GEO UK Chapter Meeting
Tuesday 1 July 2014
Simmons & Simmons
Agenda
 Introduction – Nicholas Greenacre
 Forfeiture and clawback – Ian Fraser and Andrea Finn
 Pensions Deregulation – Nick McMenemy
 GEO Global Equity Insights – Jay Foley and Ralph Beidelman
 Drinks and canapés (7pm)
Dates for your Diary etc
 14 November 2014 – Pan European Regional Event,
Paris
 Presenters Notified late July
 15-17 April 2015 – Annual Conference, London
 RFP – 8 September – 17 October
 GEO connect
 Online member only community
GEO – UK/CI Chapter meeting
Forfeiture and clawback
clauses are becoming more
common (and not just in the
financial services sector) –
how enforceable are they?
Ian Fraser and Andrea Finn
1 July 2014
Overview
 Why do organisations introduce deferral (and clawback and forfeiture)? What
are the benefits?
 Are provisions enforceable in the UK? What are the avenues for challenge?
 Some practical issues
© Simmons & Simmons LLP 2014. Simmons & Simmons is an international legal practice carried on by Simmons & Simmons LLP and its affiliated partnerships and other entities.
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Why defer remuneration? Why introduce power of
clawback and forfeiture?
 Regulatory requirements
 Alignment of interests and control
 Retention tool
 Share costs of misconduct and fines
© Simmons & Simmons LLP 2014. Simmons & Simmons is an international legal practice carried on by Simmons & Simmons LLP and its affiliated partnerships and other entities.
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Avenues for legal challenge
 Penalty clause
–
Breach of contract
–
Condition to entitlement
 Restraint of trade
–
Good leaver clauses and/or specific non-compete provisions
 Uncertainty and discretion
 UCTA
© Simmons & Simmons LLP 2014. Simmons & Simmons is an international legal practice carried on by Simmons & Simmons LLP and its affiliated partnerships and other entities.
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Avenues for legal challenge
 Discrimination – relevant as cause of action and value of claims following
departure
 Constructive unfair and wrongful dismissal
 Challenge to choice of law and jurisdiction clauses given connection to
employment
 (For UK banks, PCBS recommendations)
© Simmons & Simmons LLP 2014. Simmons & Simmons is an international legal practice carried on by Simmons & Simmons LLP and its affiliated partnerships and other entities.
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Practical issues
 Enforcement
 Tax
 Accounting
 Competitive Disadvantage
 Pressure to increase salary / fixed pay
 Flight risk?
© Simmons & Simmons LLP 2014. Simmons & Simmons is an international legal practice carried on by Simmons & Simmons LLP and its affiliated partnerships and other entities.
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Questions?
© Simmons & Simmons LLP 2014. Simmons & Simmons is an international legal practice carried on by Simmons & Simmons LLP and its affiliated partnerships and other entities.
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Pensions deregulation – can a pension work as part of a Long Term
Incentive Plan?
NICK MCMENEMY
Director, Head of Consulting | 1st July 2014
Agenda
•
About Arthur J. Gallagher
•
Pensions & Long Term Incentive Plans
•
Recent Pension Legislation changes
•
Some examples
•
Questions
ARTHUR J. GALLAGHER | BUSINESS WITHOUT BARRIERS™
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Arthur J. Gallagher
•
Award-Winning Employee Benefits and Wealth Management Consultancy, both
in the UK and internationally
•
Global organisation with global reach - grown to become part of one of the
largest insurance and risk management organisations in the world
•
Founded in 1927, now employs over 16,300 employees with operations in 24
countries and an extended network of partner brokers and consultants in 140
territories
ARTHUR J. GALLAGHER | BUSINESS WITHOUT BARRIERS™
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Background
•
Political pressure for deferred remuneration
•
Employers seeking creative and attractive remuneration solutions for
senior execs and top talent
•
Recent pension changes make them more relevant and worth revisiting
ARTHUR J. GALLAGHER | BUSINESS WITHOUT BARRIERS™
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Pension as long term incentive
Limitations:
•
No withdrawal until age 55 (except in serious ill-health)
•
25% tax free lump sum with residual fund as ‘income’
•
Tax on ‘income’ at relevant Income Tax rate
•
Restrictive rules on passing funds to spouse & dependants
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Pension as long term incentive
The Advantages:
•
Income Tax relief
•
Tax-protected growth – no CGT, Income Tax or Inheritance Tax
•
No ‘cliff edge’ retirement
•
Annuities – high price of secure income?
