The cost of keeping defined benefit pension schemes afloat is costing the average worker £200 a year in lost income, according to a new report from the Resolution Foundation.
Yet while workers who are in a final salary pension scheme might be prepared to take a hit on their salary if it safeguards their retirement income, the report claims the cost of plugging pension deficits is also impacting employees that won’t enjoy its benefits. This is likely to be younger, lower paid workers who joined the company after the defined benefit pension scheme had been closed to new members.
Since the early 2000’s, a combination of poor investment growth, low interest rates and increasing life expectancy has led to a substantial increase in the size of companies’ pension deficits. ‘The Pay Deficit’ report claims that last year companies paid £24 billion in special payments to keep their pensions afloat, £19 billion more than would have been required if deficits had remained at their pre-2000 levels.
For the first time, the report shows that the need to make these payments has created a £2 billion drag on the amount of money affected businesses are able to pay in salary, costing the average worker £200 a year.
The Resolution Foundation claims that this is creating significant issues for intergenerational fairness – with older and retired workers, who are part of the final salary scheme, most likely to benefit from payments made into the workplace pension. It says of the 10.9 million members of such pension schemes, 40% have already retired while fewer than 2% are aged under 30. Half of the UK’s 6,000 defined benefit pensions are closed to new members.
As a result, the think tank says that future discussions on pension deficits need to extend beyond the sustainability of the pension to include a proper assessment of the distributional impact of deficits on pay, dividends, and investment.
‘Low - and often younger - earners are losing out’
Commenting on the findings, Matt Whittaker, chief economist at the Resolution Foundation says: “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.
“This drag on pay has important implications across generations as low – and often younger – earners in affected firms are losing out on pay even when they are not entitled to the pension pots they are plugging.
“With average earnings still £16 a week below their pre-crisis peak and prospects for a return to strong pay growth looking shaky, it’s important that younger and low paid workers don’t take a hit to their pay because of deficit payments to pension schemes that they’re not even entitled to.”