In its annual FTSE 250 Executive Pensions Survey, the consultancy found that the average pension cost of an executive working for one of the UK’s leading 250 companies was £68,000, compared to £87,000 in 2010.
According to LCP, the drop is largely due to tax limits on pension savings introduced last April, which capped the annual pension allowance at £50,000 and the lifetime allowance at £1.5m.
This has led companies to move away from higher-value final salary pensions and to offer smaller, more flexible pension compensation that includes an element of defined contribution alongside cash supplements. This type of flexible approach is now in place for 20% of executives, compared to 3% two years ago.
LCP explained that this flexibility meant executives were under more pressure to plan their pensions savings carefully in order to avoid unexpected tax bills or miss out on tax relief. A third of executives surveyed had annual pension savings in a scheme that exceed that £50,000 limit, leaving them potentially liable to sizeable tax payments.
Mark Jackson, a partner at LCP and author of the report, said: ‘The Treasury has achieved its aim - in the old days executives got tax relief on all their pension compensation, but now they are actually paying tax on it. A FTSE 250 executive who cannot shoehorn their pension savings into the new limits is paying £35,000 a year in tax.
‘The changes we have seen in this year's survey highlight the need for careful - and annual - pensions planning and decision making by companies and their senior leaders. The executive who carries on regardless will suffer tax surprises and could miss out on valuable tax relief.’
LCP’s survey also found considerable differences between the average costs of pensions paid to FTSE 100 and FTSE 250 executives. For the UK’s leading 100 companies, the average cost to an employer of an executive’s pension was £225,000 a year – three times more than for a FTSE 250 counterpart.
Jackson added: ‘This year's survey shows that, irrespective of the tax changes, pensions remain a valuable part of the pay packet of any senior executive, with the knock-on desire for a tax efficient and practical solution. The defined benefit scheme is disappearing and flexible DC and cash, are winning through.’