•
Immediate Vesting Personal Pensions
ARTHUR J. GALLAGHER | BUSINESS WITHOUT BARRIERS™
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Share Incentive Plans
The Basics:
•
£3,000 of free shares or £1,500 (capped at 10% of salary) partnership
shares (with 2:1 employer match) or dividend shares
•
Tax and NI payable if withdrawing shares within 5 years
•
CGT-free if shares kept in plan plus annual CGT exemption
•
Transfer shares into Pension within 90 days of taking them out of the
SIP – treated as payable net of basic rate (20%) tax so grossed up plus
further Income Tax to claim
•
On death, shares sold back to employer or passed to personal estate
and liable to IHT
ARTHUR J. GALLAGHER | BUSINESS WITHOUT BARRIERS™
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LTIPs
The Basics:
•
There are various LTIP structures
•
No tax liability upon granting
•
On vesting, Income Tax at value of shares (plus NI if ‘readily
convertible assets’)
•
On disposal, Capital Gains Tax if over annual exemption
•
Entrepreneur’s relief gives a reduced 10% CGT rate (rare in large
firms)
•
Inheritance Tax is payable by estate on death if value flows to spouse
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Deferring variable remuneration
One example:
•
40% deferred to 3 to 5 years for a material risk taker
•
Recommended increase to 60% if amount £500,000 or more
•
50% paid in shares and should be retained for 6 months after relevant
vesting date
•
Deferred amounts should be subject to forfeiture
•
Variations on the above across sectors and individual companies
ARTHUR J. GALLAGHER | BUSINESS WITHOUT BARRIERS™
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Annual Allowance
•
£40,000 in 2014/15 tax year
•
Tax relief on contributions
•
Tax charge applies to the excess – scheme pays?
•
Annual Allowance includes employer contributions
•
Carry forward up to 3 years
ARTHUR J. GALLAGHER | BUSINESS WITHOUT BARRIERS™
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Lifetime Allowance
•
Limit on an individual’s fund - £1.25 million for 2014/15 tax year
•
Assessed when benefits drawn (or on death)
•
Includes Registered Group Life schemes
•
Includes Defined Benefit pensions: 25:1 or 20:1
•
55% tax charge on unprotected excess
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Pension Protections
•
Various protections can be applied for by individuals:
–
Primary & Enhanced Protection 2006
–
Fixed Protection 2012
–
Fixed Protection and Individual Protection 2014
•
No further “pension accrual” including new membership of Registered
Group Life Assurance
•
Auto-enrolment – no exemption for those with protection
•
On-boarding of new staff
ARTHUR J. GALLAGHER | BUSINESS WITHOUT BARRIERS™
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The pensions landscape has changed
•
March 2014 Budget Statement
•
Immediate interim changes:
•
–
Increased drawdown limits
–
Lower secured income requirement
–
Relaxation of trivial commutation
From April 2015:
–
No restriction on amount drawn from fund
–
25% tax-free, remainder taxed at marginal rate of Income Tax
ARTHUR J. GALLAGHER | BUSINESS WITHOUT BARRIERS™
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Possible Variable Remuneration
Structure
• Individual age 50 given £100,000 award
• £60,000 deferred into LTIP; £40,000 as immediate employer pension
contribution
• Employee saves at least £16,000 Income Tax and NICs
• Employer saves £5,520 NICs
• Unvested pension remains free of Capital Gains, Income and Inheritance
Taxes
• Full access to the pension fund from age 55
• Retirement income from pension taxed at 0%, 20%, 40%, 45% compared to
47% for vesting stock options
ARTHUR J. GALLAGHER | BUSINESS WITHOUT BARRIERS™
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Summary
• Despite limitations, pensions remain an attractive component of reward
package
• As part of a long term incentive, they make more sense as a result of recent
changes
• Especially attractive for those at or approaching age 55
• Powerful tax advantages over other remuneration options
• For very high earners, the annual allowance is limiting.
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Thank you, any questions?
ARTHUR J. GALLAGHER | BUSINESS WITHOUT BARRIERS™
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Important Information
This presentation is based on Arthur J. Gallagher’s understanding of
current tax legislation and practices. No liability can be accepted for any
error or omission and we strongly suggest that you take tax planning or
independent financial advice if uncertain of your own corporate position.
