Happily ever after

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Happily ever after

By Philip Inman

The Guardian, March 17, 2001

For these men retirement holds no fear, (…) thanks to their hugely enhanced pensions. But, Phillip Inman reports, it's a different story outside the boardroom, with those on less rewarding schemes facing a bleak future when they quit work.

Fears that Britain will be as divided in retirement as it is in work were fuelled this week by a survey that revealed the number of company directors who will be paid a pension of more than half a million pounds has more than trebled.

Last year, seven company directors in the survey could lay claim to a pension worth more than £500,000. A further 35 can rely on a pension package that will bring them more than a £250,000 each year, index linked to the rate of inflation. In 1999 there were only two members of the half a million pound club.

Unilever, the maker of Elizabeth Arden cosmetics and Wall's ice cream, provides one of the seven. Bob Phillips, who managed the cosmetics division, left the company last year. He can look forward to £556,723 in annual pension payments. Drugs giant Glaxo Smithkline is more generous. It is due to give its chief executive Jean-Pierre Garnier a pension of £700,000 and chairman Sir Richard Sykes £551,000.

Yet the survey underestimates the amount of money pouring into boardroom pension schemes and the number of directors who benefit. Only those directors with the largest pension entitlement in each FTSE 100 company are highlighted. Behind them lurk many more.

Unilever is a case in point. Niall Fitzgerald, the company's chairman, is also a member of the exclusive club after amassing a pension of £502,0000 so far.

Most directors of large companies enjoy the security of a pension linked to their final salary, known as a defined benefit scheme. They are guaranteed a proportion of their salary as a pension, which means that the sound of crashing stock markets will not keep them awake at night.

Employees often have more to fear. Final salary schemes are expensive and directors have been ditching them, if not for themselves, but certainly for the staff.

Those companies that have switched from offering final salary schemes to money purchase pensions, which have a defined contribution rather than defined benefit, will have seen their pensions gain little in the past year as stock markets stood still or tumbled.

In the last couple of years GlaxoWellcome, media group Reuters and the banks Alliance & Leicester, Halifax, Barclays and HSBC have all closed their final salary schemes to new staff. Employees joining these firms must pay into a money purchase scheme instead.

If staff are lucky enough to keep their final salary scheme they will be protected from the vagaries of the markets and will enjoy a better pension than anyone who has missed out. But they usually find themselves playing by a different set of pensions rules to directors.

To keep with Inland Revenue rules, companies can offer up to two-thirds of the final salary as pension. Traditionally, workers and directors needed to clock up 40 years out of a nominal 60 in the occupational scheme to get their two-thirds.

This rule can be bent and frequently is. What are called pensionable years can be added to your total in order to reach the 40 years target more quickly. Revenue rules allow directors to add pensionable years at a rate of one for every 30 years rather than 60, halving the time it takes to reach the maximum level. Other complex rules allow pensions to leap at a rate unimaginable for an employee. Clive Thompson, the chief executive of cleaning and business services company Rentokil Initial, had accrued a pension of £406,000 in 1999, according to the company's annual report for that year. By last year, the figure had risen to £502,000. The 23% jump in pension income is not in line with him adding another pensionable year to his tally. Nor is it justified by any increase in the company's profits, which moved up by 10.3%, or the share price. Since January 1999 Rentokil's share price has more than halved from 460p a share to 204p.

Geoff Mulcahy, the boss of B&Q to Superdrug retail business Kingfisher, capitalised on a 15% jump in profits to push his pension entitlement up by 24% from £440,000 to £548,000. Shares in the firm dropped by more than a third in the same period. None of the usual measures seems to account for the huge increases in accrued pension income. Even more interestingly, both companies have just reported drops in profits in the last month, along with further falls in their share prices. The effect on directors' pensions, however, will not be known until the latest annual reports appear next month.

