Out-Law / Your Daily Need-To-Know

Low earners suffer wage suppression as companies plug pensions deficits

Out-Law News | 22 May 2017 | 4:23 pm | 2 min. read

Employer contributions to defined benefit (DB) pension schemes deficit payments are leading to a reduction in hourly wages, a study has found.

A new study into pensions deficit payments (32-page / 340KB PDF) by the Resolution Foundation said DB deficit payments were “directly lowering employee pay by between £1.4 billion and £2.2bn a year”.

The study identified a sharp increase since 2000 in the share of 'non-wage' elements in employee compensation, including payments into pension schemes. Last year non-wage elements accounted for just under 17% of average pay, up from 13% in 2000.

The biggest driver of this increase, accounting for £26bn of the overall £37bn increase in 2016, was employer pension contributions. The report said increased deficit funding contributions accounted for around £19bn of this rise in non-wage employer contributions.

Resolution said every increase in deficit payments equivalent to 10% of a company's total wage bill fed through into an average reduction in hourly pay for its employees of roughly 1%. In turn, this meant that around 10% of the £19bn rise could be directly associated with lower hourly pay.

The average annual impact on workers in companies with DB scheme deficits was between £145 and £225. Although there was a stronger negative effect on employees who remained active members of a DB scheme, there was also a significant impact on lowest-paid workers.

Resolution said the “current scale of deficits and the tendency of longevity to surprise on the upside” meant that there was likely to be a continued impact on pay for the foreseeable future.

There are around 6,000 DB schemes in the UK but 85% are closed to new members and 35% are closed to future accruals. About 40% of DB members are already retired.

DB schemes promise a set level of pension once an employee reaches retirement age, no matter what happens to the stock market or the value of the pension investment, in contrast to defined contribution schemes where payouts are determined by the amount of contributions paid in and their investment performance.

Pensions deficits have been rising as a result of increased longevity and falling interest rates and the Department for Work & Pensions has estimated that between 90 and 95% of DB schemes are in deficit.

Resolution chief economist Matt Whittaker said wages had been flat-lining for some time, even before the financial crisis.

“Understanding what contributed to the pre-crisis slowdown in pay growth is crucial to determining what might come next,” Whittaker said. “Our research shows for the first time that there is indeed a link between rising pension deficit payments since the turn of the century and reduced pay.”

Last year the UK government said it was reviewing the way in which DB schemes calculated deficits. Pensions expert Alastair Meeks of Pinsent Masons, the law firm behind Out-Law.com, said at the time changes could be of value to employers, provided they did not mask genuine funding problems.