Executive pensions face tighter clampdown from investors

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Sainsbury’s new CEO Simon Roberts receives a 7.5% pension allowance, compared to 30% for his predecessor
Photo: Sainsbury’s

Investors are clamping down further on executive pensions after the Investment Association updated its pay guidelines for companies.

Board directors have often profited from superior pension packages with pension contributions set considerably higher than for the wider workforce. But, in an attempt to promote fairness and good employee relations, the Investment Association (IA), the trade body for investment managers, has written to the remuneration committees of the UK’s 350 largest public businesses urging them to take a stronger stance.

The IA informed FTSE 350 companies that its Institutional Voting Information Service (IVIS) will assign a “red-top”, its highest level of warning, to those that fail to draw up a credible action plan to align incumbent directors’ pension contributions by the end of 2022, if they are 15% of salary or more.

The IA’s 2021 Principles of Remuneration lowers the threshold from last year, which was set at 25% of salary. New executive directors are expected to automatically join with a pension contribution aligned to the workforce rate.

Andrew Ninian, IA’s director of stewardship and corporate governance, said: “With coronavirus continuing to hit household finances across the UK, investors expect companies to treat their executive directors and workforce consistently when it comes to pay.

“Investors will be paying close attention to ensure pay remains linked to the experiences of shareholders, employees and other stakeholders. Aligning executive directors’ pension contributions with the rest of the workforce is fundamentally an issue of fairness. Investors have already played an important role in bringing about change and today’s announcement will further increase the pressure on those companies that have yet to take action.”

Many companies have already taken action. Sainsbury’s chief executive Simon Roberts receives a 7.5% pension allowance, in line with the supermarket’s workforce. He succeeded Mike Coupe in June, who commanded 30% when he was appointed in 2014.

Firms are expected to balance the need to incentivise executive performance, while reflecting the experience of investors, employees, and other stakeholders. As a result, investors have warned remuneration committees not to compensate executives for reduced pay as a result of the pandemic by adjusting next year’s remuneration, whether through ‘catch up’ awards or disproportionate salary increases.

The IA also does not generally expect bonuses to be paid if a company has taken government or shareholder support – any company that choses to do so is expected to provide a clear rationale.

IA members range from small, independent UK investment firms to global players. Collectively, they manage over £8.5 trillion of assets on behalf of their clients.