Aviva 2005 Annual Report Download - page 70

Aviva plc 2005 Governance
Governance continued
Directors’ remuneration report continued
As a result from April 2006, executives will continue to accrue
pension benefits on their current basis under the Scheme up to the
lifetime allowance, the amount of which is determined by HMRC.
From April 2006, the lifetime allowance will be £1.5 million,
equating to an annual pension of c. £75,000 pa. The contribution
of 5% paid by the executives will continue. Once the value of the
executive’s pension benefits reaches the lifetime allowance, further
accrual in the Scheme will cease and no pension will be provided in
excess of this. However, the death in service benefit of four times a
member’s salary will continue.
As mentioned above it has been the practice of the Company to
provide for pensions in excess of the HMRC earnings cap through
the provision of an UURB. The UURB liability is unfunded and
therefore once it falls into payment it is met each year from the
Company’s general resources and recorded as an expense.
At 31 December 2005 30 current employees had accrued an UURB
benefit and the aggregate liability of these benefits was estimated
to be £23.5 million. Following the changes brought about by
pension simplification the Company is taking the opportunity to
curtail its UURB liability by funding it either through the Scheme, in
cases where there is scope within the lifetime allowance, or through
the capitalisation of the UURB benefit into an investment fund, thus
crystallising the liability. Fifteen executives, including Richard Harvey,
have benefits which currently exceed the lifetime allowance and are
currently considering the terms which the Company has offered
regarding the crystallising of these benefits into an investment fund.
Those executives who do not accept the offer will remain entitled to
an UURB. The Company ceased offering any new UURB benefits
from April 2005.
All new employees in the United Kingdom including senior
executives are now offered membership of the defined contribution
section of the Scheme.
Long-term benefits
In order to provide a long-term savings opportunity for those senior
executives whose pensions benefits from the Aviva Staff Pension
Scheme are restricted by the lifetime allowance, the Company
will consider making discretionary contributions into a capital
accumulation plan. The level of any contribution will vary
depending upon seniority but will not exceed 50% of the
executive’s basic salary. Executives leaving the Company, either by
resignation or breach of contract, would forfeit any contribution
for the year in which they left.
Other benefits
In addition to the benefits described above, senior executives are
entitled to the benefit of a company car allowance and private
medical insurance.
The Company operates a number of HMRC approved all-employee
share plans in the United Kingdom. Senior executives are entitled
to participate in these plans on the same basis as other eligible
employees. These include the Free Share element of the Aviva
All-Employee Share Ownership Plan (AESOP). Under this plan,
eligible employees can receive up to a maximum of £3,000 pa
in the form of shares from the profits of the Company, free of tax,
subject to a retention period. The Partnership element of the AESOP
allows participants to invest up to £125 per month out of their
gross salary in the Company’s shares.
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Pension arrangements and long term benefits
During 2005, the remuneration package for senior executives in the
United Kingdom included Company contributions into the defined
benefit section of the Aviva Staff Pension Scheme (the Scheme).
Executive directors accrued pensions at a rate of one thirtieth
(Richard Harvey, Philip Scott and Patrick Snowball) or one forty-fifth
(Andrew Moss) of their final pensionable salary for each year of
service as a senior executive, subject to a maximum pension of
two-thirds of their final pensionable salary. No pension benefits
were accrued on bonuses or other benefits. The Scheme provides a
lump sum death-in-service benefit of four times the member’s basic
salary at the date of death and a spouse’s pension equal to two-
thirds of a member’s actual or prospective pension. Post-retirement,
pensions are reviewed annually and increases are guaranteed at
a rate equivalent to the increase in the Retail Prices Index up to a
maximum of 10% pa. Under the Scheme, executive directors have
a normal retirement age of 60.
From 1 April 2005, all members of the defined benefit section of
the Scheme were required to contribute 5% of their total gross
basic salary to the Scheme.
The benefits paid from the Scheme are subject to HM Revenue
and Customs (HMRC) limits . An Unapproved Unfunded Retirement
Benefit (UURB) exists in order to provide executives with the
benefits promised to them by the Scheme, notwithstanding a limit
relating to their level of earnings which, in some cases caps the
amount of pension which can be paid from a tax approved
scheme. Where this limit applies, the benefits that cannot be paid
from the Scheme are provided from the UURB. Richard Harvey and
Andrew Moss are both affected by this limit. At retirement, they will
receive some of their pension benefits from the UURB.
Major changes to the legislation governing the provision of
pensions in the UK (known as “pension simplification”) will come
into effect from April 2006. In anticipation of the changes, and as
part of an holistic review of senior executive remuneration, the
Committee undertook a review of the pension provisions for
its executives and how they relate to the total remuneration
package. The review was set against a number of design principles
which included:
– The need to continue attracting and retaining top quality
management;
– Keeping the employee retention element that is built into an
occupational pension scheme;
– Future pension arrangements for senior executives were not to
cost the Company more than its current arrangements;
– The Company would not pay or compensate managers in
respect of any increased tax liability arising from pensions
simplification.