Companies in the UK have held down staff wages as they plug pension deficits, including those of lower-paid workers excluded from the schemes.
An average 10 per cent of the money that has been paid into defined-benefit schemes over the past 16 years has been funded by suppressing wages, according to new research.
On average, workers are paid £200 a year, or 0.6 per cent, less than employees in similar companies which have not had to plug pension deficits, the Resolution Foundation said.
The impact has been largest on workers who are, or were, members of defined-benefit schemes, but Matthew Whittaker, chief economist at the Resolution Foundation, said that low earners were also being hit even though they “are not entitled to the pension pots they are plugging”.
The vast majority, 85 per cent, of the UK’s nearly 6,000 defined-benefit pension schemes are now closed to new members and 35 per cent are also closed to future accruals. As two-fifths of the 10.9m scheme members are already retired, employers cannot claw back wages from that group.
Rising longevity and poor investment returns have significantly increased defined-benefit pension scheme deficits since the turn of the century.
Low interest rates, which have been depressed by the Bank of England’s quantitative easing programme, have also increased the size of deficits, which currently stand at a collective £530bn.
Last year, companies in the UK made £24bn of special deficit financing payments. This is £19bn more than would have been the case if pre-2000 deficit levels had continued, or 6 per cent of wage costs for affected companies.
The new research, carried out by Brian Bell at King’s College London, concludes that a tenth of this, or nearly £2bn, was financed by companies suppressing workers’ wages relative to their counterparts in other organisations.
The study is the first to link company-level data on deficit funding to employee-level data on wages to examine directly how the increase in pension deficit funding has affected wages.
The data included 475 UK-listed companies, all of which had been among the 300 largest UK-domiciled businesses on the London Stock Exchange, by market capitalisation, at some point between 2000 and 2010. Two-thirds of these companies had exposure to a defined-benefit pension scheme.
Some of the largest deficit financing contributions made by companies in recent years include a £4.2bn payment by Royal Bank of Scotland to its pension scheme in 2016, a £2bn payment by BT in 2012 and a £1.8bn payment by Barclays in 2011.
With 10 per cent of the overall deficit financing estimated to have come from lower wages, Dr Bell said the remaining 90 per cent was likely to have come principally from companies’ retained profits: “Firms are so cash rich since the financial crisis, I would be surprised if we saw much evidence that firms had resorted to other strategies like cutting dividends or reducing new investment.”
Earlier this year, research by the Bank of England concluded that “deficit reduction plans only had a very small effect on investment growth between 1996 and 2015”.
Dr Bell’s findings are also consistent with survey evidence released at the end of last year which suggested that one in ten companies had dealt with increased pension costs since 2013 by restricting pay rises for staff. One in 20 companies said they had reduced staff numbers.
“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,” Mr Whittaker said.