Will the upcoming increase to minimum auto-enrolment contributions help women’s financial independence at retirement?
The problem of women saving less for their retirement than men is something the financial services industry is acutely aware of. But, as the multitude of reports it produces on the subject each year indicate, there is no simple solution.
In January, the Chartered Insurance Institute group Insuring Women’s Futures published a report, “Securing the financial future of the next generation”, which looks at women’s exposure to financial risk.
One of the 12 “perils and pitfalls” it identified is the pension deficit that affects women as the result of the decisions and circumstances that build up over their lives, such as entering sectors where jobs are lower paid, taking career breaks to look after children or elderly relatives or working part time.
Auto-enrolment has been credited with bringing more women into the pension system, so will the phased increases to minimum contributions that start in April improve the retirement outcomes of women? Or do we need to find other solutions?
Every little helps
Fidelity International head of pensions product Carolyn Jones says the contribution increases to auto-enrolment will be helpful.
“The key thing is every little helps; it’s the power of small amounts. Doing it through auto-enrolment means inertia kicks in and women will get some extra money in their pension pot.”
However, she says paying the minimum contribution, even when that increases, will not provide enough to live on, particularly when taking inflation into account.
Legal & General Investment Management head of DC solutions Emma Douglas also thinks the auto-enrolment rises need to go further.
“My hopes are that auto-enrolment contributions rise from 8 per cent. I’ve been involved in work with the Pensions and Lifetime Savings Association calling for contributions higher than 8 per cent – 12 or even 15 per cent would be great. But we would want the employer to be paying their fair share,” she says.
Jones points out that many women do not understand the lower earnings limit, where the first £5,000 of their earnings do not count when calculating auto-enrolment contributions, and how this hits the lower paid the hardest.
But Standard Life head of pensions strategy Jamie Jenkins believes changes announced in the 2017 auto-enrolment review will help.
“The removal of the lower earnings limit will be of most benefit to lower paid people, where there is a greater number of female workers, as more of their earnings will be counted in calculating contributions,” he says.
“In addition, it will remove the inherent unfairness for people with multiple jobs, where their earnings would be discounted for each. Again, the majority of people in this position are women.”
Royal London director of policy Steve Webb also highlights the “glimmers of good news” contained in the auto-enrolment review but points out that the gender pay gap needs addressing.
“Auto-enrolment has had some positive effects on the pension gender gap, particularly through increasing women’s pension membership in the private sector.
“But the gender pay gap feeds through into pensions, meaning that the amounts going into those women’s pensions are still far below those of their male counterparts. Tackling gender inequalities in
the workplace is a crucial part of tackling gender inequalities in pensions,” he says.
Another challenge is the fact that there are a significant number of women who will fall outside auto-enrolment, such as the self-employed and part-time, lower earners.
State Street Global Advisers senior relationship manager Sophie Ballard says: “We have to work as an industry to address ways of helping currently excluded groups and to raise awareness of the impact of this potential loss in pension savings.
“Ways to do this could include more robust resources and toolkits for employees to increase education and understanding; carers’ ability to earn credits for auto-enrolment, and student loan payments and childcare voucher payments should default into pension payments once no longer required.”
Sanlam UK head of employee benefits Elliott Silk says the industry needs to promote the fact people can opt in to auto-enrolment and qualify for an employer contribution if they earn between £5,824 and £10,000. If they earn less than £5,824 they can still opt in, but the employer is not obliged to contribute.
“The fact they can opt in is never highlighted in the mandatory communications when they join a new employer,” he says.
“If everyone talks about the £10,000 minimum for eligibility and you’re earning less, you might tend to think it doesn’t relate to you.”
With the state pension the cornerstone for many women in retirement, mothers who are not in paid work because they are bringing up children need to protect their state pension records.
However, since the introduction of the high income child benefit tax charge, many mothers are not claiming and are missing out on their National Insurance credits.
Webb says: “The Government urgently needs to use data-matching techniques to track down the women who are missing out and make sure they get these vital credits.
The Government also needs to use technology to help those with multiple low-paid jobs who are missing out on auto-enrolment. HMRC should be able to tie together separate jobs and organise pension contributions directly, rather than simply neglect this group.”
Jenkins suggests perhaps it is time the child benefit tax credit system was changed to an opt out basis.
“This would be consistent with auto-enrolment, learning from its success. Inevitably, the alternative will be trying to deal with this problem as it emerges for people at state pension age, when it is too late to resolve it easily,” he says.
The broader view
Author of the Insuring Women’s Futures report, PwC partner, insurance, Jane Portas says auto-enrolment is only part of the solution for improving women’s retirement prospects in the context of greater financial resilience.
The report puts forward a range of interventions, including nudges that can be made to help women become financially independent at each stage of their lives.
“Auto-enrolment is a hugely positive step – the data shows more young people engaging in pensions as a consequence of it,” says Portas.
“A huge part of this is around engagement. The ways in which different people access this type of information will vary so the journey of engaging and getting the right information is vital.”
Selectapension marketing manager Sarah Jones says its research has found that women who receive advice are better off than those who do not. However, culture change and role models can also play a vital role in influencing behaviours and attitudes.
“We see older women more often in the media these days talking about equal opportunities and other feminist issues. But where are the older female role models when it comes to pensions and financial security?” she says.
Portas believes we need to address the root causes of the financial disadvantages women face throughout their lives, not just the symptoms.
But she adds that there needs to be a collaborative approach between the financial services industry, the Government, the regulator and employers. “It’s bigger issue than insurance and financial planning,” she says.
Emma Hall, chartered financial planner, Clifton Wealth
Auto-enrolment is particularly helpful for women due to the employer contributions. This is important as a lot of women will go on maternity leave at some point in their career, at which point the employer pension contributions have to continue on the same level.
So, although a woman will take a dip in her earnings for the months she takes off, at least her pension pot will continue to be funded. Even if a woman is not working, she can still contribute £3,600 per annum gross (£2,880 net before basic rate tax relief is applied). If the client does not have this money personally then somebody else, such as her spouse, can contribute towards her provision.
Chris Daems, director, Cervello Financial Planning
There is still an earnings gap between men and women. A gap in earnings also means a gap in pension contributions.
Lower earners will not be enrolled and there is a risk that anyone who works part-time with low earnings won’t benefit from being nudged into contributing into a pension scheme. That will include a large number of women.
The key to helping people save for retirement is a greater understanding of the implications of not saving, supplying tools to support people’s financial decisions and getting more employers to provide support in workplaces. These steps, in addition to a changing society where there is greater equality, should see women saving more for their futures.