UK companies' efforts to plug the funding gaps in their defined benefit pension schemes are suppressing wages by as much as £200 per year, according to research.
The hit to wages includes those lower-paid workers excluded from the defined benefit schemes.
Over the past 16 years, an average 10 per cent of the money that has been paid into defined benefit schemes has been funded by suppressing wages, according to the 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 stated in its sixth report for the Inter Generational Commission.
The research looked at the impact of deficit payments on pay levels based on more than 180,000 observations across around 400 firms between 2002 and 2015.
Before 2000, non-wage elements at companies accounted for 13 per cent of compensation on average; but this share increased sharply thereafter, reaching more than 18 per cent in 2012.
While it has fallen a little since, it remained just under 17 per cent in 2016. But by far the biggest driver of the increase in non-wage payments over the post-2000 period – accounting for £26bn of the overall £37bn increase in 2016 – was employer pension contributions.
The analysis identifies a strongly significant negative effect on hourly pay at the level of the individual firm.
For every increase in deficit payment equivalent to 1 per cent of the firm’s total wage bill, the hourly pay of its workers is lowered by roughly 0.1 per cent.
With the £19bn relative increase in DB deficit payments identified by the Resolution Foundation in 2016 being roughly equivalent to 2.5 per cent of the UK’s total wage bill, the implication is that such employer contributions are lowering average employee pay by between 0.2 per cent and 0.3 per cent.
Converting that hourly pay effect into an aggregate annual figure suggests that DB deficit payments are directly lowering employee pay by between £1.4bn and £2.2bn a year.
This means that in the region of 10 per cent of the £19bn elevation in special payments can be directly associated with lower hourly pay.
With roughly half of private sector employees working in firms with DB schemes, the average annual pay effect within this group rises to somewhere in the range £145-£225. And this average is likely to mask still more sizeable effects for some: looking across the firms in the sample used in the research, the average deficit payment relative to wage bill is 6 per cent, with a standard deviation of 9 per cent.
The regression also shows that the wage effect is stronger on those employees who remain active members of the DB scheme.
For such workers, an increase in deficit payments equivalent to 1 per cent of a firm’s wage bill is associated with a pay reduction of between 0.12 per cent and 0.18 per cent. The magnitude of impact is lower for deferred DB pension members (those in schemes which are closed to future accrual) and across all firms is not statistically significant for employees who have never been members of the pension scheme.
However, the reports stated: "There is a significant negative effect (with a coefficient of 0.22 per cent) for those who have never been members, for employees in the bottom quarter of the pay distribution. This group is younger than any other considered in the research, with an average age of 34.7 years. This compares with an average age across the sample of 39.5 years.
"The implication is that the UK’s youngest and lowest earners are suffering an additional pay penalty as a result of DB deficit payments that have no benefit to them. The fact that higher earners who have never been members of their firm’s DB schemes (where the average age is 40.4 years) do not appear to have been affected implies that relative labour strength may form part of the story too."
Matt Whittaker, chief economist at the Resolution Foundation, said: “Pay growth has under-performed in the UK for well over a decade.
"While the financial crisis fall-out and recent combination of rising inflation and productivity stagnation have had the biggest effects, wages actually started to flat-line before the crash hit.
"Understanding what contributed to the pre-crisis slowdown in pay growth is crucial to determining what might come next.
“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. The scale of increased deficit payments reduced workers’ wages by around £2bn last year, with workers in affected firms losing out on £200 on average.
“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.”
Nevertheless, the current scale of deficits and the tendency of longevity to surprise on the upside implies that contributions will drag on pay for the foreseeable future.
