Workers expecting Britain’s economic recovery to fill out their pay packets are in for a nasty surprise.
While the UK’s collective national income is expected to grow by more than 2% a year until at least 2020, the share distributed in wages is going to be less than many hope. As much as one percentage point could continue to be knocked off annual pay rises because firms need to plug holes in the pension pots of retired staff, according to a report.
The blame lies with the retired baby boomer and their employers who failed to ensure enough funds went into their final salary schemes during their working lives. The deficit-ridden schemes must now be filled from company cashflows, denying today’s workers a proportion of the forecast wage rises.
The day that average wages regain their pre-crash peak is now expected in the middle of 2017, but the Resolution Foundation points out that the pensions effect will continue to be felt in pay packets for years to come.
Economists have failed to make the connection between private pension scheme deficits and workers’ current wages, according Jon Van Reenan – an economics professor at the London School of Economics and a leading expert on the labour market.
Brian Bell, an associate professor at Oxford University consulted by the report’s author, said the huge sums involved would deepen the already growing inequality between generations.
Maybe this should not come as a surprise after more than a decade watching those who own assets – mostly the over 55s – ringfence their booty from anyone planning to tax it or allow the market to diminish its value.
It is well known that a major prong of the rescue operation following the banking crash – the Bank of England’s £375bn quantitative easing scheme – was designed to generate bank lending, pumping fresh money into the economy. In practice it did more to support the stock market and help stop property values tumbling.
Baby boomers had successfully lobbied in the early noughties to protect their final salary pension payouts, even when it was obvious they were becoming unaffordable. It was never fair that one generation could secure its own pensions knowing everyone else would be left with a pittance in old age – as companies rushed to ditch their final salary-linked schemes – but we did not know it would also mean people sacrificing wage rises.
Until recently, economists examining decades of pay and productivity data had found the spoils of higher productivity were often unevenly distributed, with a disproportionate slice going to the better-off employees and much of the rest ending up in other forms of compensation, primarily pensions.
But they reasoned that the pensions portion was at least part of workers’ retirement incomes – albeit deferred for 30 or 40 years. Or at least this was the assumption.
However, the report shows that since the 2008 financial crisis wages have similarly been depressed by pension payments – not because the money has been diverted into workers’ retirement funds so much as it has been used to fill huge black holes left behind by former workers; who can now claim to be among the wealthiest pensioners in the world.
It means that employers with final salary pension scheme liabilities have denied their workers a pay rise to fill final salary scheme deficits that ballooned after the crash.
The annual report by the pensions regulator earlier this year found that the £44bn worth of extra contributions by employers between 2011 and 2014 had been the equivalent of a rain shower on a dried up reservoir, filling only a fraction of the overall shortfall, which expanded from £215bn to a record £375bn.
The regulator has pressured firms recently to dig deeper to close their pension deficits, but the worsening picture forced it to relent. Where deficits persisted, the regulator said trustees and employers sponsoring the worst-hit schemes could consider taking longer to eliminate them.
The link that emerged between pensions and wages was not the original focus of the thinktank’s researchers – its chief economist Matthew Whitaker was attempting to fathom out how much staff and the self-employed have lost from the UK’s flatlined productivity and how a rise in productivity would feed into future wages.
He found that without a dislocation between productivity growth and wages after 2002 – which meant wages lagged behind soaring productivity gains – and the subsequent stagnation in productivity growth after 2007, median pay would today stand at around £13.95 an hour, £2.80 higher than it does now.
Whitaker said 55p of that £2.80 is considered wages in official data from the Office for National Statistics (ONS), but is accounted for by other forms of compensation, mostly pension payments made by companies into their final salary schemes.
“There is of course much uncertainty over how the relationship between productivity and pay will evolve in the coming years,” he said. “However, the compensation effect – which has grown in importance – looks as though it will remain significant in the medium term.”
The productivity puzzle is one that has taxed economists for some time. Productivity measures the value of goods and services produced from labour and capital. As such it measures how efficiently they are being used in an economy. The concern has been that the UK is increasing production simply by using more, and cheaper, labour as a substitute for investment in new equipment and processes.
This, it is said, cannot go on for much longer. At some point firms will be forced to upgrade ageing machinery and move to offices equipped for a digital future. According to the ONS, business investment is on the rise. It just hasn’t shown up yet in productivity.
George Osborne was keenly aware that wages might not pick up strongly over the next five years when he stole Labour’s plan for a living wage. Why else would he demand a £7.20 minimum for the over 25s from next April and say that he expects it to be worth £9 by 2020.
Right across the economy, it is pension liabilities that are the guilty party. British Airways is a classic example. It has one of the oldest pension schemes and one of the biggest deficits. Last week it told hundreds of cabin crew at Gatwick they must choose between hefty pay cuts or redundancy.
Of course the airline is making profits – the airline’s owners are expecting them to amount to more than €2.2bn (£1.6bn) this year. It could sacrifice profit and cut shareholder dividends – but that is not going to happen. One reason is that the desperate BA pension fund managers are among the chief lobbyists telling employers to maintain dividend payouts.
So some of the most senior, long-serving BA crew – cabin managers and pursers – were sent letters telling them they would either have to accept new lower-paid roles as “customer service managers” or lose their jobs on 31 October.
Those staff with more than 20 years’ experience can earn £33,000. A customer service manager’s salary is expected to be capped at about £24,000. That’s a hefty price to pay to protect the gilded pensions of former staff.