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Deficit payments ‘eat into wage growth’, think tank claims

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Deficit reduction contributions have taken almost £100 (€118) a year away from potential wage growth, according to a think tank’s research.

The International Longevity Centre (ILC) analysed data from the Office for National Statistics to calculate that the average UK salary would have been 6%, or £1,473, higher at the end of 2015 if money diverted to plug defined benefit (DB) pension scheme shortfalls had been put towards wages.

The ILC also estimated that wages were falling as a percentage of total employee compensation as more cash was diverted to pension funds.

The ILC said: “While some of those pension contributions will be for current employees, and therefore represent deferred consumption, around half has been for servicing the deficits of DB pensions which have since closed to new members.”

Ben Franklin, head of economics of ageing at the ILC, argued that deficit reduction contributions had “acted as an opportunity cost” for companies as they were forced to support pensioners instead of investing in their existing workforce.

“This situation will not change overnight,” Franklin said. “Based on conservative assumptions about future life expectancy and mortality, we estimate that DB pensions will continue to be paid out well into the latter half of this century.

“We call on government, regulators, and industry to devise solutions that move away from simply securing full member benefits and towards those that build in a recognition for the wider societal and economic challenges associated with continued DB pension deficits.”

The UK government plans to issue a green paper next year proposing reforms for the DB sector to make it more secure, after the high-profile collapse of the British Home Stores high street chain left its pension scheme in limbo. The Pensions Regulator is currently attempting to secure funding to avoid the scheme having to enter the Pension Protection Fund, where a majority of its members would be forced to take a 10% cut to their benefits.

This week a group of politicians issued a wide-ranging report, designed to feed into the government’s discussions, that criticised the regulator and called for radical rule changes to secure DB pensions. The proposals including removing barriers to consolidation and making it harder for employers to shirk their responsibilities towards DB pension funds.

The ILC’s data comes from a study to published in January: “The End of the Beginning? Private defined benefit pensions and the new normal”.

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