Some executives have found that their benefits package is not all they first thought. Lorna Bourke highlights the need to understand the real value of a scheme and negotiate a watertight contract.
At a time when the relationship between employer and employee is undergoing profound change, the terms and conditions of employment are the subject of scrutiny like never before. In this new climate of austerity many senior executives who thought they had watertight contracts are finding their employers seeking to renegotiate terms agreed in a more generous era.
Even those already in retirement are falling victim to economies. Take Bill Skeggs, formerly a senior executive at Abbey National. When he took early retirement his package included an agreement that his former employer would continue with a 50% subsidy of medical fees insurance for him and his wife. Many other early retirees enjoyed the same benefit. Or so he - and they - thought.
It's a very valuable benefit, for a number of reasons. First, buying medical fees insurance as an individual is expensive, even when in your 30s and 40s. Premiums are age-related, increase in line with insurers' claims experience, and by retirement the cost can be prohibitive. For example, a married couple paying for top of the range comprehensive medical fees cover from PPP - husband aged 45, wife 40 - would have to pay £133.79 a month. But if they were aged 70 and 75 respectively, the cost is a massive £232.22 a month - even after 25% tax relief which is not available to the under-60s.
Bill Skeggs and many of his former colleagues are still in dispute with Abbey National and the matter has still to be resolved. The electronics giant Phillips faces a similar challenge. Its pensioners have won in the High Court and are awaiting the decision of the Court of Appeal. But Skeggs 's experience highlights how important it is to understand the real value of benefits and to negotiate a watertight contract.
'One of the problems we keep coming across now is pensions for top executives who change jobs', explains David Brooks of employee benefit consultants William H Mercer. Employees who joined a new employer's scheme after May 1989 suffer a cap on the income on which pension contributions are eligible for tax relief - currently £78,600 a year for 1995-96.
High-flying executives usually negotiate a FURBS (Funded Unapproved Retirement Benefit Scheme) to cover the excess of their salary above the earnings cap. It allows the company to offer the maximum pension allowed by the Inland Revenue - two-thirds final salary - of the entire salary, not just the first £78,600. For someone earning in excess of £100,000 a FURBS is a significant part of any remuneration package.
'Not all employers want to commit themselves to a funded unapproved scheme, particularly if it is just for one employee. As a result an unfunded arrangement may be organised in an informal way, with a vague promise written into the contract,' explains Brooks. 'Very often it is not legally watertight and if the company hits hard times and decides not to pay, the individual doesn't have the trustees to fall back on with their legal responsibilities. In some cases the company just says "Tough".' The answer is to insist on a properly funded scheme for the excess benefits. This can usually be arranged through an insurance company.
There are other problem areas. 'Bonuses, share options and incentive schemes invariably start off as gentlemen's agreements', says Brooks. 'But after six months or a year the backtracking starts. Employees don't always get the agreement in writing or the agreement is too informal for them to sue.' Another problem is that the contract of employment sent to the would-be employee often bears no relation to what was supposedly agreed in the interview. 'The difficulty is that the person who conducts the interview has no idea what it costs to provide certain benefits. The implications for taking on older employees for things like pension provision can be phenomenal,' says Brooks.
Most people are aware of the value of core benefits such as salary, bonuses, pensions and death-in-service benefits, but it is the minutiae of such areas as FURBS, medical fees insurance, share option schemes, profit related pay, incentive schemes and other benefits which confuse.
If help is required, benefits consultants will negotiate on behalf of individuals or cast an eye over a contract. Expect to pay around £200 an hour for advice and negotiation of a benefit package of £150,000 per annum upwards. Below that figure the remuneration package is likely to be straight-forward and hence not worth the fees.