How a pension deficit could be costing you £200 a year

I have written here several times before that pension deficits in the UK must be holding down in the UK. That’s partly because the ongoing liability deters capital investment – one of the factors that is keeping productivity and hence wages down. But it is also about simple short-term affordability.

Firms who have to keep contributing large sums of money to the pension funds they sponsor and who know they are more than likely to have to keep doing so for many years to come are, I said, surely less likely to feel able to raise wages than those who do not.

So the low base rate that gives us the low bond yields that create theoretical pension deficits (see previous blogs on this – the deficits are as much a function of trustee behaviour as reality) keeps wages low too. Modern monetary policy isn’t good for workers.

The problem with this idea so far has been that there hasn’t been any empirical research backing it up (it seems like common sense but not all common sense turns out to be correct sense). However the Resolution Foundation has just come out with a bit of research that begins to make the case.

According to its analysis, reported in the FT, around 10% of the total paid into pension funds to make up deficits over the last 16 years has been “funded by suppressing wages”. The result is that workers in companies with defined-benefits pension deficits are paid on average £200 a year less than those in firms without them.

This matters hugely for all sorts of reasons. It is demoralising for workers and expensive for the taxpayer: we subsidise low wages via the tax credit system. And it exacerbates the tension between generations: young and low-paid workers end up taking the hit for deficits in the kind of pension funds that will never pay out to them (85% of defined-benefits schemes are closed to new members).

It is something else to add to a long list of evidence that very low interest rates might be doing much more damage than they are good. It is past time for normalisation.

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