Why the EU Pay Directive is important to UK pension schemes

Gender pay and pension transparency is a growing theme. In the UK, employers with 250 or more employees have had to report their gender pay gap data for several years.

However, this is based only on “pure” pay and bonus elements and doesn’t extend to cover pensions. The gender pay gap in the UK has been dropping in recent years and, according to the Office for National Statistics, stood at around 15% in 2022 across all workers.

 In Europe, research carried out by the European Parliament in 2017 suggested a starker position, with a gender pay gap across EU member states of up to 26%, and a gender pension gap up to an eye watering 46%.

The EU reporting requirements on the gender gap across both pay and pensions are about to be strengthened, and – despite Brexit – there is likely to be a knock-on effect in the UK.

Why it matters

The EU Pay Transparency Directive came into force on 6 June 2023, and companies employing workers in the EU will have to start reporting under it from 7 June 2027.

The directive sets a new ‘gold standard’ of minimum requirements, with a much wider scope and more onerous obligations than in any pay transparency legislation to date.

While you might think that UK corporates and pension arrangements don’t need to worry about an EU directive in a post-Brexit world, it isn’t as simple as that for at least two reasons.

First, the EU directive includes a very wide definition of pay, which not only includes basic salary, but also includes any other consideration “whether in cash or in kind, which a worker receives directly or indirectly (complementary or variable components)” in respect of their employment.

The definition of pay in the EU directive is therefore wide enough to include pensions and other benefits, and the preamble specifically calls out “occupational pensions”.

Second, many UK corporates will be part of groups with EU workers. Experience suggests that if part of the group is subject to new reporting requirements, this regime may voluntarily be extended to catch all the entities within the group.

This is good for investor relations, as it links into environmental, social and governance issues and corporate social responsibility agendas. There may also be peer, sector or talent pressure to conform.

How to prepare

Where this happens, UK corporate sponsors and pension plans will need to be ready to play their part.

Under the directive, the corporate sponsor of a pension arrangement will – with the assistance of the trustees or providers running the fund – need to form an accurate picture of the value attributable to any given worker from the fund in any given year. Corporate groups with multiple funds will need to do the same for each fund they sponsor.

Apart from assembling all the data, there is no guidance in the directive as to how to attribute a value to non-cash pension benefits. This can be inherently difficult, particularly with defined benefit schemes, and actuarial input may be needed.

In the meantime, companies will need to put in place suitable arrangements with their pension trustees and providers to gather, store and analyse the required data. Pension providers and trustees should be ready to deal with detailed information requests as we edge towards 7 June 2027.

The consequences

The data suggests that pensions will tend to be a major contributor to an employer’s overall gender pay gap. Two consequences flow from this.

First, this is likely to require an explanation of any historical factors underlying the gap. For example, reporting may need to include details of historic state pension rules that may have influenced the design of the group arrangements.

Trustees and providers should start thinking now about the historic position and how this can best be communicated in the sponsor’s report.

Second, in broad terms the EU directive requires employers to take measures to narrow any pay gap over 5%. Measures to address gender pay gaps will inevitably have an impact on pension plans. This could be through pay adjustments or policy changes, which in turn could affect contributions made to the plans. There could be a more direct impact on funds if forward-looking measures are taken to reduce the pension gap.

As groups navigate the emerging position on the gender pay and pension gap under the new EU directive, UK pension sponsors, and the trustees and providers who run their pension arrangements, can expect to be called upon for help.

Francois Barker is a partner at Eversheds Sutherland.