UK – The Bank of England says it does not expect higher corporate pension contributions to lead to higher prices – though it does acknowledge that non-wage compensation has risen to around 15% of total pay, against 13% in 1998.

“What effect might higher pension contributions have on firms’ prices?” the central bank asks in its latest quarterly inflation report.

It said that companies with defined benefit plans in deficit following the fall in equity prices were “unlikely to finance the deficit by lowering wages, as these should reflect the balance of demand and supply in the labour market, which is probably unaffected by the pension fund deficit”.

“The deficit is therefore likely to be met from profits,” the bank said. “Part of the rise in pension contributions in recent years could reflect firms making up this shortfall, and that has affected measures of unit labour costs.

“But while the pension deficit is a cost for firms, it is not part of the marginal cost of production—the cost of producing an additional unit of output.

“And as it is marginal cost that is important for pricing decisions, the Committee does not expect these increased pension fund contributions to be passed on in higher prices.”

The report said that the rise in pension fund contributions has resulted in unit labour costs growing faster than unit wage costs, which exclude these forms of compensation.

And going forward, “some further upward pressure” on labour costs was likely from non-wage costs such as employers’ pension contributions.

Last year the bank warned that companies risk losing staff if they cut pension provision or reduce pay to finance pension fund shortfalls – and that pension deficits may hit UK companies’ investment, dividends and employment.