How a pension deficit could be costing you £200 a year

Handful of cash © Getty Images
A defined benefits pension could be costing you £200 a year

I have written here several times before that pension deficits in the UK must be holding down in the UK. That’s partly because the ongoing liability deters capital investment – one of the factors that is keeping productivity and hence wages down. But it is also about simple short-term affordability.

Firms who have to keep contributing large sums of money to the pension funds they sponsor and who know they are more than likely to have to keep doing so for many years to come are, I said, surely less likely to feel able to raise wages than those who do not.

So the low base rate that gives us the low bond yields that create theoretical pension deficits (see previous blogs on this – the deficits are as much a function of trustee behaviour as reality) keeps wages low too. Modern monetary policy isn’t good for workers.

The problem with this idea so far has been that there hasn’t been any empirical research backing it up (it seems like common sense but not all common sense turns out to be correct sense). However the Resolution Foundation has just come out with a bit of research that begins to make the case.

According to its analysis, reported in the FT, around 10% of the total paid into pension funds to make up deficits over the last 16 years has been “funded by suppressing wages”. The result is that workers in companies with defined-benefits pension deficits are paid on average £200 a year less than those in firms without them.

This matters hugely for all sorts of reasons. It is demoralising for workers and expensive for the taxpayer: we subsidise low wages via the tax credit system. And it exacerbates the tension between generations: young and low-paid workers end up taking the hit for deficits in the kind of pension funds that will never pay out to them (85% of defined-benefits schemes are closed to new members).

It is something else to add to a long list of evidence that very low interest rates might be doing much more damage than they are good. It is past time for normalisation.

  • Kath Wood

    Thank goodness CEO’s of our most illustrious companies still get a decent wage!!!

  • MK22

    In some quarters it would be nice to blame Trustees for pensions deficits and therefore low wages, but I’m afraid they are not the culprits! The story is complex, but basically pensions deficits exist because accountants and the Government got it wrong when they tried to come up with a way to quantify the effect of pensions on the Balance Sheet so that those nice investors would know what might lie ahead. Pensions deficits as we see them do not exist. As you rightly say, they are just a measure of the current state of the bond yield, no more no less. If wages are kept low because of the deficit in the DB Pensions Scheme, please blame firstly company management who are following a will’o the wisp, secondly blame their accountants for coming up with a farcical way of evaluating the pension scheme and finally blame the Government and its Pensions Ministers, who have been told time and time again how wrong it is, but who seem to have their fingers in their ears!

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    • John Child

      There have been times when pension funds have been in very good health ,until
      the Governments decide that its a useful revenue source and increase tax on the profits of its investments ,then when the bad time come along, and they have we end up with a short fall in funds or it fails completely and the tax payer picks up the tag If it works don’t fix it. the result is DB Pensions are in steep decline , and will no doubt vanish ,this is detrimental to future gernerations

Merryn

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