No Free Lunch 

The dark side of pensions

Paul Jackson

The dark side of pensions

‘Nobby’ writes: “That Hispanic bloke in charge of Lloyds was only in the role for five minutes around 2011 when he went off with stress for six months no doubt on full pay and now we find that he was given an uber-inflated final-salary pension when the rest of us are having to give them up… shareholders need to fight back and protect their holdings.”  A bit harsh, but this comment by a Financial Times subscriber echoes widely held views: why aren’t pension rates uniform for all employees, including top executives?

Defined benefits

When Antonio Horta-Osorio (pictured) joined Lloyds Banking Group (LLOY) as chief executive in March 2011, he was promised a pension at the age of 65. Initially, each year of service increased the proportion of his salary that he would eventually receive, but these accruals were frozen in 2016. The proportion that he has ended up with is 6 per cent of whatever his salary turns out to be during the 12 months before he leaves Lloyds.

So yes, he has a final-salary pension and yes, it is uber-inflated in the sense that it was supposed to go up in step with his salary. In 2018, his salary was £1,244,400, so the pension due was £74,664. His salary was increased by 2 per cent for 2019, which would have lifted his pension to £76,139, but at this point Lloyds’ remuneration committee got cold feet. It cut it to £73,200. So a £3,000 cut on a salary of over £1m? Mark Brown, general secretary of Affinity, the Lloyds’ staff trade union, dismissed this as “an obscene piece of symbolism”.

But is it? That £3,000 would have been paid in every year that Mr Horta-Osorio lives beyond the age of 65. For tax purposes, pensions like this are valued at a rule-of-thumb rate of 5 per cent. This assumes that an annuity of £3,000 a year would cost £60,000. It also suggests that (if his lifetime allowance was £1.5m) by taking his pension over £75,000, Mr Horta-Osorio could have been taxed on future withdrawals at 70 per cent. In reality, current annuity rates are more like 3 per cent, which would make Mr Horta-Osorio’s £3,000 cut worth £100,000, or about8 per cent of his salary.

And what about others who have had to give up their final-salary pensions, and how come he got one? Like many companies, Lloyds has frozen the pensionable salaries of its employees, and a spokesperson said that the reduced pension would bring Mr Horta-Osorio “in line with other colleagues participating in the group’s defined-benefit arrangements”. The reason that he was given something similar was as a partial buyout for the pension he forfeited when he joined Lloyds from Santander.  


Defined contributions

But that’s not all, for like those employees with frozen pensionable salaries, Mr Horta-Osorio receives another pension as well. His is in the form of a cash allowance in lieu of a pension contribution. This used to be 46 per cent of his salary, but for 2019 it’s been cut to 33 per cent, which reduces his pay by £154,535. Still too high, according to Mr Brown of Affinity. “Everyone else in the bank gets just 13 per cent,” he said, and added: “That’s the issue that the Investment Association (IA) needs to confront head on.” 


Fighting back

The good news for Mr Brown (and ‘Nobby’) is that the IA was already on the case. When the Financial Reporting Council revamped its UK Corporate Governance Code last July it said that executives should have the same pension rates as employees. This helped prompt the IA to call on companies to focus on pension inequality. Since February, its Institutional Voting Information Service (IVIS) has been recommending censure (through a ‘red-top’ report) for companies that make pension contributions to new executive directors at higher rates than for their employees. It also amber-tops companies that pay pension contributions to existing ones of 25 per cent or more of their salary. Amber-tops are less severe than red-tops, but both are ways of advising major shareholders to challenge remuneration committees, and to vote accordingly.

What rattled Lloyds’ directors was a 20.78 per cent vote against its remuneration report at its AGM last year (compared with the 98 per cent support they received in 2017). This was just over the 20 per cent threshold that earns a place on the Investment Association’s ‘Public Register’ blacklist. Companies that fail to respond are confined to the ‘Repeated Dissent’ list – the IA’s naughty step for companies that experience significant opposition in consecutive years for the same resolution. 


Pension equality trumps gender inequality

Lloyds is not alone, for pension allowances are embarrassing all the banks at the moment. The table below shows the pay that the UK’s five largest banks guaranteed to their chief executives last year. Apart from Lloyds, pensions were between 30 per cent and 40 per cent of their salaries.  

