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Categorized | Banks

Spain’s bankers reap pension jackpot

Posted on April 30, 2013


The departure of Alfredo Sáenz as chief executive of Banco Santander has shone a spotlight on a quirky remuneration detail – quite how generous the pension arrangements for Spain’s top bankers are compared with the norm in the rest of the world.

Chief executives’ pensions have traditionally attracted relatively little interest from investors or the general public – in stark contrast to the attention paid to the annual allocation of bonuses.

Yet, the most generous pensions can leave bonus awards looking pale by comparison.

As was pointed out on Monday when Mr Sáenz announced his departure from Santander, the 70-year-old will hardly miss his pay cheque, given the €88.2m pension pot he has to fall back on.

    But such arrangements are far from universal. Compare Mr Sáenz with the man who is generally acknowledged to be the best paid bank chief in the world – Goldman Sachs’s Lloyd Blankfein – and the stark differences between the structure of top bankers’ pay around the world is clear. While Mr Blankfein received $21m in salary and bonuses for 2012, his pension pot is minuscule – worth less than $34,000.

    In some ways Santander is a special case. Mr Sáenz’s pension, while the biggest publicly disclosed by a large bank, is echoed by similar arrangements for some of his top colleagues. The bank’s patriarchal chairman Emilio Botín is sitting on a pot worth €25.6m, while other members of the Santander board such as his daughter Ana Botín (with €34.9m) and risk chief Matías Rodríguez Inciarte (with €45.5m) could also claim their spots among any future pensioner rich list.

    Mr Botín has always argued that such generous schemes are a crucial retention tool, ensuring the longstanding loyalty of senior executives, although that theory was tested when António Horta-Osório, now chief executive of Lloyds Banking Group in the UK, walked away from a pension entitlement, reputed to be worth a prospective €30m-plus.

    There are also tax benefits, helping to make generous pensions a broader feature of remuneration across Spanish banking.

    “From the 1980s, companies in Spain have had to provide specific external funding for any pension promises,” says Paul Kelly, an international pensions expert at consultancy Towers Watson. “But there was an exception for the banks. That has given them relative tax flexibility.”

    The anomaly has tended to mean that bonuses for top Spanish bankers have been relatively low compared with foreign rivals, particularly in the US. However, critics make the point that some top executives have had the best of both worlds. Last year, Mr Sáenz received a bonus of €7.2m.

    Seniority rules for the señores

    Even though Alfredo Sáenz resigned this week from Banco Santander at the age of 70, in the world of Spanish business the outgoing chief executive is classed a relatively young man, writes Miles Johnson.

    It is still customary for many of Spain’s largest companies to be dominated by men who serve well past the country’s retirement age of 67. Out of the country’s Ibex 35 index almost half of its corporate leaders are aged over 65, with several approaching 80.

    Of these the oldest is the 82-year-old Juan Miguel Villar Mir, head and founder of builder OHL and former Spanish finance minister in the first government after the death of dictator Francisco Franco in 1975.

    On Monday, he was named an independent director at Santander.

    Mr Villar Mir will share a board room table with Emilio Botín, the lender’s executive chairman, who at 78 has shown no sign of stepping down from the bank his father, Emilio Snr, ran until he was 83.

    Other senior citizens of the Ibex include Gas Natural president Salvador Gabarró, 78, and José Lladó, the 79-year-old chairman and founder of engineering group Técnicas Reunidas who was also a minister in one of the governments following Franco’s death.

    Younger leading business figures who are still old enough to claim state pensions include the country’s two other powerful banking chiefs aside from Mr Botín: Francisco González of BBVA, 69, and Isidro Fainé of Caixabank, 71.

    Elsewhere, César Alierta, executive chairman of Telefónica, the former state telecoms monopoly, is 69, Salvador Alemany of Abertis, the Catalan infrastructure operator, is 70, and Red Electrica’s José Folgado is 69.

    But the change at the top of Santander is a possible sign that gerontocracy may be coming to an end, with Javier Marín, Mr Sáenz’s successor at Santander, a youthful 46, being the same age as many top executives’ children.

    BBVA awarded a less fulsome cash-and-shares bonus currently worth €2.1m to its chief executive, Francisco González, last year. But when it froze additional contributions to his pension when he hit age 65 a few years ago, the pot was already worth €79.8m.

    Underpinning some of Spain’s generosity to its elite bankers is the broad European tradition of protecting workers in retirement. While mainstream employees in markets such as Spain, France and Germany have found that protection through state-funded social security systems, top executives have benefited from employer-funded schemes.

    The former chief executive of Deutsche Bank, Josef Ackermann, left the bank with a pension pot of nearly €19m.

    But a shift away from such schemes is well under way. Anshu Jain, now Deutsche’s co-chief executive but earlier a trader and one of the group’s best paid staff, has a pension of barely €400,000. Similarly Frédéric Oudéa, head of Société Générale, has no legacy benefits and now accumulates a flat €300,000 a year. The advent of a new generation of bank chiefs from outside their new employers at the likes of Royal Bank of Scotland, Lloyds, UBS and Morgan Stanley, has contained pension costs, too.

    The moves are underpinned by government restrictions on tax breaks. France, for example, recently doubled the tax rate on defined benefit schemes which guarantee payouts on the basis of salary, while in the UK there has been a steady erosion of DB schemes in favour of defined contribution arrangements where investment risk is born by the employee.

    For top executives in the UK caps imposed a decade ago on both tax-free annual contributions and the size of total pension pots have led to a shift away from CEO participation in company-sponsored schemes. Instead, all of the big four banks now make cash contributions to their CEOs and other top executives in lieu of pension payments.

    The generosity of executive DB schemes in the UK was highlighted recently when Sir James Crosby, the former head of collapsed bank HBOS, volunteered to forgo a third of his £580,000 annual pension entitlement.

    The broad shift away from specific company-sponsored promises has been particularly strong among investment banks, says Marc Hommel, pensions partner at PwC. “There is a real difference between retail and investment banks that explains a lot of the contrast between [pension practices in] Europe and the US. In the 1980s, US investment banks were among the first to move from DB to DC schemes.”

    The trend has been reinforced by investment bankers’ own preference for running their financial affairs themselves rather than relying on company schemes whose tax benefits are severely limited.

    That explanation might be one factor behind the revelation that Brian Moynihan, the commercial banker who runs Bank of America, is the only one of the US big global bank bosses with a big pension entitlement – his near $8m pot is more than 16 times the next biggest, JPMorgan’s Jamie Dimon.

    Even top US bankers, though, appear quaintly attached to that symbol of the American free market, the 401k self-administered pension, accepting company contributions capped at just $10,000 towards their schemes.