BofE warns employers
The Bank of England has warned that companies risk losing staff if they cut pension provision or reduce pay to finance pension fund shortfalls.
The central bank believes that total pay should reflect demand and supply in the labour market, saying that pension fund shortfalls are unlikely to affect employees’ total pay.
“So if firms make pension provisions less generous, they are likely to experience recruitment difficulties, unless there are compensating adjustments to other elements of pay,” the bank said in its quarterly inflation report.
“Similarly, firms that try to finance pension fund shortfalls by reducing wages may have difficulties retaining staff,” the BOE adds.
The report sees higher pension fund payments having an impact on corporate investment, with pension fund deficits “diverting cash away from other uses”.
“The drain on cash-flow from increasing pension fund payments may restrain these companies’ investment plans,” it notes.
According to actuaries Lane Clark & Peacock, the combined pension deficit of the UK’s top companies has more than doubled, to £55bn (E78 bn). LCP partner Bob Scott suggested that companies topping up their pension funds with extra contributions means that there would be more cash available in the ‘system’ for investment.
In its assessment of the economy, the BOE said inflation will fall back over the next year before rising to slightly above its 2.5% target in two years.