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

Workers in companies with defined-benefits pension deficits are paid on average £200 a year less than those in firms without them, says Merryn Somerset Webb.

170522-pensions-b

A defined benefits pension could be costing you £200 a year
(Image credit: This image is subject to copyright.)

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

Get 6 issues free
https://cdn.mos.cms.futurecdn.net/flexiimages/mw70aro6gl1676370748.jpg

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

Sign up

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.

Merryn Somerset Webb

Merryn Somerset Webb started her career in Tokyo at public broadcaster NHK before becoming a Japanese equity broker at what was then Warburgs. She went on to work at SBC and UBS without moving from her desk in Kamiyacho (it was the age of mergers).

After five years in Japan she returned to work in the UK at Paribas. This soon became BNP Paribas. Again, no desk move was required. On leaving the City, Merryn helped The Week magazine with its City pages before becoming the launch editor of MoneyWeek in 2000 and taking on columns first in the Sunday Times and then in 2009 in the Financial Times

Twenty years on, MoneyWeek is the best-selling financial magazine in the UK. Merryn was its Editor in Chief until 2022. She is now a senior columnist at Bloomberg and host of the Merryn Talks Money podcast -  but still writes for Moneyweek monthly. 

Merryn is also is a non executive director of two investment trusts – BlackRock Throgmorton, and the Murray Income Investment Trust.