Low earners suffer wage suppression as companies plug pensions deficits

31 May 2017

Employer contributions to defined benefit (DB) pension schemes deficit payments are leading to a reduction in hourly wages, a study has found.

According to a report by Pinsent Masons a study has identified a sharp increase since 2000 in the share of 'non-wage' elements in employee compensation, including payments into pension schemes. Last year non-wage elements accounted for just under 17% of average pay, up from 13% in 2000.

The biggest driver of this increase, accounting for £26bn of the overall £37bn increase in 2016, was employer pension contributions. The report said increased deficit funding contributions accounted for around £19bn of this rise in non-wage employer contributions.

Resolution said every increase in deficit payments equivalent to 10% of a company's total wage bill fed through into an average reduction in hourly pay for its employees of roughly 1%. In turn, this meant that around 10% of the £19bn rise could be directly associated with lower hourly pay.

The average annual impact on workers in companies with DB scheme deficits was between £145 and £225. Although there was a stronger negative effect on employees who remained active members of a DB scheme, there was also a significant impact on lowest-paid workers.

There are around 6,000 DB schemes in the UK but 85% are closed to new members and 35% are closed to future accruals. About 40% of DB members are already retired.

DB schemes promise a set level of pension once an employee reaches retirement age, no matter what happens to the stock market or the value of the pension investment, in contrast to defined contribution schemes where payouts are determined by the amount of contributions paid in and their investment performance.

Further details on this subject can be found on Pinsent Mason’s website.