However, one thing the UK has never regulated is the provision of executive pensions. Many other liberal democracies have rules to prevent senior executives getting proportionately higher pensions, but the UK has always kept out of that area, preferring instead to focus on ensuring that what is promised gets paid in full.
As a result, the recent furore about the pension contributions for Ross McEwan, the CEO of the Royal Bank of Scotland, has not chimed with the political push on pensions. The focus from the political parties in their election manifestos, from Frank Field as chair of the Work and Pensions Select Committee and from Amber Rudd as secretary of state for Work and Pensions have all focused on “rogue employers” not paying into their pensions, and not at all on the argument that someone is paying too much.
As well as this, the law does not step in to stop large pensions for executives. In fact, a recent case relating to a company called Keymed involved, amongst other things, an argument that directors had behaved improperly by setting up an executive pension in which they enjoyed good benefits. The argument failed and it was clear that the court saw no legal reason why a generous pension should not be established for executives only.
In practice, significant executive pension payments have reduced in recent years purely for tax reasons. UK pensions are immensely tax effective, with no tax on contributions, none on the growth, income or capital gains in the scheme, and generally only income tax on 75% of the benefits that are paid out. However, recent years have seen a drop in the limits governing the benefits, and in particular the contributions that can be made in a tax efficient way relate only to £40,000 in any tax year.
The question then arises, should there be a control on pensions for senior employees? In general, one would assume, no more than any other form of executive pay – if it is inflated it does not really signify whether the pay is made by salary, pension or some other benefit. Of course, there is a concern that pension contributions may be made to an executive at the expense of providing a pension for employees, but as businesses are required to provide pensions for all employees under automatic enrolment legislation this can be ameliorated to some extent, although of course the minimum contribution rate for automatic enrolment at 3% from employer and 5% from employee are not generous, and unlikely to be sufficient for a decent income in retirement.
The present controls, such as the disincentive from tax treatment of higher contributions (McEwan’s pension contribution will clearly not benefit from the tax regime referred to above) and the need to disclose senior executive remuneration, ensures that significant pension contributions are self-regulated to some extent. Is it therefore wise, even if desirable, to consider any more controls?
Those of us in the pensions sector would be likely to argue strongly against this. The whole world of pensions, at its heart a simple concept of putting money by for one’s old age, has become entirely mired in regulation. Successive governments have tightened the obligations on employers running defined benefit pension schemes so far that nearly all of them have been closed down, and every time that new pension products arise, further regulation is put in place with a belief (in spite of all available evidence) that constant regulation will ensure there are never any bad outcomes.
The treatment of executive pension contributions is one area pensions regulation has yet to enter. Experience suggests that regulation will involve a lot of cost for compliant businesses, without, in the end, eradicating inappropriate behaviour.
Pensions do make headlines, and perceived misbehaviour can fill political speeches, but it often conceals the real issue. If McEwan’s total remuneration package is excessive, then the discussion should focus on that. Similarly, if it is not, the fact that a lot of his remuneration is being directed to his long term savings is largely irrelevant and, probably, no one’s business but his.
Rosalind Connor is a partner at Arc Pensions Law