Punishing Poor Pensions: The Investment Association cracks down on pension schemes

October 9, 2019

2 min read

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What's going on here?

The Investment Association (IA) have decided to issue penalties to firms that have unfair pension plans.

What does this mean?

The Investment Association, a trade body that represents over 250 UK investment management firms, recently began implementing penalties on companies that refuse to release sincere plans to close the gap between the pensions of their executive members and the rest of the workforce. The IA are expecting this issue to be resolved by 2022. However, if firms refuse to publish plans that will achieve this target, they can expect to face severe financial consequences.

The IA plan to issue warnings (“tops”) to get companies to re-adjust their pension schemes. The IA will issue an “amber top” to companies with an existing director who has a pension worth 25% or more of their salary, as long as they have a plan that will decrease the pension and bring it in line with the majority of the workforce.

A “red top” will be issued to companies that have a director with a pension worth 25% or more of their salary but fail to release a plan that will reduce this contribution by 2022. The red top penalty will also be issued to a company that promotes a new director with a pension plan that is out of line with the majority of the workforce. These tops will be included in the firm’s annual reports and are likely to act as a warning label to potential investors.

What's the big picture effect?

It currently stands that executive members typically receive more than 25% of their salary as a pension contribution whilst the rest of the workforce typically receive a pension worth 10% of their pay. However, the pressure exerted by shareholders has forced firms to re-evaluate this as they risk being issued a red warning on their annual reports. These warnings will be taken into consideration when each Investment Association member has a yearly meeting concerning their voting plans.

Negative annual reports are not the only penalty firms could face as shareholders threaten to revolt if the pension inequality is not resolved. In May 2019, 40% of Standard Chartered’s shareholders refused to support the bank’s remuneration policy. This is only the tip of the iceberg as Andrew Ninian, director at the IA, has promised that companies “who don’t provide [a] plan risk facing further shareholder rebellions in their 2020 AGMs”. These warnings have begun to prompt firms into implementing changes to their pension policies to ensure companies no longer pay their executives the majority of retirement benefits.

In 2019, 33 of the FTSE 100 companies adjusted their executive pensions, with 25 of those companies promising to pay their executives in line with the rest of the workforce within the two-year deadline. It appears the threat of shareholder revolt has been effective in forcing some firms to make the required changes to their pension plans and with shareholders showing no signs of relenting the pressure, it seems it will only be a matter of time before other firms follow suit.

Report written by Hanna Tesfazghi

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