Millions of workers are being paid a pittance, because their employers are ploughing millions into pension schemes that they will never get to take advantage of. Between then, companies are taking £19 billion a year from young workers to give to older workers and pensioners.
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According to The Resolution Foundation, the issue has hit people who work for companies that used to offer defined benefit (final salary) pensions. These guarantee an income for life, so as investment returns have disappointed or workers lived longer than expected, the companies have been forced to pay far more into them than they ever expected.
Jon Hatchett, Head of Defined Benefit Consulting at Hymans Robertson says: "Defined Benefit pension schemes have cost more than anyone ever thought that they would. There are three reasons for this – equities are now at half the expected levels predicted in 2000, interest rates have added over 50% to liabilities while longevity increases have added a further 10-15%. Cash clearly does need to be diverted to address the deficits."
New workers are likely to receive far less generous defined contribution pensions. According to figures from the Office for National Statistics, while employers typically match 7% of salary or more in a DB plan, they tend to match up to 2% in DC. It means that of the £40 billion in total pension contributions made by employers each year - only £5 billion goes into DC plans.
It means younger workers will never benefit from the millions that employers are pumping into these old schemes. Yet the Resolution Foundation calculated that they are paying £145-£225 each a year for the schemes - through pay rises they will never be awarded.
"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."
Hatchett adds: "The employees who are seeing the reduction in pay while companies divert these funds are unfortunately often the very same savers who are facing massive shortfalls in their own pensions. Our calculations show that three quarters of those in DC pension schemes are not saving enough to provide them with an adequate income in retirement."
Unfortunately he warns that, "The requirement to pay cash to schemes is unlikely to change any time soon. In fact, the direction of travel for regulation following the fallout from BHS is for more cash from sponsors sooner."
However, Chris Stiles, director at Gowling WLG says there is some hope that as time goes on that companies may be forced to take a hit to the bottom line, rather than leaning on wages to make up the extra cash. He says: "Defined benefit pension schemes do not operate in isolation - the focus on their funding and security must not overlook the potential impact on other areas of the business, including wages, and indeed also including the pension provision for those employers who are not in the defined benefit scheme. Only certain sections of the population have defined benefit pensions, and we expect the question of intergenerational fairness to be an increasingly challenging issue in the public debate about pension provision."
But what do you think? Should younger workers be missing out so that older workers can get a far better deal? Let us know in the comments.