Recommendations on disclosure will affect more than directors.
As companies begin thinking about implementing the recommendations of the Greenbury Committee, some of its consequences loom far larger than originally appeared. The area attracting particular attention is disclosure of directors' pension fund contributions, where the effect - as with share options - will be felt far beyond the board. Greenbury noted that under present obligations 'pension schemes where the employer is making no contribution ... can be valuable to the director, and costly to the company in the longer term'. The committee recommended that annual reports should disclose 'the present value of the extra pension entitlement earned from increases in salary during the year'.
This recommendation has been welcomed in many quarters. Members of the panel at the Natwest Investment Management conference in October (revealingly entitled 'Whose Money Is It Anyway?') were uniformly enthusiastic. John Martin recently retired head of pensions investment at British Petroleum, noted that such disclosure would 'put an end to the lovely trick of putting 50% on a director's salary on the last two months of employment, costing the company not very much money but the pension plan a great deal. This is funded effectively in the long-term contribution rate, but in the short and medium term it's really the other members of the pension scheme that are paying.' Broadcaster John Plender, who is a non-executive director of Pensions Investment Research Consultants, went further, claiming that the present loophole on disclosure helped some people 'to use the defined benefit scheme as a bit of a slush fund for directors'.
Few have been as publicly forthright as that. Nevertheless there clearly have been abuses of final salary pension schemes at the highest level, which Greenbury's recommendations will highlight. Further, shareholders have a right to know the total cost to the company of each director. As remuneration consultants MM&K point out, 'For a director who receives a significant salary increase in his 50s, and who participates in a defined benefits pension plan, the additional funding can be enormous and may surprise shareholders'. Anne Robinson, director general of the National Association of Pension Funds agrees. 'The numbers for older directors and late joiners to the board can be very large. The changes in disclosure will show up in sharp relief how very expensive it is for high-paid people coming late into a company.' How large these figures turn out to be will depend on actuarial interpretation, where the assumptions required to reach a figure are highly sensitive and subjective. This is where the difficulties begin. As Paul Haines of Sedgwick Noble Lowndes observes, 'Everybody agrees with the basic principles of Greenbury, but bald statements of costs will need to strip out elements such as the investment effect. If investment values have gone up during the year, this will reduce the cost of funding an increase in benefits.' These interpretations will create problems for companies. 'Small changes in actuarial assumptions can create anomalies,' affirms Chris Pearce, finance director of Rentokil and chairman of the technical committee of the 100 Group of UK Finance Directors. 'If companies can't be confident of what's going to appear in their accounts we could see a move towards defined contribution' - ie money purchase schemes.
At this point the Greenbury recommendations start reaching way beyond the board, since the focus widens to pension schemes in general. 'Some companies don't realise how much pay rises for employees who are part of a defined benefit scheme can cost, particularly when there is a surplus in the pension scheme,' says Richard Mulcahy of actuaries Bacon & Woodrow. 'This realisation will increase the trend towards defined contribution.' His views are echoed both by Robinson ('Greenbury will be another nail in the shoe of pensions being based on defined contributions') and by Haines ('We're in line for another piece of legislation arguing against defined benefits').
However the extent to which the tail of disclosure will wag the dog of pension scheme structures is disputed. Rentokil's Pearce argues that 'Defined benefit schemes are such a major part of British retirement packages that any move to defined contributions would be slow.' But Peter Tompkins of Price Waterhouse, a member of the Institute of Actuaries' pensions board, believes otherwise. 'All directors must now think about the value of their company's schemes and the cost to the company of these schemes. The knock-on effect - for those outside the board - of Greenbury's recommendations on pension disclosure will be even greater than those on share options.'.