Reducing the pensions gap between men and women is a work in progress – and there’s still a long way to go, with women retiring on 50% less than men, says Alexandra Miles
A pensions gap is the difference in pension savings between two distinct groups, such as men and women. There is not yet an official or strict definition for ‘pension savings’; some reports use levels of prospective income in retirement. In this article, we are looking at differences between the average pension pot sizes of men and women.
How big is the gap?
A pensions gap between men and women, caused by the gender pay gap, exists from day one; on average, the pensions gap is 16%. The gender pay gap has been shrinking over time, but work is still required.
Since 2017, all employers in the UK with more than 250 employees have been required to report on their gender pay gap. The Office of National Statistics (ONS) has been collecting data on the gender pay gap since 1997, with its latest report showing a gap of 14.9% for all employees (part-time and full-time) – down from 27.5% when reporting started.
Based on the underlying data, the average pensions gap between men and women across all ages is 38%. This means that women’s pension pots are, on average, 38% smaller than those of their male peers. The gap never closes, and only grows wider on the journey towards retirement. On average, women retire with less than half the pension of their male peers, with pots that are 55% lower.
According to research from L&G, the pensions gap exists regardless of industry sector, although its size varies between sectors. The six industries with the biggest gaps include the top three industries for female employment: healthcare (59%), pharmaceuticals (46%) and care (45%).
The top 9 reasons for the gender pay gap
- Lower salaries
- Career breaks
- Unaffordable childcare
- Part-time work
- State benefits
- Financial confidence
What are the causes?
The gender pay gap is just one reason for the gender pensions gap. These reasons are well documented, and many of them are interconnected…
Unaffordable childcare: The UK has the most expensive childcare in the world, according to a recent OECD report. More affordable and accessible childcare is key to getting more parents back to work after they have had children. A trial in Quebec, Canada, that fixed childcare costs at C$10 a day, ‘A Canada-wide Early Learning and Child Care Plan’, has yielded impressive results, showing an increase of 1.7% in the province’s GDP. In the UK, charity Save the Children’s analysis of the Department for Education’s childcare and early years survey of parents found that 870,000 mothers – more than half of all ‘at home’ mothers in the country – want to work but cannot because household finances will be worse off if they do.
Part-time work: Many women who return to work after taking time out to care for newborns will do so in a part-time capacity, so that they can support their families from both home and work. According to the ONS, 36% of women work part-time, compared with 11% of men. Going part-time has a significant impact on projected pension provisions in retirement, as highlighted by a recent article in the Sunday Times that quotes L&G research: “Taking on two part-time jobs after having two children could leave the typical woman with a pension worth £219,425 at 65 – less than a quarter of the size of a man’s pension if he worked full-time without taking a career break.”
Auto-enrolment regulations: The current regulations do not help those who are earning less across multiple jobs. The impact of scrapping both the current £10,000 auto-enrolment threshold and the lower and upper qualifying earnings limits (£6,240 and £50,270 respectively for the 2022/23 tax-year), as well as reducing enrolment age from 22 to 18 years, could be significant. According to the same recent Sunday Times article, “the typical man working without career breaks could have £1.34m saved into his pension by the age of 65. Comparatively, a woman working two part-time jobs after having two children could save £620,415, according to L&G.” Changing the current regulations would boost savings for everyone, but would provide a boost of 2.8x to those currently disadvantaged, compared with 1.5x for the base case of a man who works full-time without a career break.
Divorce: It is not mandatory to take pensions into account when divorcing, so many miss out at a time when it matters most. The latest ONS data shows that 113,505 divorces were granted in England and Wales during 2021 – a 9.6% increase on 2020. Pensions are typically the second most valuable household asset after the family house. Applications for pension sharing orders (where the value of the assets is properly calculated by a qualified actuary, and pension providers are instructed to divide the value of a pension fund) fell by 35% between 2017 and 2021, according to figures obtained by Nockolds Solicitors.
Many instead use an approximate offsetting calculation where, typically, women keep the house and men keep their pensions; as a result, many women miss out.
Why is it such an issue?
Ideally, everyone should be independently financially secure – but the current pensions gap means women are more likely than men to face poverty in retirement. L&G research shows that for those retiring in 2021, average pension pot sizes were £26,000 for men and £12,000 for women. While no one is saving enough for retirement, women are left with fewer opportunities for retirement choice, with pot size significantly driving their decisions over what to do. Women are less likely to benefit from protecting themselves against longevity risk by purchasing an annuity or retaining investment growth post-retirement by choosing drawdown, simply because their pots hardly make these choices viable.
What can be done?
There is no simple answer, and no change will fix inequalities overnight: this will be a marathon, not a sprint. Stakeholders including regulators, individuals, employers and providers need to work together. Potential solutions can be categorised under the ‘three Ps’ – policies, product and people – with changes to the status quo being required.
The IFoA has recently launched a cross-practice working party, the Pensions Gap Working Party, which is investigating potential solutions to the problem. The actuarial community is well placed to provide expert insight into the issue, as well as resolutions. Making the economic case for change, and balancing the books between the cost and benefit of new solutions, will be key in gaining traction for progress. The working party is looking for passionate new members from a diverse range of backgrounds to join and help move the agenda forward. Is that you?
Alexandra Miles is chair of the IFoA Pensions Gap Working Party
Image credit | Getty