UK firms are paying an average of £200 a year less to their staff in order to plug defined benefit (DB) pension deficits, according to a report published today by the Resolution Foundation.
The Pay Deficit shows that this squeeze extends to low earners that are not even active members of the pension schemes, and that increased deficit payments were responsible for lower wage levels of around £2bn last year.
It also reveals that UK companies allocated £24bn to 'special' deficit-funding pension payments in 2016, and that the £2bn drag on wages is hitting younger staff harder than older workers who have the most to gain from plugging deficits.
"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," Resolution Foundation chief economist, Matt Whittaker, said.
"This drag on pay has important implications across generations as low - and often younger - earners in affected firms are losing out on pay even when they are not entitled to the pension pots they are plugging."
The report shows that every increase in deficit payments equivalent to 10% of a firm's total wage bill feeds through into an average reduction in hourly pay for its employees of roughly 1%.
It reveals that for staff sitting in the bottom quarter of the pay distribution, that have never benefited from the DB pension scheme, the reduction in hourly pay associated with a given increase in deficit payments is roughly twice as large as the average effect for all employees.
With average earnings at £16 a week below their pre-crisis peak, and a fresh pay squeeze now hitting as inflation rises, it is argued that the growing 'wedge' between overall remuneration and employee pay packets warrants greater scrutiny.
"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," Whittaker, said.
"Pay growth has under-performed in the UK for well over a decade, and with 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."
The think tank also said that discussions concerning DB deficits need to broaden from the current focus on whether the schemes concerned are sustainable, to include a full assessment of the distributional impact of such deficits on pay, dividends and investment.