The annual Scottish Widows women and retirement report was recently released. The report highlights some shocking stats, including how only 56% of women are on track to receive retirement income from a private pension, compared to 68% of men – and fewer (49%) women are on track for retirement income from long term savings than men (61%).
In light of this Paul Leandro, Partner at independent consultancy, Barnett Waddingham, shares five things employers can consider to close the gender pensions gap and four things policy makers should do.
Paul commented, “The pension system that we use is outdated. Despite being introduced to address the UK’s worryingly low level of pension savings – and having some success in doing so – issues with our auto enrolment system are reflective of an archaic time in society where men were the primary breadwinners. This research underscores the pressing need for modernization”
“Whilst society has progressed, pension structures have remained frozen in time and women continue to face the brunt of this systemic misrepresentation. If our pension system is to work for everyone, we must actively tailor it to the realities of everyone’s individual lives. There is no universal or simple fix to this problem. By simply telling women to contribute more, we are overlooking the inherent fiscal, behavioural and societal issues that are contributing to the continuation of the gender pension gap.”
“We must work not only to encourage better saving habits, but also make core changes to the infrastructure of our pensions system. Whilst recognising the context of increased NI contributions, increasing default auto-enrolment levels and auto-escalating pension contribution levels when returning from career breaks are just a couple of examples of actions that can begin to overcome the significant shortfalls in women’s pension savings. But more broadly, it’s about creating a more robust and inclusive pensions framework that offers fairer solutions for everyone.”
Five things that employers can consider to close the gender pensions gap:
1/ Take advantage of inertia
This can mean setting higher default contribution levels for when employees enter the pension scheme so that they’re automatically saving a good amount and must proactively opt-out (or opt down) rather than proactively increase contributions themselves. It could also mean using auto-escalation for employees to gently increase contributions regularly or in line with pay rises.
2/ Address the shortfall after career breaks.
Employers can prevent people falling behind during a career break by paying employer pension contributions throughout parental leave based on full time equivalent earnings, irrespective of the level of pay made to individuals during parental leave. Employers could alternatively set higher levels of contributions for someone returning from a career break, even if it is for a time limited period to offset the shortfall.
3/ Introduce more targeted financial education
Employees need to understand why it’s important to pay more into their pension, and why they need to make up for reduced savings over a period of time. It shouldn’t be assumed that people and couples understand the advantages of tax efficient saving vehicles and allowances, so it’s worthwhile communicating this regularly.
4/ Address the gender pay gap
This can be ramped up by doing deeper gender pay analysis, including segmentation by age, working hours and ethnicity, to help truly understand the pay gap and thereby address it effectively. An important thing is to take time to consider the real-life impact of the pay gap and how it impacts employees in real terms.
5/ Encourage employees to pay in more, when it’s affordable to do so, and after career breaks
Saying “women need to contribute more” is too simplistic. Inertia and a lack of pension education prevent many women from increasing contributions. Especially after career breaks, its crucial for women to make up the shortfall as soon as possible. Proactively increasing contributions, whether after a pay rise or by a small percentage each year, will help build a pension pot that supports their desired retirement.
Four things that policy makers should do to close the gender pensions gap:
1/ Review auto-enrolment rules.
It is clear that the auto-enrolment minimum threshold impacts women more than men. The government should review this in the context of gender. Whilst there are proposals to remove the minimum earning requirement, this should be done sooner rather than later.
- Increase minimum level contributions. People typically anchor to the default level of contribution when joining a pension plan, which is generally impacting women more than men. This again should be reviewed in the context of gender.
- Review the decision to have an upper age band for pensions auto-enrolment.
- If not removing the lower earnings threshold, auto-enrolment rules should consider income from multiple jobs, not just one job.
2/ Review State Pension provision
This is to make sure it better reflects career breaks, and periods of being ineligible for auto-enrolment (if the minimum level of contributions remains). Provide more education on how someone can assess their State Pension – i.e. the people most affected may be the ones less able to access this information. Start with better financial education in schools.
3/ Collect data on people identifying as trans or non-binary
We know the evidence base on inequality of employment outcomes by sexual orientation is weak and inconsistent and that what is measured is what matters when we look to create change. To meaningfully develop a system that works for everyone, data needs to be collected and reported to understand progress and the impacts of policy changes.
4/ Allow couples to pay into each other’s pension plans
This will allow pension benefits to shared more equally and will allow both parties to take advantage of the incentives to save for retirement. Consideration should also be made to allow couples to transfer assets between each other’s pension plans.