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Mind the gender pensions gap

Author: ICAEW Insights

Published: 21 Jun 2023

The gender pensions gap today stands at 35%, yet women contribute a higher proportion of their pay into their pension than men. We analyse some of the potential solutions to achieving pensions equity.

Equality between the sexes has progressed significantly over the past century. Nonetheless, previous entrenched inequalities continue to negatively affect women today. Take the gender pensions gap in private pensions, which according to official data currently stands at a massive 35%.

The gender pensions gap is the difference in retirement income between men and women, where women have less pension savings in retirement than men. It’s even more complex though because there are two different ‘gender pensions gaps.’ 

First is the gap in average private and state pension incomes between men and women who are already over state pension age. Second is the gap in average pension savings between working-age men and women. 

In the past, the societal roles of men and women tended to be more clearly defined. Typically, men worked and their wives stayed at home to care for children, the home and/or the elderly. With no earnings, women had little recourse to their own retirement income and were entirely reliant on their husband’s. 

In the past 50 years that has radically changed, with more and more women entering the workforce, but typically they have worked irregularly in part-time jobs, earning less and often with no participation in a pension. These historical inequalities continue to have implications today.

State pensions vs private pensions

Men used to receive significantly more state pension income than women, but that gap has almost closed for people reaching state pension age in recent years. Still, women born in the early 1940s receive around 25% less in state pension income than men on average. This gap is below 5% for those born in the early 1950s, according to research by the Institute for Fiscal Studies (IFS).

However, the gap in private pension income between men and women over state pension age is wider and has narrowed considerably less. For example, women born in the late 1930s had average gross private pension income almost 60% lower than men during their early 70s, according to the IFS’s 2023 report The gender gap in pension savings. A similar gap existed between men and women born in the late 1940s. There has been a slight narrowing of the gap for those born in the early 1950s to around 45%, however.

The reasons for these inequalities in pension income and participation, as a result of life events such as maternity leave and child-rearing, are well known, but efforts to close the gap aren’t working as quickly as we need them to.

In 2019, among 22 to 59-year-olds, 59% of women were saving into a pension, compared with 66% of men, the IFS report found. This gap is primarily due to the fact that fewer women than men are in paid employment, and typically earn less when they do have a job.

Across all working-age people, women had average total annual pension contributions of £2,600, compared with £3,400 for men. But in fact, women actually contribute a higher proportion of their pay into their pension (15%) than men (13%), the IFS research shows.

Private-public sector variation and auto-enrolment

When you look at the differences in the private and public sector, important variances emerge. In the private sector, women have had persistently lower workplace pension participation than men, although automatic enrolment has narrowed the gap slightly in recent years from seven percentage points in 2012 to five percentage points in 2020, the IFS found.

Broadly, auto-enrolment into a workplace pension has been viewed as a positive step forward in helping to close the gender pensions gap, but it’s still not enough.

Employers are required to enrol all employees into their pension scheme if they earn more than £10,000 a year. Many women work part-time in poorly paid jobs so often miss out on the benefits of auto-enrolment. 

Moreover, employees can opt out, which many, particularly women, have done in this current cost-of-living crisis. Indeed, research by Standard Life revealed that 20% more women than men say they would cut back on their pension contributions as a way to deal with rising costs.

Glen Callow, Managing Director at Prime Wealth Planning, part of Prime Accountants Group, says: “Due to the gender pay gap, the automatic enrolment into company pension schemes favours men over women.

“It is widely known that women are more likely to be in lower-paid and part-time jobs, so with the starting salary for auto-enrolment set at £10,000, they’re less likely to be able to take advantage of being automatically enrolled into their workplace pension, losing out on employer contributions.” 

In the public sector, the gap in workplace pension participation has now disappeared, having been four percentage points in 2012, the IFS report finds.

Fixing the problem will be complicated 

Rowan Harding, Financial Planner at The Path and Path Women, says, “There are all sorts of solutions, but it’s probably not going to be one solution that closes the gap.” She argues that fixing the gender pensions gap will be a multi-pronged approach involving government, employers and individuals.

One solution, Rowan says, could be to lower the auto-enrolment threshold so that lower earners, particularly women, could benefit from employer workplace pensions contributions.

Another potential solution, in situations where one partner in a married couple stays at home to look after the home and children and the other works, could be to share the pension contributions that the employed person is earning.

“Pensions are individual arrangements, like ISAs for example, so you could look down the route that if you’ve got women who are perhaps staying at home or doing an unpaid caring role, for whatever reason, that you could have a joint type of pension arrangement, where the main breadwinner is paying into the pension for both individuals,” Rowan says.

Rowan also suggests the government could look at national insurance contributions for unpaid roles, so that those individuals, who are doing valuable jobs, don’t miss out on accruing the state pension. She acknowledges, however, that currently there is no government budget for this.

One clear message coming through from all financial experts is the need for more education around pensions. Employers, government and providers need to do more to educate people, particularly low earners and women, about the value and importance of pension participation and contributions.

Chris Eastwood, Co-Founder and CEO of Penfold, says: “The gender pension gap is a hugely complex problem with a number of societal conditions preventing us from solving it. That said, there are ways we can help in the short term, and it really starts with education. 

“Only when women understand the importance of a pension, how you go about building a healthy pot and the impact of wage discrepancies, maternity leaves and part-time work on final pot value, will we start to see an improvement in the gap. The onus is on employers and the industry alike to take into account the specific needs of women when it comes to saving and to build products and communications that work for both genders.” 

Government policy has tried to fix the gender pensions gap, but it’s clearly not enough. Government can make the biggest impact by raising the minimum wage and ensuring public sector wages for those in jobs such as nursing, teaching and administrators.

Without pay equality and greater transparency in the private sector it’s unlikely the gender pensions gap will close any time soon. When women, particularly mothers, no longer remain underpaid, the economic outlook for everyone will improve.

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