Attack on level of executive pensions

SHARP REDUCTIONS in the annual earnings limit for pensions and in the cap on overall pension funds would help achieve greater equity in the pension system, an ESRI conference will hear today.

Gerry Hughes, a visiting professor at Trinity College Dublin, will present a comparison of the pensions of executives and ordinary employees at 48 large companies, most of which he says are listed on the Irish Stock Exchange.

The study, drawn from the companies’ 2009 annual accounts, found that, on average, companies pay 26 per cent of an executive’s salary as contributions to their pension fund as against 7 per cent in the case of other employees in the private sector.

The average contribution for executive directors in large publicly listed firms in the study was €100,000 compared to €2,700 for other employees in occupational schemes at the same companies.

Employer contributions to occupational pension schemes on behalf of employees in 2007, the last year for which data is available, amounted to €1.4 billion, states Prof Hughes. He says the estimated cost of tax relief and exemption from benefit-in-kind tax were €150 million and €540 million respectively.

“These benefits are concentrated in the top 20 per cent of earners, which include executive directors of companies,” he says, noting that “top management make little or no employee contribution for their pensions whereas other employees are generally required to do so”.

In his paper, Executive Directors' and Employees' Pensions: A Level Playing Field,Prof Hughes suggests the annual earnings limit – which fell to €115,000 from €150,000 in the last budget – should be cut further, to €75,000.

“Much greater equity in the pension system could be achieved by targeting pension tax relief at earners,” he says, calling also for a dramatic reduction in the lifetime cap on pension fund size.

Following the last budget, this was cut to €2.3 million from €5.4 million previously. Prof Hughes suggests it should be set at around €600,000. “The average value of an executive director’s pension fund [in his study] amounts to €4.1 million, or 34 times more than the average value of the pension fund of €120,000 for other employees,” he says.

In other contributions, Justin van de Ven of the National Institute of Economic and Social Research in London analyses the impact of auto-enrollment in defined contribution occupational schemes based on the UK’s National Employment Savings Trust. He finds such schemes help people on modest incomes to save more for retirement in schemes with low administration costs.