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Workers ‘are losing out on £200 a year in pay’ thanks to employers’ struggles to fund pension deficits

Workers are losing out on an average £200 a year in pay because their employers are struggling to fund growing pension deficits, a think-tank claimed today.

The Resolution Foundation says that employees are paying the bill as companies look to plug historic gaps in final salary – or ‘defined benefit’ – pension funds.

Its report argues that increased deficit payments have taken £2billion out of companies’ pay chests. This limitation on pay is worth £200 a year on average to workers in firms with defined benefit pension deficits.

Lost pay: The cost of keeping defined benefit pension schemes is costing the average worker £200 a year

Poor investment returns, falling interest rates and longer life expectancy have considerably increased defined benefit deficits since 2000.

The report highlights that UK companies assigned approximately £24billion to ‘special’ deficit-funding pension payments last year – £19billion more than would have been the case had pre-2000 levels of deficits continued to prevail.

The Resolution Foundation said that the presence of such sizeable defined benefit deficit payments has important implications across generations, with older workers and those already in retirement standing to gain most from the plugging of gaps.

Forty per cent are retired and fewer than 2 per cent are aged under-30 and still contributing out of the 10.9 million members of defined benefit schemes in the UK.

A chief economist at the Resolution Foundation, Matt Whittaker, said, ‘Pay growth has under-performed in the UK for well over a decade.

‘While the financial crisis fall-out and recent combination of rising inflation and productivity stagnation have had the biggest effects, wages actually started to flat-line before the crash hit.

‘Understanding what contributed to the pre-crisis slowdown in pay growth is vital to determining what might come next.

‘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.

‘With average earnings still £16 a week below their pre-crisis peak and prospects for a return to strong pay growth looking shaky; it’s important that younger and low paid workers don’t take a hit to their pay because of deficit payments to pension schemes that they’re not even entitled to.’