Closing the gap

What can be done to address the differences in pensions for men and women, asks Andrew Sheen

It is a source of shame to the pensions industry that women have been historically much worse off than men with regards to retirement provision. Women are for the most part disproportionately disadvantaged when saving for a pension – a situation that has gone on for far too long.

“Men are not retiring in great wealth, so women are retiring in poverty,” says JLT Employee Benefits director Margaret Snowdon OBE. “That’s ridiculous in this day and age.”

Scottish Widows’ annual Women and Pensions report, now in its ninth year, paints a somewhat depressing picture. The study found that far fewer than half of women (40 per cent) had adequate preparations for retirement in place, compared to 49 per cent of men – an all-time low for women – with well over a third (37 per cent) of women having no pension at all, compared to 27 per cent of men.

One of the key factors behind this disparity is the gender earnings gap. According to the latest figures from the Office for National Statistics (ONS), women earn on average £5,600 less than men, at £23,100. While women are more likely to save than men, they tend to save for a ‘rainy day’ or for family reasons, rather than for retirement. The Scottish Widows’ Women and Pensions report found that women who were contributing to a pension were saving an average of just £182, compared to an average of £260 by men, or a gap of nearly £1,000 a year. Women are also much more likely to take career breaks to raise children or look after family members than men.

B&CE head of policy Darren Philp says that taking time off impacts their earning potential when returning to the labour market: “If you take that much time off, your income progression doesn’t go up as much as it would if you’d stayed in work.”

Recent analysis by the Pensions Policy Institute on the effect of career breaks shows the impact that gaps in pension contributions can have to final outcomes. In order to achieve a replacement rate of two-thirds of salary at retirement, someone taking five to six years out of work would have to make contributions of 14 per cent, compared to 11 per cent for a worker with a ‘full’ contribution record of 46 years. Without the government’s ‘triple lock’ to safeguard the value of the basic state pension, these rates would rise to 14 per cent for workers with unbroken contributions and 18 per cent for those who have taken a break.

Government action

Recent years have seen the government in a flurry of activity to reform and rebuild the pension system for the 21st century. Many of these reforms are intended to improve pension provision for women.

Reforms to the state pension, lowering the National Insurance Contribution (NIC) records requirement to receive the basic state pension will go a long way, as will the transition to the flat-rate state pension. Philp notes that the Turner report found up to half of women do not qualify for the full basic state pension, through not having the full 39 years’ National Insurance records. He says: “Reducing the number of qualifying years for the state pension potentially makes a big difference for women.”

But Aries Pension & Insurance Systems director Ian Neale adds that the issue of GMP (Guaranteed Minimum Pension) equalisation must also be dealt with, which so far has proven a headache for government and the industry. “It’s illustrative of the intractable problems that endure from the past,” he says. “Some of these problems have been with us for generations already.”

Snowdon says that although the government’s flagship policy of auto-enrolment has brought many more women into saving for a pension, contribution rates are still uneven, with women paying in an average of 2 per cent compared to 2.5 per cent among men. “Broadly equal numbers of men and women are now in DC,” she says. “But contribution rates are not even. It’s not a big difference at the moment, but over the years, it will make a big difference.”

While legal minimum contribution rates will rise over time to 8 per cent, for many, this will not be enough. The Scottish Widows report talks about a minimum 12 per cent contribution as ‘adequate’, while a wider industry consensus believes 15 per cent to be more appropriate. Anthony Hodges Consulting chief engagement officer Karen Heath says: “The level of contributions simply isn’t adequate. Auto-enrolment per se is not the silver bullet, but it is a step in the right direction.”

Threshold question

Perhaps more worryingly, the very design of auto-enrolment disadvantages many women. Scottish Widows head of business development, corporate pensions, Lynn Graves says: “Auto-enrolment is taking great strides to bring people in, but part-time and low-paid workers are more likely to not be caught. I can’t see there being material improvement in spite of auto-enrolment – women will continue to be outside.”

The minimum threshold for eligibility is £9,440, earned from a single job, although ‘non-eligible jobholders’ – those earning over £5,668 and up to £9,440 and aged between 22 and the state pension age – can opt in, and benefit from employer contributions. However, while an ‘entitled worker’ earning less than £5,668 can also opt in, they are not eligible to receive employer contributions. Someone working 16 hours per week part-time at the national minimum wage in a single job – a not unrealistic prospect for a mother taking time out to look after children – would therefore be ineligible for employer contributions.

As The Pensions Advisory Service head of information and guidance Charlotte Jackson says, in some cases, women with multiple part-time jobs who would be eligible for auto-enrolment when their earnings are taken in aggregate, are excluded by the design of the policy.

“They won’t just not get auto-enrolled, although they can opt in, but they won’t get employer contributions,” she notes.

But, says Heath, there is a real question as to whether people earning below this threshold can actually afford to save for retirement: “At that level, the bare necessities are an issue – saving for retirement is even further down your list of priorities.”

The situation looks set to get worse before it gets better, thanks to the auto-enrolment threshold being aligned with the personal allowance for income tax. While this is a welcome move from an organisational point of view, it also risks the mass exclusion of many of those who auto-enrolment was designed to benefit.

Philp says: “There comes a point where you have to think, are we beginning to exclude too many? Increasing the personal allowance is a positive move, but we need to understand the knock-on consequences.”

Although the figures appear contradictory, the DWP’s own data shows that raising the threshold to £10,000 in 2014 would remove 1.4 million potential savers from auto-enrolment at a stroke – 76 per cent of whom would be women – while Treasury figures show that by raising the personal allowance to £9,440 in April 2013, some two million people had been exempted from paying income tax, and thus likely excluded from auto-enrolment.

But Graves says “there’s not much more that can be done, policy-wise”, meaning further improvements will have to be led by the private sector.

Private sector insights

Unsurprisingly, the private sector has not been shy in innovating to improve engagement and education around pension issues – and therefore the products and services it provides. Despite this, Graves says increasing engagement and improving education “sounds easy but is incredibly difficult”, requiring major effort from providers and employers alike.

Education has been one of the major areas, with the rise in specialist benefit communications agencies working to make messages more relevant to various audiences. As anyone who has sat in on a communications presentation at a pensions conference will be all too aware, the days of one-size-fits-all comms material are over.

Snowdon says: “We need targeted information to help educate women.” She says that while financial measures to incentivise women’s saving would fall foul of discrimination laws, “we probably need to introduce some female bias, with targeted communications to make them aware of the issues”.

At a simple level, this can involve comms materials being tailored to the workforce, using examples and imagery such as photos relevant to the workforce. At a more sophisticated level, there are tools such as the ‘Pensions Village’ built by AHC for insurer LV=, which contains a variety of modelling calculators and services.

Heath says “giving people tools that demonstrate how small savings in lifestyle can impact pension saving” is a valuable and effective way of illustrating the effect of small changes. AHC’s ‘Small Change’ modeller allows users to see how skipping a small treat such as a coffee, glass of wine or glossy magazine can add up in retirement. The modeller shows that one less pint a week can add up to over £14,000 in a pension pot over 35 years, while foregoing a daily latte can add up to over £100,000.

Older workers are another valuable resource that employers can harness to encourage younger members and women to save for retirement, acting as ambassadors for the scheme and the value of saving for retirement.

“When you get older, attitudes of how young you should be when you start saving shift. The older you get and the more realistic retirement becomes, the more you start to think ‘I should have started earlier’,” says Heath.

Andrew Sheen is a freelance journalist

    Share Story: