Executive pensions are morphing into salary top-ups for well-paid directors, says the TUC’s Tim Sharp in a guest blog

The latest TUC PensionsWatch, published today, tells both a familiar story and a new one.

Our study of executive pensions at FTSE-100 companies shows a two-tier system with lavish awards at the top-end and, for the large part, inadequate contributions at the other. This long-standing divide is widening as executive pay packages pull away from the rest.

What is relatively new is the emerging disconnection between executives and workplace pensions. A pension contribution is no longer about retirement savings for many directors. It is a cash top-up to a salary.

Cash payments in lieu of pensions first started making an appearance in our analysis in 2008. At the time the vast majority of senior executives were accruing generous defined benefit (DB) pensions, often on terms far more favourable than those offered to the bulk of employees. Cash was companies’ answer to the 2006 A-Day reforms limiting tax relief on large pensions.

Then just four companies in the FTSE-100 offered them to executives. Now 76 provide cash top-ups to at least one director. The trend towards cash has accelerated in the wake of the current government’s decision to cut individuals’ annual and lifetime allowances for pensions.

The typical cash contribution to executive remuneration in lieu of pension is 16.6 per cent of basic salary, or more than £149,493 each, our research found. For some the cash element is just part of a lavish buffet of pension options with many getting cash on top of contributions to defined contribution (DC), or more rarely, DB plans. A select few are accruing rights to DC and DB schemes as well as getting cash top-ups.

The higher up the company, the more you can expect. The recipient of the largest cash pension allowance at each company receives on average 24.5 per cent of salary or £230,854. Some get upwards of 80 per cent.

It is arguably good that limits to pension allowances means a greater proportion of executives’ remuneration packages are being taxed up front as income. Indeed much more could be done to ensure that tax incentives to save for retirement are targeted at those who could most benefit from them.

But the use of cash supplements to circumvent the allowances mean that executive pension contributions are increasingly just topping up a salary. This could undermine the many positive things going on in workplace pensions (with the clear exception of the government’s ill-thought out reforms to retirement income).

Take, for example, pension auto-enrolment. It presents a significant opportunity to ensure that millions of workers receive a decent income in retirement. However, this will only happen if contribution rates, particularly from employers, are increased.

Likewise, executives whose own pension contributions are just another top-up to the annual package, alongside the private health insurance and car allowance, are surely less likely to look at more effective and innovative means of providing decent retirement incomes for employees such as utilising powers contained in the current Pension Schemes Bill allowing the establishment of collective defined contribution pensions?

It is important that excesses at the top of corporate Britain are not allowed to blight the opportunity for better pension provision for the rest.

Tim Sharp is the TUC’s pensions policy officer