping share-based awards that differ in value at any one time. The new methodology is an attempt to make sense of this confusing muddle of information released into the public domain."

The method uses an ‘expected value approach’ which, rather than the current system, is forward-looking, and allows a more consistent comparison to be made between companies.

With regards to pension valuation, Mercer is recommending a calculation based on the increase in total accrued pension net of inflation, multiplied by 20 – not taking into account the actual benefit structure which is not currently disclosed. “Twenty pounds is the approximate cost of securing a pension of one pound each year from age 60, including the usual allowances for spouses’ benefits and pension increases,” says Mercer.

Up until now pensions entitlements have largely been ignored when looking at executive pay. The increase in defined contribution schemes has brought the issue to light.

"What we are looking for is to remove the interpretation of data from the equation, and create real transparency. We can then concentrate on the important issue - that of identifying those companies where top pay actually rewards top performance,” says Patterson.

The controversial issue of over-generous executive pay packages has been a hot topic this year as shareholder activism increases. Most recently shareholders voted to reject a controversial pay package of the chief executive of drugs company GlaxoSmithKline - the first time a UK blue-chip company has had its pay scheme rejected by shareholders.

Mercer’s new method was announced today, and a wider consultation with the business community is being undertaken. The consultant will engage with the Association of British Insurers, the National Association of Pension Funds, and the London Stock Exchange among others.

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