All are under different management from the banking crisis of 10 years ago, when two of the five (Lloyds and RBS) had to be bailed out by the UK taxpayer. At RBS (RBS), its chief executive, Ross McEwan, is still subject to that legacy. He is paid less than the others, and has been criticised for receiving a pension allowance worth 35 per cent of his salary. UK Government Investments, which still owns 62 per cent of RBS, has been “quite weak-willed on pay practices at RBS”, according to Luke Hildyard of the High Pay Centre.  

It’s easier to pay lower pensions to new entrants, such as Katie Murray, RBS’s chief financial officer. Her male predecessor had received a pension allowance, like Mr McEwan’s, of 35 per cent. In keeping with a general trend, hers was set at 10 per cent – a blow against gender equality, maybe, but a step towards pension parity. For existing employees, contractual issues complicate reductions in pay, but recently HSBC (HSBA) managed to backtrack on paying its chief executive a 30 per cent pension allowance. This year, John Flint will also receive 10 per cent. 



The table also shows pension allowances in the context of other types of pay. Only guaranteed (‘fixed’) pay is included, and chief executives will have also received a similar amount for their performance. 

Fixed share awards were brought in when regulators restricted the scale of performance-related pay, based on the somewhat dubious belief that high bonuses encouraged reckless banking practices. This year, Lloyds’ remuneration committee chose to increase Mr Horta-Osorio’s. It argued that “as a result of taking on the role of chief executive of the ring-fenced bank from 1 January 2019 in addition to his existing responsibility as group chief executive, it has been determined that the fixed share award should be increased to £1,050,000”.  This ring-fencing was forced on UK retail banks to insulate them from losses elsewhere in the banking system. But since Lloyds has always been predominantly a UK retail bank, it appears that the hike simply rewards Mr Horta-Osorio more for a role that he was already doing. His award used to be £900,000, so the increase of £150,000 neatly offsets the cut to his pension allowance. Why not just admit that it was a rebalance?

Just as hard to fathom is his salary increase. Two per cent might sound modest when compared with the 2.6 per cent uplift that Lloyds paid to its 65,537 employees. But his salary is now 20 per cent higher than when he joined Lloyds, and these increases crank up other pay elements – his flexible benefits are set at 4 per cent of his salary, his group ownership share award is 300 per cent and normally his salary would drive his pension too. That 2 per cent has increased his potential pay by almost £75,000, although admittedly how much of this he eventually gets will depend on his future performance.

But why increase his salary at all? The committee says “it takes into account base salary increases for employees throughout the group... an objective assessment of the size and scope of the role” and “pay for comparable roles in comparable publicly listed financial services groups of a similar size”.  But those last two judgments are open to challenge, for Lloyds hardly has the complexity of HSBC, a global financial services organisation that’s three times its size. Nor does it suffer the scale of the challenges facing Barclays (BARC) or RBS. So why pay its chief executive more than all three? 

You could argue that Mr Horta-Osorio deserves to be rewarded for turning Lloyds around. The short answer is that he is in other ways. His performance-based pay last year shelled out £3.4m – again, more than any of the other chief executives listed below. This brought his total for the year to £6.3m, taking what he received between 2012 and 2018 to over £49m. Of this, less than 9 per cent was for his pension.



This column has asked before why anyone paid this sort of money needs to have a pension provided by their employer. Long gone are the days when pensions supported people entirely in their retirement. Today, most of the well-paid provide for their future through other investments, such as shares or property. Now that contributions no longer attract meaningful tax relief at this level, why can’t they fund their retirement from their salaries?

The truth, strangely, is that for executives, “cash allowance in lieu of pension contributions” has little to do with pensions. With high salaries under scrutiny, the allowance has evolved into a way of paying executives more in cash without triggering the knock-on costs wrought by salary increases. Remuneration committees worth their salt must realise this, but the misnomer persists. 

Investors will no doubt have their own opinions as to whether Mr Horta-Osorio is worth the pay premium that he commands.  Those on Nobby’s side of the fence will have their day at Lloyds’ AGM on 16 May. For some, that IA naughty step will beckon.


Fixed (guaranteed) pay of the chief executives of the UK’s major banks in 2018 (£)

 Standard CharteredBarclaysRBSLloydsHSBC
Pension “allowance”460,000396,000350,000573,400308,000
Pension as % of salary40%34%35%46%30%
Fixed share award1,150,0001,175,0001,000,000900,0001,459,000
Total benefits210,00055,000117,000157,00068,000
Fixed pay2,970,0002,801,0002,467,0002,874,8002,863,000
Market cap (12 April, £bn)22293146133
Source: company accounts

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