Directors' Report: Governance - British American Tobacco

www.bat.com/annualreport2009
The Pension Fund, for members who joined before 1 April 2005, is a
non-contributory defined benefit scheme. The early retirement rules
in the Pension Fund permit a member to draw the accrued retirement
pension within five years of normal retirement age without actuarial
reduction, subject to the employing company’s agreement. Alternatively,
an Executive Director may choose to leave and take a pension at any time
on or after his or her 50th birthday without the employing company’s
agreement, subject to a reduction as determined by the Pension Fund
trustee in conjunction with the Pension Fund actuary. Accrual rates
differ according to individual circumstances but do not exceed onefortieth
of pensionable salary for each year of pensionable service.
Pensionable pay covers basic salary only and therefore bonus awards
and the value of benefits in kind are not pensionable.
The Pension Fund includes provision for spouses’ benefits on death in
service or after retirement. In the event of death in service, a spouse’s
pension equal to half of the member’s prospective pension at normal
retirement age would be payable. A spouse’s pension payable in the
event of death after retirement is equal to half of the member’s full
pension, irrespective of any decision to exchange part of the benefit
for a lump sum.
Paul Adams and Ben Stevens each joined the Pension Fund after 1989.
As a result, prior to 6 April 2006, these individuals were subject to
the HM Revenue & Customs cap on pensionable earnings (notionally
£123,600 for the tax year 2009/10). In addition, each has an unfunded
pension promise from the Company in respect of earnings above the
cap on an equivalent basis to the benefits provided by the Pension Fund.
This is provided through membership of an unfunded unapproved
retirement benefit scheme (UURBS).
These unfunded commitments are included in note 12 to the accounts.
However, following the changes in pensions legislation in 2006, it
was agreed that benefits up to £75,000 per annum (targeting the
Lifetime Allowance) would be provided through the Pension Fund
(subject to the consent of the member) with the remainder of benefits
being provided through the UURBS. As a result, the Company paid an
additional amount to the Pension Fund in 2006 to fund the additional
benefits up to a maximum of £75,000 per annum. The overall pension
entitlement for each of the Executive Directors remained unchanged.
Members of the Pension Fund are entitled to receive increases in their
pensions in line with price inflation (as measured by the Retail Price
Index) up to 6 per cent per annum.
Nicandro Durante is a member of the Fundacao Albino Souza Cruz
in Brazil. This is a non-contributory defined benefit scheme and
includes a spouse’s death in service benefit equal to 37.5 per cent of
the member’s prospective pension at normal retirement age. Accrual
rates do not exceed 1.85 per cent of basic salary (excluding bonus)
averaged over the 12 months to normal retirement age, for each year
of pensionable service. Nicandro Durante’s pensionable salary will be
Directors’ report: Governance
British American Tobacco Annual Report 2009
reviewed by the Company annually with reference to the salary of that
of a General Manager of Souza Cruz SA which will increase annually
in line with local practice. In addition, Nicandro Durante accrues
a pension of 0.65 per cent for each year of service based on his
12 month average UK basic salary (excluding bonus) with effect from
1 March 2006, that being the date of his appointment as a member of
the Management Board. This benefit is provided through the UURBS.
Executive Directors’ service contracts
Each Executive Director has a one year rolling contract, executed at
the time of his original appointment. The contract may be re-executed
during the term of employment to take account of variations in terms
and conditions as well as changes in best practice. Each contract
incorporates a provision for a termination or compensation payment
in lieu of notice.
The Remuneration Committee, however, maintains the discretion
to vary the policy of one year rolling contracts in the event that an
Executive Director is recruited externally or from overseas, when it
may then be appropriate to offer a contract with an initial period of
longer than one year, reducing to a one year rolling contract after
the expiry of the initial period.
An Executive Director’s compensation payment, in lieu of notice,
would comprise: (1) 12 months’ salary at his then current base pay;
and (2) a cash payment in respect of other benefits under the contract
such as medical insurance, or the Company may at its option continue
those benefits for a 12 month period. The Committee maintains
discretion as to how to deal with any grants or awards made prior to
termination under the LTIPs, the IEIS and the Share Option Scheme
(if appropriate). Pension entitlements are dealt with in accordance
with the terms and conditions of the applicable pension scheme and
do not form part of the contractual compensation payment.
The compensation payment is payable where the requisite 12 months’
notice is not given to the Executive Director or when he terminates by
giving 12 months’ notice and the Company does not wish him to serve
his notice. If a period of notice is served, the compensation payment is
reduced pro rata. In the unlikely event that the contract is terminated
for cause (such as gross misconduct), the Company may terminate the
contract with immediate effect and no compensation would be payable.
Nicandro Durante has a service contract with the Company in the
form outlined above. In addition, as a result of the application of local
labour laws in Brazil, Nicandro Durante retains certain termination or
compensation rights in respect of his former employment with Souza
Cruz SA. In the event of any compensation being payable to Nicandro
Durante pursuant to his service contract with the Company, these
Souza Cruz rights will be taken into account first in arriving at a final
compensation amount in order that he does not benefit twice from
these dual arrangements.
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