Investment Association increases pressure on executive pensions in updated remuneration guidelines

The Investment Association (IA) recently published its annual letter to Remuneration Committee Chairs as well as its updated Principles of Remuneration which provide additional clarity on the IA’s position on various areas, including executive pensions.

The IA continues to expect pension contributions for executives (both new and incumbent) to be aligned with those available to the rest of the workforce by the end of 2022 and it is increasing the pressure on companies that do not have a credible action plan in place to achieve this.

The principles also provide further clarity on the IA’s position on post-employment holding periods, personal and environmental, social and governance (ESG) performance measures, bonus deferral and leaver provisions. To find out more about these, see our incentives team’s briefing.

Pension contributions for new directors

It is now standard market practice for any new executive director or any director changing position to be appointed on pension contributions that are aligned with the rate payable in respect of the majority of the workforce. In 2021, IA’s Institutional Voting Information Service (IVIS) will continue with its current approach, meaning:

• any new remuneration policy that does not explicitly state that any new executive director appointed will have their pension contribution set in line with the majority of the workforce will result in a Red Top on the remuneration policy, and
• any new executive director or director changing role whose pension contribution is not aligned with the rate payable in respect of the majority of the workforce will result in a Red Top on the remuneration report.

Pension contributions for incumbent directors

For companies with year-ends starting on or after 31 December 2020, the IVIS expects:

• pension contributions of incumbent directors to be aligned with the rate payable in respect of the majority of the workforce by the end of 2022, and
• if there is no credible action plan in place to acheive this, the level of contributions for executives at which IVIS will red top the remuneration report will reduce from 25% to 15%.

Separately, the Institutional Shareholder Services (ISS) has updated its UK proxy voting guidelines for 2021. One of the updates includes a particular focus on the extent to which pension contributions are aligned with those available to the wider workforce and whether there is an appropriate post-employment shareholding requirement in place.

Comment

Levels of executive pension contributions continue to be “hot topics” for the IA. This is unsurprising given its expectation that pension contributions for all executive directors are aligned with those available to the wider workforce by the end of 2022 and in light of the impact of the current economic environment on jobs and pay. The IA is increasing the pressure on Remuneration Committees to adjust the pension contributions for incumbent (as well as new) directors by reducing the threshold at which IVIS will red top remuneration reports if there is no credible alignment strategy in place.

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