Rolls-Royce has announced it will be reducing the pension contributions for newly appointed executive directors from a maximum of 25 per cent to 12 per cent, in line with its broader new hire rate.

It has also confirmed that contributions for existing directors will be reduced gradually until 2022, though these will be aligned with the average wider workforce rate for existing UK employees, at 17 per cent of salary.

Executive pensions have faced increased scrutiny since September 2019, with the Investment Association cracking down on companies that have failed to align executive pension pay with their workforce.

The company’s existing executive directors, Warren East and Stephen Daintith, had pension remuneration of £236,000 and £150,000 respectively in 2019 and 2018.

This equated to a 25 per cent allowance for East, and 22 per cent for Daintith.

Both East and Daintith’s allowances will fall by 2 per cent as of this month (March 2020), with further reductions scheduled annually until 2022.

The report stated: "In arriving at the 17 per cent contribution rate for existing executive directors we have considered our UK population, which represents the largest employee group.

"Currently almost half of our UK workforce (45 per cent) are active members of our defined benefit (DB) plan with a funding cost in excess of 30 per cent of salary (based on the most recent funding valuation in March 2017).

"Given current financial market conditions, we would expect that cost to increase by the time of the next valuation in March 2020."

It continued: "As we have such a significant proportion of our UK workforce in a DB plan, we have reviewed the average blended contribution rate across all UK employees, which currently gives an average of 17 per cent of salary.

"We believe that this is currently a fair reflection of the pension arrangements of the wider workforce.

"However, to reflect funding costs of defined benefit pensions and the proportion of employees in the defined benefit and defined contribution plans, we plan to keep this rate under review."

The group also entered into a partial buy-in with Legal & General in June of last year, which saw the benefits of around 33,000 pensioners insured. This also led to an asset re-measurement net loss of £600m.

Ninety per cent of the buy-in liabilities had been transferred as of 1 December 2019, resulting in £3.6bn being derecognised from the groups balance sheet.

The remaining 10 per cent of liabilities were concluded in January 2020 and is expected to result in a further £408m in pension asset and liabilities being derecognised in 2020.

Over the year, the firm also noted a number of actuarial gains and losses, including a £309m gain due to demographic assumptions, and a loss of £1,723m attributed to financial assumptions.

Combined with the completed buy-in, this saw a £849m drop in the groups post-retirement scheme surplus, falling from £1,926m in 2018 to £1,141m in December 2019.

Rolls-Royce's DB schemes' funding level switched from a surplus of £641m in December 2018 to a defcit of £208m before deferred taxation at December 2019.

"The size of the net surplus/deficit is sensitive to the actuarial assumptions, which include the discount rate, price inflation, pension and salary increases, transfers, mortality and other demographic assumptions and the levels of contributions," said the report.

The group also confirmed that it expects to contribute a further £100m to its UK DB schemes in 2020, down from the £140m contribution made in 2019.

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