DB deficits drag down wages

DB deficits drag down wages

Between 2000 and 2015, if the money that was used to plug private defined benefit pension deficits had instead been redirected towards wages, average salaries would be £1,473 higher, according to think tank the International Longevity Centre.

A report by the centre due to be published in January also reveals that since the year 2000, pension contributions have accounted for an increasingly large proportion of total employee compensation.

Where wages once accounted for more than 87 per cent of total compensation, they now account for around 83 per cent, the research shows.

According to the ILC, whilst some of those pension contributions will be for current employees, and therefore represents deferred consumption, around half has been for servicing the deficits of defined benefit pensions which have since closed to new members.

The number of retirees receiving a defined benefit pension will remain in the millions well into the latter half of this century, at three million by 2060 and one million by 2070.

The ILC said the collapse of British Home Stores and concerns over the future of Tata Steel have put the sustainability of private sector defined benefit pension schemes firmly into the spotlight.

In April, BHS collapsed and the pension scheme fell into the Pension Protection Fund, a year after Sir Philip sold the company to Dominic Chappell's Retail Acquisitions for a pound.

Earlier this month,  it was announced by The Pensions Regulator it will be months before ex-BHS employees know whether or not Sir Philip Green will be forced to rescue the pension scheme that he allowed to run into a deficit of hundreds of millions.

Additionally, in June this year, the trustee of one of Britain’s biggest defined benefit pension schemes - British Steel Pension Scheme - urged members to support cuts to their benefits, in a move that is likely to have ramifications for the entire sector.

These types of defined benefit schemes promise a set payment to their members in retirement based on salary and years of service.

However, there are growing concerns that many such schemes and their sponsors will be unable to fulfil their promises at a time of rising life expectancy and falling interest rates.

The ILC report finds through new analysis of the Office for National Statistics’ National Accounts that if the resources used to plug rising defined benefit deficits had been directed towards boosting the pay of current workers, wages may have been, on average, as much as 6 per cent higher - £1,473 - in 2015.

The piece of research will make a series of policy recommendations to help ensure the long-term sustainability of defined benefit schemes, and the companies and employees funding them.

Ben Franklin, head of economics of ageing, ILC-UK said: "While the vast majority of private sector defined benefit schemes have closed to new members or future accrual, their impact on individuals, firms and the economy as a whole is likely to be long felt.

"Our analysis suggests that plugging pension deficits has acted as an opportunity cost – supporting the pensions of retirees at the cost of investing in the current workforce.