These regulations provide for a new way of reporting directors’ remuneration in company accounts with effect from 1 October 2013 (for financial years ending on or after 30 September 2013). This will require separate reporting on remuneration policy and implementation. The policy section will be subject to a binding shareholder vote at up to 3-yearly intervals, while the implementation section will be subject to an advisory shareholder vote each year.
The purpose of this [article] is to look at the new requirements for reporting the value of pensions accrued during the financial year.
“Column (e)”
The regulations require the inclusion of a table showing remuneration as a single figure for each director within each of a number of remuneration categories, pensions being category (e). This figure should include both:
- the value of pension benefits accrued during the year and
- any payments made in lieu of retirement benefits.
Payments in lieu will be included at their cash value, while pension accrual will be valued in a similar way to how it is measured for comparison with the Annual Allowance for tax purposes. Some changes will be made to this method of measurement for the purpose of company reporting:
- the benefits to be measured will be those earned during the company’s financial year, rather than during a “pension input period”;
- pension earned in schemes that are not Registered Schemes will be included;
- any pension contributions made by the director will be deducted from the value to be reported;
- a defined benefit pension will be valued at 20 times its annual amount (rather than 16 times for assessment against the Annual Allowance);
- this valuation method will be applied even if the director dies or retires through serious ill-health during the year.
The regulations require also a description of each director’s pension arrangements under company-sponsored pension schemes.
Comment
The move to the HMRC-style valuation, as opposed to the previous method of calculating the cash equivalent (transfer) value of the director’s benefits is, in our view, a retrograde step. The only advantage we can see in using the HMRC methodology is that the company will not have to ask an actuary to calculate the required value (although, if the company is listed, even that advantage disappears, since the Listing Rules still require that the cash equivalent transfer value of benefits accrued during the year be stated).
On the other hand the method has several disadvantages:
- the use of a single factor of 20 to value a pension will mask differences in the quality of schemes between different companies: a pension of £10,000 pa will be worth £200,000 regardless of the age from which it becomes payable, the rate it will increase in retirement or the amount of dependant’s pension available on the director’s death;
- the single factor will also mask differences in the present value of providing a pension at different times: a pension of £10,000 pa will be valued at £200,000 whether it is due to commence next year or in 30 years’ time;
- the HMRC methodology can have unexpected (unintended?) effects, depending on how an individual’s pension accrual is defined: it is not uncommon for an executive’s pension to be defined as “1/30th of salary for each year of service, subject to a maximum of 20/30ths”. For an executive with prospective service of say 30 years this will lead, for reporting purposes, to pension accrual of 1/30th of salary each year for 20 years and no accrual thereafter, whereas, if he left service after say 10 years, the pension would be deemed to have accrued uniformly, giving him a pension of 10/45ths of salary (10/30 x 20/30ths);
- despite HMRC’s rules for valuing pension accrual having been in force for a couple of years, there are still uncertainties in how they operate in certain non-standard situations: in such cases you might not need an actuary but you may well need a lawyer!