Not getting paid enough? Blame your pension

It's not that companies don't want to pay their employees more, says Merryn Somerset Webb. They're too busy plugging holes in their pension schemes.

Today David Cameron has said it is time for Britain to get a pay rise. After six post-crisis years of nasty real wage cuts (although not for everyone see my post on full-time permanent workers), and with corporate profits at a six-year high, he reckons its time for investors and top management to share a little more with the workers.

But look at the data and the idea that workers in the UK haven't been getting their fair share looks a bit odd. As the charts in this article show, the share of total income going to labour in the UK has not fallen in the same way that it has in the US. So what's going on?

The answer might lie in the costs of the UK's remaining defined benefits pension schemes. According to the Treasuryand to a recent study, contributions made by employers to these schemes are the "major component behind this disparity".

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Employees have seen their real wages fall. But thanks to the fact that their employers have been pouring vast amounts of money into their pension schemes on their behalf, the numbers still show labour getting much the same share of national income has it always has. This is a problem that isn't going to go away.

Consider why companies are having to put all this money into their pensions. It is all about the present valuing of their future liabilities. The lower interest rates go, the harder the actuaries assume it is for them to get the returns they need to pay the pensions they owe so the more money they insist they put in. The lower interest rates go, the higher pension deficits get.

That matters, even if it is just actuarial nonsense. It is why numbers out today show that pension deficits now stand at a record £367.5bn, up from £266.3bn at the end of last December.

It's also why employers stuck with defined pension benefit schemes feel they can't raise wages: they need all the cash they can get their hands on to feed their pension funds. It's just one more example of the slow poison and oddly deflationary* effect of modern monetary policy.

* If workers aren't seeing actual pay rises, they are unlikely to do much actual extra spending.

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.