Plunging bond yields have left the U.K.'s defined-benefit pension plans with a combined deficit of one trillion pounds ($1.3 trillion).
Unless interest rates rise again soon (which doesn't seem likely) some of Britain's biggest companies are going to have to find a lot of cash from somewhere to plug that hole.
That doesn't bode well for your chances of getting a pay rise this year.
Although U.K. wage growth has fared better lately it's generally been pretty disappointing since the great recession. And soon, British workers will be in for a shock. The cost of living is set to rise in the wake of Brexit because sterling's 10 percent trade-weighted slump will push up the cost of imported goods.
But convincing the boss he can afford to boost wages to offset that is going to be difficult right now.
So far the U.K. economy seems to be faring OK, but that probably won't last: the hit to demand and employment from the referendum have yet to feed through. A softer labor market doesn't bode well for workers' power to lock in higher pay.
But at companies with a widening unfunded liability in the pension plan the prospects for higher pay are even worse. Finance directors will be under even more pressure to protect profit margins by taking a hard look at all uses of cash. The Bank of England warned last month that:
To meet the cost of an increased deficit companies may reduce their dividends or attempt to reduce other spending, which could weigh on activity. For example, to the extent they are constrained by available funds, companies may reduce investment or they may try to reduce other labor costs such as salaries or benefits for employees.
To be sure, some companies are sitting on large cash piles so can afford to boost pension contributions without inflicting suffering on staff. And while there are around 6,000 defined benefit pension plans in the U.K., most people work for small companies that don't have this problem. Ultimately, factors like productivity growth, along with supply and demand, will have a much bigger impact on pay than pension funding will.
Nevertheless, it would be unwise to ignore pensions entirely because some of the U.K's biggest employers -- BT Group, International Airlines Group and BAE Systems, for example -- face large shortfalls. If big employers don't increase wages much, smaller businesses won't be under pressure to either.
Importantly, this isn't just a theoretical problem, as pensions have been quietly putting downward pressure on wages for years. Non-wage labor costs -- things like social security and pensions -- have risen 35 percentage points faster than regular pay since 2000 . That helps explain why workers haven't felt better off in a while.
The combination is bad news for the broader economy -- pressure on wage gains and faster inflation can crimp spending power.
And if pay is held back while companies spend more on defined-benefit pension plans -- most of which have long since been closed to new entrants -- that's likely to exacerbate the U.K.'s generational divide.
Younger workers tend to be enrolled in less-generous defined contribution plans where the employee, not employer, bears the investment risk.
A recent study estimated that companies were putting aside 1.7 billion pounds a year for defined contribution pensions but a staggering 42 billion pounds a year to fund defined benefit plans. Much of that money is being used to fund the pensions of folks who are nearing retirement, or who have already stopped work.
Were companies to halt pension deficit reduction contributions and use the money for pay increases instead, the study calculated the typical private sector worker would receive £1,600 a year more.
This isn't just unfair, isn't also potentially a bad development for the wider economy. Wage pressure on millennials makes it even less likely that they'll be able to afford homes and other big-ticket purchases, and thus support consumption growth in the long term.
If you're young and don't get a raise this year, ma and pa's gold-plated pension may be partly to blame.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
Including one-off contributions to fill funding shortfalls.
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