Thursday, 24 May 2018

    Defined benefit legacy hits current pay

    Younger, lower-paid, workers worst affected by deficit payments

    Defined benefit (DB) pension scheme deficits are pushing down employee pay rises, new research has found.

    The Pay Deficit report, written by Dr Brian Bell of Kings College London with the Resolution Foundation, shows that UK firms allocated around £24bn to deficit-funding pension payments in 2016. The research says that this is £19bn more than would have been the case if scheme deficits had remained at pre-2000 levels.

    It demonstrates a link between DB deficit payments and lower pay levels for workers, with the latter costing workers around £2bn in total. This is worth an average of  £200 per year per person in those firms that are affected.

    An increase in deficit payments equivalent to 10 per cent of a company’s wage bill equates to an average reduction in hourly pay for employees of around 1 per cent, claims the report. The effect is even more marked for lower-paid workers.

    “Our research shows for the first time that there is indeed a link between rising pension deficit payments since the turn of the century and reduced pay,” said Matt Whittaker, chief economist at the Resolution Foundation. Whittaker also highlighted the intergenerational unfairness of pension deficit payments, saying that the drag on pay had “important implications” for low and younger earners whose pay might be affected “even when they are not entitled to the pension pots they are plugging”.

    Average earnings are still £16 a week below their pre-financial crisis peak, and Whittaker described the current likelihood of strong pay growth as “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 they’re not even entitled to,” he added. 

    John Hatchett, head of DB consulting at Hymans Robertson, said that figures were “not a surprise”, adding that the same employees who were experiencing pay constraints are also “facing massive shortfalls in their own pensions.”

    Trustees may need to take a different perspective, however. The Pensions Regulator’s 2017 funding statement encourages trustees with ‘strong or tending to strong’ sponsors to “seek higher contributions now to mitigate against the risk of the employer covenant weakening and other scheme risks materializing in the future.” Resolving the conundrum of deficit reduction versus present-day reward will not be straightforward. 

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