The government believes that forcing companies to become more transparent about the rules around pay and perks packages will embarrass them into dropping ludicrous schemes that cannot be justified by either rises in share prices or profits. Instead of limits on boardroom excess or increased powers to stakeholders like employees, trade and industry secretary Stephen Byers said this week there will be new disclosure requirements to take effect from later this year. It is not known if pensions will be mentioned, but experts reckon it is unlikely. Shareholders will be the sole judges of excess, and they concentrate their fire on huge share option schemes rather than soaring pensions.

Rows this week about executive pay are typical. Matt Barratt, chief executive of Barclays, who could receive £36m if the bank meets certain targets, revealed further jumps in his own income. Most critics, however, focused on the cost of share options offered to Mr Barratt, which directly affect shareholders.

So for the moment, the situation is left to drift. Companies are paying their directors enhanced pensions in the good years as part of burgeoning pay and perks packages, while employees in the same scheme rely on clocking up their years of service. In addition, a growing band of employees rely on money purchase schemes.

The latest figures from the government actuary's depart ment for 1995 report that 52% of male employees were members of a final salary occupational pension scheme, down from 64% in the mid-1980s. The proportion of women in final salary schemes increased to 39%, but the rise followed a huge influx of women into the labour market in general.

Unfortunately, the problems for employees in money purchase schemes are not just about how the slow growth of investments can affect pension payouts.

The Association of British Insurers highlights that employers tend to put less money into money purchase schemes. Laurie Edmans, chairman of the association's pensions committee, says employers, on average, will cut their levels of contributions from 15% of salary to 10% after they move from final salary schemes.

Life insurers, while they like becoming the pension manager for a company money purchase scheme, are concerned by the overall drop in cash coming from employers into pensions investments. In effect, their own livelihoods are at risk along with the prospective pensioner if more employers dump final salary schemes.

Jim Cousins, a prominent backbench Labour MP and member of the Treasury select committee, is deeply concerned about the widening gap between pensions paid out to boardroom directors and employees. He is also disturbed by the uncertainty faced by employees who are only given the option of a money purchase scheme.

"We could be looking at the creation of a pension rich and pension poor. I think it is urgent that we look at the ways employees are treated compared to directors."

Mr Cousins says that ministers have failed to see the warning signals that shares can go up as well as down. "I think the government has been extremely naive in respect of the switch from defined benefit schemes to defined contribution. Given the falls in the stock market this week and over the last year, it shows how the payout from defined contribution schemes leaves the employee vulnerable."

He adds: "The government has projected the benefits of defined contribution pensions based on the gains of the last 10 years, which I think is a flawed way to approach an assessment of the next 10 years."

Help the Aged is concerned that the pensions landscape is changing to the detriment of employees. "It could be that the best days of pension policies in the UK are behind us," says Mervyn Kohler, the charity's head of public affairs.

He believes the current crop of employees nearing retirement are the real winners in the pensions battle. "They are doing quite well because many will have final salary pensions and unlike generations before them, the pensions payments have been protected from erosion by inflation. But now it is a pretty scary scenario."

He points to the way pensions are paid for on the con tinent, which involves a large commitment from the employer. "On the continent it is expected that employers must put in a decent whack of money to safeguard the pensions of employees. We seem to be going more in the direction of the US where everyone is left to fend for themselves."

Moderate trade unions such as the electrical and engineering union AEEU say directors should use the same rules as employees when calculating pensions.

The union's general secretary, Sir Ken Jackson, says: "We have never opposed reasonable levels of pay for directors, but there is clearly a problem when one set of principles is used for the board and another for employees."

Mr Barratt, of Barclays, negotiated a separate pension scheme that accelerated his path towards his two-thirds entitlement, says a spokesman for the bank. BP Amoco also admits that directors will earn their pension credits at twice the speed of employees.

According to the survey, conducted annually by Labour Research, early retirement is also governed by a "one rule for you and another for me" policy.

Ian Strachan, the former chairman of automated controls group Invensys, left the company last year at the age of 56. He received £1.5m compensation for cutting short his contract, £53,970 in other benefits and a pension credit of £64,724, taking his annual pension to £331,351. Given the large compensation package, it is not surprising he felt he would defer taking his pension until a later date.