When freezing of director retirement allowances put some companies on thin ice – how frozen is “frozen”?

There have been two broad approaches to the removal of retirement benefits:

a) cessation of the accrual at a specified date for all directors;
b) ceasing to offer the benefit to directors appointed after the specified date, but continuation of the arrangements for existing directors.

Companies frequently advised that they had “frozen” the accrued value of the benefit at the specified date, but the approaches to this took different forms.  Some froze the fee component of the formula, but continued to accrue the years of service component for application to the final payment.  Alternatively, other companies froze the service component but not the fee element.  Another method employed by some companies involved applying a growth factor to the accrued benefit, either by reference to CPI or a benchmark interest rate. In each of these cases, the payment due at retirement continues to increase despite the claimed “freeze”.

Interestingly, one company is phasing out retirement benefits and is releasing accrued amounts to directors over the remaining term of their service.  So instead of disclosing the (positive) value of current year accruals for future payments, it has shown the payments actually released as negative amounts under a rather unusual interpretation of the post employment benefits requirements of the AASB 119 standard.

Irrespective of the approach adopted, shareholders have overwhelmingly welcomed the removal or reduction of these benefits, notwithstanding the compensating increase to fees. 

© Guerdon Associates 2024
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