Directors are immune to troubles in their pensions

The politics of envy or a damning indictment on rich bosses getting richer at the expense of their staff?

The Trades Union Congress's annual PensionsWatch survey, published yesterday, certainly painted a bleak picture of the gaping inequalities in the provision of occupational pension benefits at Britain's largest companies.

The survey showed that the directors of the companies in the FTSE 100 index have now built up benefits worth almost £1bn in final salary schemes where pensions are guaranteed, whatever the performance of the stock market and other investment assets in the coming years.

The typical director's pension is now worth £168,000 a year, 24 times the value of the average occupational pension, the TUC said. Not that more lowly staff can expect an average pension in the years ahead - while 80 per cent of directors are still covered by final salary schemes, two-thirds of FTSE 100 companies have closed these plans to new employees. Instead, they are now offered defined contribution schemes, where pensions depend on how much growth investment managers can deliver.

The PensionsWatch report also showed that directors often do better than even those staff who do still qualify for final salary benefits. Senior executives' pensions are mostly likely to accrue at one-30th of pay for each year served, compared to one-60th for the typical worker. And three-quarters of schemes allow directors to retire at 60, while 65 is the more typical normal retirement age for most staff.

Brendan Barber, the TUC's general secretary, claimed that the gap between directors' pensions and the retirement benefits on offer to everyone else had never been wider.

"Britain's boardrooms and business lobby groups have failed to tackle upstairs-downstairs style company pensions," he said. "If bosses were in the same scheme on the same terms as staff, they would still build up massive pensions compared to employees but they would at least be fairer."

It's a familiar lament. Trades unions have become increasingly angry about the closure of final salary pension schemes. Mr Barber said that while companies blamed the closures on pressures including falling investment returns, an ageing population, greater regulation and new tax and accounting rules, directors often seemed to be immune to such troubles.

Neal Moister, a researcher at the pressure group Labour Research, said business groups such as the Confederation for British Industry had also been at the forefront in the campaign for pension reforms such as a rise in the state retirement age.

"It is very hypocritical for so many senior business figures to advocate pushing the state pension age up and up while they negotiate a completely different set of rules for themselves," he said. "Many low-paid workers will have to work for many more years to receive a basic pension while FTSE 100 directors can look forward to a luxury retirement from the age of 60 if not younger."

A separate survey published yesterday by Labour Research showed that at least 112 FTSE 100 directors are entitled to more than £200,000 a year, including 27 who can expect more than £500,000.

FTSE 100 directors can generally retire at 60, the survey confirmed. It pointed out that directors at AstraZeneca can retire at 50 if the company asks them to, while directors at energy group BG and life insurer Friends Provident are entitled to retire at 55 with no reduction in pension benefits. Earlier this summer, Friends became the latest in a long line of FTSE 100 companies to announce the closure of its final salary scheme.

Some pension experts believe that while directors may appear to be enriching themselves at the same time as depriving staff of a comfortable old age, the inequality is really the result of a coincidence of timing.

Jeremy Dell, a partner at actuarial consultant and pension fund adviser Lane Clark & Peacock, said that while many directors of large companies had amassed very generous pension benefits, it was misleading to characterise this in terms amounting to class war. "The level of pensions inequality is pernicious, but the divide is not between bosses and workers, but between generations of staff," Mr Dell said.

"Newer employees may well end up with much less valuable pensions than company directors, but they could just as easily be sitting opposite someone with a much better pensions package, if their colleagues have been with the company for some time."

In any case, not all companies where directors are in line for large benefits have closed their final salary pension schemes. For example, while Lord Browne, chief executive of oil giant BP, now has a pension fund that is worth almost £20m, there is no evidence that he has profited while more junior staff have been neglected.

Wendy Silcock, a spokeswoman for the company, said: "We still have a non-contributory final salary pension scheme that is open to new and existing staff."

Similarly, Katie Macdonald-Smith, of Cadbury Schweppes, pointed out that while the confectionery giant's chairman, Sir John Sunderland, has earned a larger pension pot than almost any other worker in Britain, he has done so over a career spanning more than 30 years at the company.

Cadbury has ostensibly reduced the quality of pension provision for staff, by moving in 2001 to a scheme that offers benefits based on average pay over workers' careers, rather than their final years of earnings. But Ms Macdonald-Smith said this was more suited to the work patterns of the company's predominantly manufacturing workforce.

"Our pensions policy is driven by the long-standing values of our company," she said. "That's one reason why we have made very large payments into the scheme this year."

Even so, companies whose senior staff are on schedule to retire with pensions worth hundreds of thousands of pounds or more leave themselves vulnerable to attack if the same managers have been responsible for cutting retirement benefits for the workforce as a whole.

Corporate governance watchdogs are alert to such dangers. Last month, the Association of British Insurers wrote to the chief executives of the UK's 350 largest companies, warning them to ensure that directors' pensions were set in line with the same guidelines that apply to pay. "Broadly, that means directors' pensions must relate to performance and that they are appropriate given the pensions on offer in the market as a whole," an ABI spokesman said.

Similarly, the CBI has been careful not to back pension inequality. John Cridland, its deputy director general, said. "There should be no special access terms for directors."

There are signs that some employers are not heeding such warnings. Yesterday, the TUC pointed out a new worrying trend. In some cases, senior directors have now been shifted into defined contribution schemes, but there is still little question of them losing out.

The average director in a defined contribution pension plan receives a contribution from the sponsoring company worth 19 per cent of salary. The figure for the average worker is just 6 per cent. This finding could suggest that even after the retirement of the generation of directors who were in the right place at the right time to benefit from final salary benefits, there will still be a clear divide between the pension haves and have-nots.

Cats that got the cream

Sir Francis MacKay Former chairman, Compass Group

Sir Francis stood down as Compass's chairman earlier this summer, having amassed a pension pot worth £16.1m, enough to buy him an annual income of £830,000. He built up his pension entitlement with an accrual rate of a 30th of final salary for every year of service, twice as fast as the standard rate in final-salary schemes. Compass closed its final-salary scheme to new entrants last year.

Sir John Sunderland Chairman, Cadbury Schweppes

Sir John's pension fund was worth £15.3m by the end of last year according to Cadbury's latest annual report. However, the company's final salary scheme was closed to new staff in 2001 and a career-average scheme is now on offer. While benefits are still guaranteed, staff in traditional career patterns, whose earnings peak in the run up to retirement, will now receive smaller pensions than under the old scheme.

Sir Julian Horn-Smith Former deputy chief executive, Vodafone

Sir Julian was one of the founders of the telecommunications giant. He resigned as deputy chief executive in February. His pension fund is worth £13.2m. However, while Vodafone, as a relatively young company, has none of the long-term problems faced by pension schemes at employers with ageing workforces and growing numbers of pensioners, it decided to close its final salary scheme to new staff last year.

Sir Tom McKillop Former chief executive, AstraZeneca

Sir Tom stood down as chief executive of Astrazeneca on 1 January after seven years in the top job at the pharmaceuticals company. While in charge, Sir Tom took the decision to close the company's final salary scheme to new entrants, but as an existing member of staff continued to benefit. By the time he left, his pension fund had grown to £12.65m. He was also entitled to retire two years early with no reduction in benefits.

Larry Fish Director, Royal Bank of Scotland

Larry Fish is not only RBS's highest-paid director, he also has the largest accrued pension rights of anyone at the company. His current pension pot would buy him an annual pension of £726,400 according to RBS's latest annual report. Earlier this year, despite announcing annual profits up 19 per cent to £4.5bn, the bank said it would close its final salary pension scheme to new entrants - the deadline for new joiners is 1 October.