This presentation is not designed to replace advice and does not constitute
advice under the Financial Services and Markets Act 2000.
Levels and bases of, as well as reliefs, from taxation are subject to change
and their value depends on the individual circumstances of the investor.
ARTHUR J. GALLAGHER | BUSINESS WITHOUT BARRIERS™
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Thank You
Nick McMenemy | Head of Consulting
Arthur J. Gallagher | Employee Benefits
D. +44 (0) 20 7204 6195
T. +44 (0) 20 7204 6000
E. nick_mcmenemy@ajg.com
W. www.gallaghereb.com
Arthur J. Gallagher (Employee Benefits) and Arthur J. Gallagher (Wealth Management) are trading names of Gallagher Risk & Reward Limited, which
is authorised and regulated by the Financial Conduct Authority. Not all business carried out by the company is regulated.
Registered Office: The Walbrook Building, 25 Walbrook, London EC4N 8AW. Registered No. 3265272 England and Wales.
Tel: +44 (0)20 7204 8990 Fax: +44 (0)20 7204 6001 Web: www.gallaghereb.com
ARTHUR J. GALLAGHER | BUSINESS WITHOUT BARRIERS™
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GEO Global Equity Insights
Discussion of the 2014’s survey results
Jay Foley, Computershare
Ralph Beidelman, Discovery Communications
Survey Framework
•
•
•
•
•
169 companies including the largest global corporations: 89% of the
companies surveyed have a market capitalization above USD 1 billion,
with the top 10% exceeding USD 100 billion at year-end 2013.
Two-thirds of the companies generated revenues above USD 5
billion.
National leading companies from 20 countries around the world, with
special focus on North America and Europe.
Representative sample across 10 industries.
Data collected within a period of six weeks starting mid-January 2014.
Survey sponsors and support partners
Sponsors:
Support partners:
Three main equity-based pay drivers of value creation
1. Companies should increase both the percentage of LTIP in the pay
mix and the integration of LTIP across all staff levels and countries.
2. Companies should actively promote their equity culture by introducing
ESPP on a broad scale. Both LTIP and ESPP are a key factor to
compete successfully in a globalized economy.
3. Companies should allocate more time and budget to create a more
diversified communication platform. Diversified communication
methods are a main lever for employee satisfaction and carry the
potential to invigorate LTIP and ESPP.
Link between ESPP participation and performance
•
•
High performing companies
have higher participation
rates in ESPP.
ESPP are not only a crucial
factor of success in a
competitive labor market, but
are also a more general value
lever when it comes to
participation.
ESPP participation
(in % of eligible employees)
Link between LTIP penetration and performance
•
•
Broad-based equity culture
across staff levels and
countries fosters company
performance.
High performing companies
offer LTIP much more frequently
also to other employees than
executives.
LTIP eligibility for non-executives
(in % of companies)
LTIP plan types in place
•
•
The trend of 2013’s survey is
further affirmed, as stock
options are on a sharp and
steady decline.
Apart from this trend, European
companies prefer performance
shares, North American
companies prefer restricted
stock as long-term incentive.
LTIP types
(in % of companies)
Restricted Stock
35
Performance Shares
26
Stock Options/SAR
20
Performance Cash
4
Equity/Cash Deferral
3
Share Matching
2
Other
12
Link between pay mix and performance
•
•
Successful companies give
more weight to long-term
incentives across all levels.
What is true for the top
management is also valid for
further levels down the
hierarchy ladder.
LTIP proportion
(in % of TDC for executive committee)
Link between communication and satisfaction
•
•
Communication is a main
lever to achieve higher
employee satisfaction.
Companies with a broad set of
communication tools are better
connected with their employees,
and those are much more
satisfied with their equity plans.
Companies with satisfied employees
(in % of companies)
Allocation of actual and desired and actual budget
•
•
Technology ranks first in both
the actual budget allocation
and the additional budget
desired.
Despite companies are aware of
the need to improve
communication, however,
importance of communication is
currently not reflected in budget
allocation.
Allocation of additional budget
(in % of additional budget)
Technology
29
Communication
24
Rollout
14
Staff
11
Outsourcing
10
Legal
Other
7
5