Well according to the Resolution Foundation think tank (1), it’s the young and low-paid workers who are taking the biggest hit to cover the cost of defined benefit schemes; a trend which the foundation believes is set to continue for the foreseeable future.
The research estimates that workers are each being paid around £200 less per year to enable employers to contribute billions into defined benefit pension schemes. This equates to around 10% of the money paid into DB schemes over the last 16 years (2). Those interpreting the figures have been quick to point out that the young and low paid workers taking the hit are those least likely to benefit from these schemes (1).
“The UK’s youngest and lowest earners are suffering an additional pay penalty as a result of DB deficit payments that have no benefit to them,” the Resolution Foundation said (1).
In their research the Resolution Foundation sought to explain why wage increases had slowed from 2.4 per cent per year between 1996 and 2004, to just 0.5 per cent between 2004 and 2008 (3). The conclusion was that increased contributions towards pensions along with lacklustre growth were key factors
Matt Whittaker, chief economist at the Resolution Foundation, said: “Our research shows for the first time that there is indeed a link between rising pension deficit payments since the turn of the century and reduced pay (1).
Defined benefit pension schemes are pension schemes that provide benefits based on an employee’s earnings and length of membership in the scheme (2). The cost of these final salary schemes have led to most now been closed to new members as firms struggle to plug the scheme deficits. It’s estimated that roughly £24bn was spent on these deficits in 2016 which had the effect of reducing wages by around £2bn overall (1).
The total gap between the resources sitting in pension funds against what they need to cover payments is thought to be around £500bn (1), though the amount fluctuates based on predicted investment returns. The situation seems to have been worsened by poor investment returns and longer life expectancies.
The value of pensions and the income they produce can fall as well as rise. You may get back less than you invested.