Ofwat reminds remuneration committees of their PRP licence obligations

(by Verity Mitchell)

Ofwat has felt it necessary to write to the remuneration committee chairs of all English and Welsh water companies, reminding them of their licence obligations. 

The year that ended 31 March 2025 was the first year in which Ofwat applied a performance related executive pay (PRP) prohibition rule. Where a company has triggered the PRP prohibition rule, it should provide an explanation of the reasonable steps it has taken to ensure that a director does not receive PRP from elsewhere.

Ofwat contends that there has been a lack of transparency in how water companies actually disclosed and justified their remuneration decisions. It has therefore proposed new regulatory reporting requirements on remuneration, which were finalised on 31 March 2026 and will apply to reporting for the 2025-26 financial year. Companies must now transparently explain any changes they have made to their remuneration policy, including a sufficient reason for those changes.

An important water licence obligation, set out in Condition P, is to meet the objectives of the 2019 Board, Leadership, Transparency and Governance principles. The board of each company must be provide transparent governance which engenders trust in the water company and provides accountability for its actions. The PRP recovery mechanism now allows Ofwat to intervene to ensure customers do not fund PRP where a company’s PRP decisions do not meet the expectations it has set out.

Ofwat said it will be evaluating whether water companies’ PRP decisions on all executive remuneration are aligned to this principle. Excessive increases in base pay, retention payments or other types of remuneration without sufficient justification and transparency could undermine trust. It is therefore important that remuneration committees carefully consider this obligation when deciding on current awards and future policy changes.

Each company should clearly set out what factors its board has considered in setting its remuneration policy, taking into account an overall assessment of company performance. This should include factors which are wider than just the individual metrics used as part of PRP arrangements. Factors which may provide an indication of company performance overall could include: performance by reference to performance commitments not otherwise included as part of individual metrics; financial resilience; reputational issues, including significant events impacting customers and/or the environment in the course of the year; compliance issues, including enforcement action or litigation; and performance in Ofwat’s Water Company Performance Report and in the Environment Agency’s Environmental Performance Assessment.

Where any of the directors on the regulated company board has received any remuneration from any group company (including parent companies), the following information should be provided for each director:

• The value of remuneration paid.

• Details of what activities the remuneration was received for, including whether any of it relates to the activities of the regulated company.

• Whether any element of the remuneration was performance-related (e.g. linked to a qualitative or quantitative assessment of the performance of the individual or a company) or not.

• (Where a company considers that it has triggered the PRP prohibition rule) an explanation of whether or not any of the remuneration is in scope of the PRP prohibition rule.