UK – Highly paid employees can no longer rely on their employer to provide them with a final salary pension plan, according to a survey published by management consultants Towers Perrin.
The UK Executive Pension Provision study, which covers 211 UK companies’ executive pension arrangements, suggests that two thirds of employers have abandoned final salary pensions to executives whose wages reach the earnings cap of £91,800 a year.
Over 20% of companies provide no pension benefit above the earnings cap, while the rest offer cash supplements, money purchase benefits or a choice of benefits or cash.
“Not far off half of senior executives are now affected by the earnings cap. It is also no longer just affecting senior management but also other high paid employees,” says Tilly Ross, senior consultant in Towers Perrin’s employee benefits practice.
“ As the number of capped executives increases, one-off solutions are ceasing to be viable and companies are putting more formal policies in place. However, individual negotiation is likely to remain prevalent when trying to recruit at the most senior levels.”
The report says this situation might result in more companies favouring money purchase provision for all employees. The increasing complexity and diversity of provisions, however, mean that it is becoming more and more difficult for executives to understand their benefits.
Also, advice on a one-to-one basis is becoming less popular with IT-based education and projection tools being favoured by companies.
As a result, lack of understanding on the part of the executives is more common, the survey suggests.
Of the participating companies, 78% provide final salary benefits to executives - a slight reduction from 81% in 1998 and 90% in 1996.
Over 92% of the respondent companies employ executives with earnings over the cap, and 22% of the companies have over twenty capped executives.
Among the companies with policies for highly paid employees, 34% provide final salary benefits, 34% provide money purchase or cash in lieu of benefits, 11% provide a combination of the two and 21% make no specific provision for pensions over the cap.
The 1989 Finance Act introduced an earnings cap of £60,000 per annum for new members of UK occupational schemes on or after June 1, 1989. This meant that tax-approved schemes can only provide pensions for such members on earnings up to the cap and the maximum is restricted to two-thirds of the cap for such members.
The earnings cap has generally increased in line with price inflation and in the current tax year is £91,800. Many companies have established unapproved and unfunded arrangements to compensate for the shortfall in pension benefits.