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The Actuary The magazine of the Institute & Faculty of Actuaries

Tax limits prompt top firms to swap cash for pensions

Changes to the tax ceiling on contributions are prompting the UK’s top firms to offer executives cash supplements instead of a pension scheme, according to LCP.

Companies are moving quickly to change pension packages for key personnel according to the firm’s Executive Pensions Survey 2011, released today, which analysed responses from 330 executives at FTSE100 firms.

Early signs of this trend were evident in previous reports, LCP says, but the Government’s introduction of a new £50,000 ceiling on tax relievable pension contributions in April has accelerated the move.

"A new executive recruited by a FTSE100 company today is very likely to be offered a cash supplement instead of a company sponsored pension scheme," said Mark Jackson, partner at LCP.

"Cash is more flexible - it allows executives to make pension contributions within the new limits."

The report states that a cash supplement is typically 25% of basic salary whereas the cost of a pension provided from a final salary pension scheme would normally be much higher, averaging 60% of basic salary for executives.

This move to lower cost pensions is reflected in a £42,000 per year fall in the cost of providing pensions for the average executive, LCP says.

Nevertheless, the report shows that pensions remain a valuable component of the annual remuneration package at £225,000 per executive, and predicts that pension costs will continue to fall from £225,000 to £150,000 a year if the trend towards providing cash supplements instead of pensions continues.

However, a select group of longer-serving executives appear immune from this trend and from the new tax regime, the firm says, noting a resurgence in the use of unfunded Employer Financed Retirement Benefit Schemes (EFRBS) which allow executives to continue enjoying final salary pensions with no limits or tax penalties.

The full report is available for registered download here.