While some insurers and brokers are still rewarding top performers, others have responded to the downturn by resorting to pay freezes and pension cuts. Katie Puckett reports on a new era of payout pragmatism

As markets fall around the world, pay and benefits in the financial services sector have become one of the most hotly debated issues of the day, not least among the world leaders at this month’s G20 summit, who made capping bankers’ pay a key plank of their plan to save the world from economic meltdown.

Last week, Aon became the first large UK company to cut payments to employees’ defined contribution pension schemes, effectively forcing them to pay more contributions themselves if they want to maintain payment levels. There has been widespread speculation that other major employers will quickly follow suit, and the development suggests that the insurance sector is next in line after banking for a financial bruising.

The bonus season introduces another bone of contention. The hefty remuneration enjoyed by some senior figures in financial services was also at least partly responsible for drawing thousands of protesters on to the streets of the City on

1 April, as Sir Fred Goodwin, former chief executive of nationalised bank RBS, refused to hand back his £16.9m pension. And in the United States, payouts to executives of failed insurance giant AIG created one of the first scandals of Barack Obama’s presidential honeymoon, with many recipients shamed into returning the money or giving it to charity.

Aon stuck its neck out last week with the surprise announcement that it was cutting its pensions contributions to a standard level of 6% – formerly the minimum level on a sliding scale reaching up to 12%. However, the broker said it would match employee contributions up to a maximum of a further 6%, depending on age. So effectively, those workers that pay more into their pensions – and so take home less pay – receive more. Aon has emphasised employee choice, taking a swipe at rivals such as Willis which have instead encouraged staff to take unpaid leave, another means of effectively cutting pay. In a statement, it said: “We recognise these are difficult times for employees, but we believe in taking a different, longer-term view.”

Aon explicitly linked its decision to cut pensions to the current recession, but all employers face ongoing problems with spiralling pension costs as employees live longer. In tough economic times, these problems become even more pressing, and experts predict that Aon’s move will spark a trend.

Aviva is also looking to change its pension plan. Currently, employees receive 8% of their salary with no minimum contribution. From July, they will have to pay a minimum contribution of 1% to qualify, rising to 2% in April 2010. If they pay more, they will receive more, rising to a maximum contribution of 14% from Aviva for an employee contributing 8%. A spokesman said: “We are proposing that everyone makes a contribution to increase the likelihood of people saving for their retirement.”

Those AIG bonuses aside, UK insurance staff have never enjoyed the telephone-number remuneration of their banking peers. Now though, they’re benefiting from more conservative management – many will have received a bonus in March, though hardly on a level likely to provoke a public scandal.

Whereas bankers with a six-figure basic salary may have been able to multiply that many, many times over, insurance staff would consider themselves lucky with a bonus that was a double-digit percentage of their salary. They’re also unlikely to be rewarded for taking the kinds of risks that have brought the banking system into such disrepute. Tim Johnson, director of headhunting firm ejsSearch, points out that insurance suffered its own meltdown 20 years ago, when the spiral of reinsurance and retrocession loaded insurers with toxic liabilities they couldn’t afford. “Insurers and reinsurers went through that pain, and they’ve got much greater discipline as a result.”

Bonuses within insurance companies are usually calculated by combining personal performance and company profitability. For 2008 then, with profits hit by falling asset values but underwriting still performing well, many staff enjoyed decent, if reduced, payouts. “Individual performance hasn’t been impacted by what’s happening,” points out Paul Picknett, Groupama’s corporate services director. “Our profitability was lower than it has been in previous years but we still had a 13% return on equity for our shareholders, which is quite a good level. We paid bonuses but at considerably lower levels than in the past.”

At NU/Aviva, Zurich and AXA, it was a similar story. An AXA spokesman said: “This year AXA wanted to reward its employees for the work they have carried out over the past year through a bonus contribution. This was paid in March 2009 and was relative to the business and personal performance during the 2008 calendar year. However, this was scaled down on previous years due to the current climate.”

An Aviva spokesman said its remuneration practices closely linked pay to performance “and our 2008 business results were strong. Bonuses therefore reflect performance against targets on financial, customer and employee measures and personal performance targets – ie, the levers that are within our executives’ control. Executive directors and staff will receive bonuses based on that performance. However, the bonuses received by our CEO and CFO are both down on those received for 2007 in cash terms and as a percentage of basic salary.”

Executive directors at Aviva must defer two-thirds of their bonus into Aviva shares, which will not be received for three years. As an aside, Johnson has noticed the attraction of equity plummet among senior staff. “Traditionally as part of the package, some sort of equity deal was seen as a good thing. But in the past few months, people have been more interested in a cash alternative, like a higher basic salary or bonus.”

In some cases, insurance did suffer for its proximity to the riskier areas of financial services. Where companies have a sizeable financial services arm or have made a lot of redundancies, they may have felt unable to pay their insurance divisions a bonus. The most notable example is RBS, where the insurance division includes brands such as Direct Line and Churchill. It may not have been able to persuade Fred The Shred to accept less than his £703,000-a-year pension, but it has ruled out bonuses across the group for all staff, no exceptions.

Brokers are not subject to the same constraints. “Insurers are more tied in with the financial services industry,” says Carl Mackenzie, an executive consultant in recruitment firm Reed’s general insurance team. At larger firms, in particular, Mackenzie says some staff have actually received larger bonuses than usual. “A lot of people are making redundancies among junior staff but they don’t want to lose really good people. They want stability.”

Even as performance bonuses for 2008 are being paid, the spectre of cost-cutting and a difficult 2009 hangs over the industry. With a series of large-scale redundancy rounds at some of the largest insurers and brokers, those who have received a bonus, albeit a reduced one, seem to recognise they were lucky to get it. Johnson reports a conversation with one HR director, who usually dreads the annual announcement. “It’s the worst day of the year. The letters go out and you count three, two, one and people start moaning. But this year, she said it was so quiet. A lot of people appreciate that maybe bonuses are not as high as last year but they still got one.”

Picknett says that a number of Groupama employees even wrote to the chief executive to say thank you. “Our staff are very pragmatic and they read what our competitors are doing with pay and jobs. Many people weren’t necessarily expecting anything because we’ve been communicating with staff since November, advising them that times are tough.”

Groupama has frozen pay for the highest 20% of earners and limited pay increases for everyone else. “We would rather not have implemented a salary freeze but exceptional times call for exceptional measures,” says Picknett. No redundancies or pay cuts are planned, he adds.

At Aviva, the executive committee elected to freeze basic pay for themselves and about 40 other members of senior management in 2009 – the top 50 earners in the company. RBS has frozen pay for directors and executives worldwide, for most staff in the USA and the global banking and markets division. Its February statement said that pay rises for other staff will be on average below inflation.

Aon, which announced last December that it is cutting 700 jobs, has frozen salaries for all staff this year, and at Willis, chief executive Joe Plumeri has threatened to fire the lowest performing associates and banned pay reviews until July. Even then, he said, those earning more than $100,000 (£68,000) would be unlikely to receive a rise. Willis also attracted comment last month when it announced a blanket policy of offering unpaid leave or partly-paid sabbaticals to its associates to cut costs. Marsh and Aon said they had no plans to follow suit.

It’s hard against the backdrop of economic turmoil to feel that this will be the end of the climate change in remuneration. As the downturn deepens into recession and perhaps even depression, insurance staff may look back on their pay packets in the first quarter of 2009 as the calm before the storm.