Dear Shareholder,
I am pleased to present the Remuneration Committee’s report on directors’ remuneration for 2008, the forthcoming financial year and, subject to ongoing review, subsequent years.
The Remuneration Committee has reviewed all of the Company’s key remuneration policies in the light of the draft code of practice issued by the [FSA] and other publications and guidance from the [ABI], [NAPF] and RiskMetrics. The review confirmed that current arrangements for the overall structure of remuneration for the executive directors remain largely appropriate and only limited changes are proposed.
The Committee endorses the principle of maintaining a coherent remuneration framework throughout the economic cycle and does not wish to make short term changes at the expense of longer term stability. However, given the unprecedented disturbance in financial markets and the deterioration in the general economic climate, the Committee has decided that no salary increases should be awarded to the executive directors and senior executives except to reflect promotions, and that no bonuses should be awarded to the executive directors.
Reflecting the fall in the share price, the Committee has decided to reduce the size of the 2009 Performance Share Plan awards for the executive directors from the normal policy level of 200% of salary to 150%. From 2009 onwards, the Committee will also have the discretion to withhold amounts deferred under the Share Bonus Plan in the event that the performance to which the bonus related subsequently proves to be misstated.
While the Committee believes that remuneration practices across the [Group] are in line with the FSA guidance, the Committee has extended its scope of reference to include a review of the remuneration of the ‘oversight departments’; that is, employees in Human Resources, Finance, Compliance & Risk and a further, more detailed, review of all bonus plans operating below Board level has been commissioned.
The Company operates two all-employee share plans, a Savings-Related Share Options Scheme (‘SAYE’) and a Share Incentive Plan (‘SIP’); both are approved by Her Majesty’s Revenue and Customs (HMRC). These are due to expire and shareholder consent for renewal of the plans is being sought at the forthcoming AGM.
Finally, I wish to highlight two matters relating to pensions:
i) in order to manage effectively the future costs and risks of the defined benefit pension scheme, the main defined benefit pension arrangements have been adjusted. With effect from 1 January 2009, pensionable salary increases will be limited to a maximum of 2.5% each year. Actual salary increases are unaffected by this change and any salary increases resulting from the annual pay review will continue to be received in full. For relevant executive directors, the salary supplements in lieu of pension have been reduced to an amount which is broadly equivalent to the average employer’s contribution for future accrual
ii) the table of pension entitlements in the Others section shows large increases in the transfer value of accrued final salary pensions. The increases do not, however, reflect any changes in the Group’s pension policy or any discretionary enhancement in pension provision. However, the key actuarial assumptions (such as gilt yields and mortality) used to report the transfer values of those accruals have changed in line with legislation and regulatory practice, resulting in significant changes to the calculated transfer values.
A resolution to vote for the Directors’ Remuneration Report will be put to the Annual General Meeting (AGM). I hope that you will support this resolution.
Sir David Walker
Chairman of the Remuneration Committee
The report of the Remuneration Committee has been prepared in accordance with the requirements of Schedule 7A to the Companies Act 1985 (as amended by the Directors’ Remuneration Report Regulations 2002). It also describes the Group’s compliance with the Combined Code of Corporate Governance in relation to remuneration. The Company is an active member of the ABI and the Committee, consistent with its approach of operating within the highest standards of corporate governance, takes significant account of guidelines from the ABI and other shareholder bodies (such as the NAPF) when setting an appropriate remuneration strategy for the Company. It also seeks to maintain an active and productive dialogue with investors on developments in the remuneration aspects of corporate governance generally and any changes to the Company’s executive pay arrangements in particular.