Current employees are partially funding historic gaps in defined benefit (final salary) pension schemes even when they have no claim on the pension funds held in these schemes, according to a study by the Resolution Foundation. The report finds that UK companies allocated around £24 billion to special deficit-funding pension contributions in 2016, £19 billion more than would have been required had pre-2000 levels of deficits prevailed.
Increased deficit contributions have led to lower pay levels for employees in the companies affected to the tune of around £2 billion, or £200 a year on average for the workers in these companies. The Pay Deficit concludes that a pension deficit contribution equivalent to 10% of a company’s total wage bill feeds through into an average reduction in hourly pay of around 1% for employees. This drag on pay extends to the lowest paid workers, many of whom have never been members of the, often closed, final salary schemes.
Matthew Whittaker, chief economist at the Resolution Foundation, said:
‘This drag on pay has important implications across generations as low – and often younger – earners in affected firms are losing out on pay even when they are not entitled to the pension pots they are plugging.’