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.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
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.
-
Christmas at Chatsworth: review of The Cavendish Hotel at BaslowMoneyWeek Travel Matthew Partridge gets into the festive spirit at The Cavendish Hotel at Baslow and the Christmas market at Chatsworth
-
Tycoon Truong My Lan on death row over world’s biggest bank fraudProperty tycoon Truong My Lan has been found guilty of a corruption scandal that dwarfs Malaysia’s 1MDB fraud and Sam Bankman-Fried’s crypto scam
-
Our pension system, little-changed since Roman times, needs updatingOpinion The Romans introduced pensions, and we still have a similar system now. But there is one vital difference between Roman times and now that means the system needs updating, says Merryn Somerset Webb.
-
We’re doing well on pensions – but we still need to do betterOpinion Pensions auto-enrolment has vastly increased the number of people in the UK with retirement savings. But we’re still not engaged enough, says Merryn Somerset Webb.
-
Older people may own their own home, but the young have better pensionsOpinion UK house prices mean owning a home remains a pipe dream for many young people, but they should have a comfortable retirement, says Merryn Somerset Webb.
-
How to avoid a miserable retirementOpinion The trouble with the UK’s private pension system, says Merryn Somerset Webb, is that it leaves most of us at the mercy of the markets. And the outlook for the markets is miserable.
-
Young investors could bet on NFTs over traditional investmentsOpinion The first batch of child trust funds and Junior Isas are maturing. But young investors could be tempted to bet their proceeds on digital baubles such as NFTs rather than rolling their money over into traditional investments
-
Negative interest rates and the end of free bank accountsOpinion Negative interest rates are likely to mean the introduction of fees for current accounts and other banking products. But that might make the UK banking system slightly less awful, says Merryn Somerset Webb.
-
Pandemics, politicians and gold-plated pensionsAdvice As more and more people lose their jobs to the pandemic and the lockdowns imposed to deal with it, there’s one bunch of people who won’t have to worry about their future: politicians, with their generous defined-benefits pensions.
-
How the stamp duty holiday is pushing up house pricesOpinion Stamp duty is an awful tax and should be replaced by something better. But its temporary removal is driving up house prices, says Merryn Somerset Webb.
