A recent Pensions Policy Institute report, Understanding the Gender Pension Gap, received a lot of attention. In some ways that is not surprising as the headline finding is truly shocking: for people at retirement ages in their early 60s the median private pension wealth of women is one-third that of men. But in other ways the report’s popularity was a surprise as the reasons behind the gap were already well known.
The main drivers of the difference are linked to work. Not only – as we know well from gender pay reporting – do women earn less than men, they also have work patterns that are less stereotypical and much more varied than just full-time. In this way, their work patterns already reflect some of the challenges we may see for future generations in less stable and more fractured working. But this is not news – we have known about both of these for a while.
There is also a biological gap to make up – as women live on average 3.7 years longer than men, they need to save somewhere between 5 per cent and 7 per cent more than men just to achieve the same income across their whole retirement.
Fifty per cent more women than men are heading for retirement with no private pension savings
What is perhaps less well known, however, is that the private pension system – unlike the state pension system – can amplify these differences rather than compensate for them.
Even though women currently earn approximately 18 per cent less than their male counterparts, over a working life this can contribute to a difference in pension wealth of 28 per cent by the time they are approaching retirement. Much of this is because more of men’s earnings qualify for pension contributions, with women being disproportionately affected by earnings thresholds and qualifying earnings limits for auto-enrolment.
That said, women are more likely than men to have been in a defined benefit pension, but outside the public sector these schemes tend to be in decline for both genders.
Some areas of auto-enrolment have also benefited women more than men. For example, employed women in their 30s are more likely than men to be in a workplace pension scheme.
But for some these benefits have come too late. Fifty per cent more women than men are heading for retirement with no private pension savings. There are 1.2 million women in their 50s heading for a later life reliant on the state pension and their partner – if they have one. This amounts to one in 20 women.
The state pension system has been significantly redesigned in recent years to overcome these differences, with some success. The state pension gender gap has been cut by more than 70 per cent by removing the married woman’s stamp and by introducing the new state pension.
But there has been little development of the private pension system with the express intent of making the system gender neutral.
There is one policy the government has already signed up to that would proportionately improve outcomes for women more than for men. The 2017 Automatic Enrolment Review recommended minimum contributions should eventually start from the first £1 of earnings, rather than being payable only on a higher threshold – currently £6,136.
This would guarantee a contribution increase of £490 a year for those on minimum contributions and this is most significant for those with lower incomes and, therefore, lower contributions. At the time of the review the government expected to introduce this by the mid-2020s.
Other policies are perhaps more challenging. To overcome the difference in working patterns, successful policies would need to target those not in paid work. One such policy that does this extends the credit system used for carers in the state pension system into the private pension arena.
The credit system recognises the value of unpaid caring – sometimes for children, sometimes for older generations – which otherwise would be much more costly for the state to provide. There are 1.2 million women both in relationships and with dependent children who are currently not in paid work, while a further 1.4 million women with dependent children are in work but not earning enough to qualify for auto-enrolment.
A carer’s top-up paid in to their pension scheme could make up almost half of the contributions missed by taking time out of work – but at a significant cost to the taxpayer. Policies like this are also more likely to stop such a significant gender pensions gap opening up for younger generations, rather than close the existing gap.
There is no silver-bullet policy option that results in equal pension outcomes for men and women. However, in the same way focus and scrutiny on gender pay differences are raising awareness and changing practices, more consideration and a better understanding of gender pension differences are the first steps towards closing the gender pensions gap.