Prudential Regulation Authority Rulebook

4.1

Where remuneration contains a variable component, Article 275(2)(c) of the Solvency II Regulation requires firms to defer a ‘substantial portion of the variable remuneration component’ for a period of not less than three years for Solvency II staff. There is no flexibility in the Solvency II Regulation for Solvency II firms to elect a shorter period than this specified minimum three year period, with firms required to ensure that the period (be it three years or longer) is ‘correctly aligned with the nature of the business, its risks, and the activities of the employees in question’. The natural life cycle of the business and associated risks should be considered when setting the length of the deferral period. Variable remuneration payable under these deferral arrangements must vest no faster than pro-rata from year one. There may also be the potential for multi–period schemes to operate within the same deferred bonus plan or Long Term Incentive Plan (LTIP). The actual arrangements put in place to comply with this requirement will remain, however, a discretionary matter for the firm.

4.2

The ‘variable remuneration component’ should be read as the aggregate amount awarded in a given performance year from bonus plans, LTIPs and/or any other variable remuneration plans in which the individual participates. For these purposes, the LTIP should be valued at the grant date as the maximum potential value that could be paid out if 100% of the performance conditions are met with the deferral period commencing on grant.

4.3

The PRA believes that a ‘substantial portion’ of variable remuneration, which must be deferred for a minimum of three years, is very unlikely to be less than 40%. Based on current industry practice, the PRA is of the view that a deferral threshold of 40% or more is likely to be proportionate, particularly given this would not be applied independently to distinct variable remuneration awards but to the total amount.

4.4

Deferral of variable remuneration allows firms to apply downwards adjustments by the application of malus⁸ prior to the award vesting, to take account of specific risk management failures. In order to comply with Article 275, the PRA will expect firms to consider whether or not to apply malus during the three year deferral period required by the Solvency II Regulation and to be able to apply it where appropriate. Whether reductions should be made to the unvested variable remuneration of Solvency II staff or other forms of performance adjustment applied (eg reducing current year awards) is at the employer’s discretion and should be considered on a case-by-case basis.