The cost of bringing up children tends to be viewed in terms of things like nappies, school uniforms and university fees. The cost in terms of the impact that career breaks and reduced working hours have on the ability of mothers to save for retirement does not usually cross people’s minds.
As many industry commentators have said, although the gender pay gap is partly to blame for the gender gap in pensions, it is motherhood which is most damaging to women’s retirement prospects.
“Once they leave the workforce to look after children or other relatives, that is when the real damage is done to their retirement prospects and a gap opens up between men and women that it is difficult to make up,” says Royal London pension specialist Helen Morrissey.
“Even when they return to work it is often on a part-time basis, and either they aren’t earning enough to make pension contributions under auto-enrolment or it takes a back seat to finding money to pay childcare costs, which can be eye-wateringly high.”
Policy changes are needed to make a real difference, but with the government’s attention still on Brexit, what should women do in the meantime? And what reforms are needed to improve their lot over the longer term?
There are several suggestions for what policy changes are needed to help women contribute to their pension pots during their early years of parenthood.
Last month, consumers’ association and charity Which? produced a report in conjunction with the Pensions Policy Institute which proposed that the government make a £2,000 contribution to the pensions of new mums. The idea is it would bridge the retirement savings gap between those who take time out of the workplace and those who do not.
Legal & General Investment Management head of defined contribution solutions Emma Douglas says it is the “key killer solution” for putting money back into women’s pensions at a crucial stage, but it will be a big cost to the government. In her view, the cost needs to be looked at from a different angle.
Many mothers want to split their time between home and work and this should not be a barrier to climbing the career ladder
“It will cost £1bn or £1.5bn to fund this but if we don’t do it there will still be a cost, just in a different way,” she says. “The individuals we are raising are future taxpayers that the state will make money from and we need young people in work to support the state pension system. We don’t want a slowdown in the population as the pension problem will then get worse.”
With auto-enrolment now a proven concept, Standard Life Aberdeen head of global savings policy Jamie Jenkins wonders if it could inspire some sort of matching system to help mothers save for retirement. “If £2,000 is the right figure, we could divide it by 12 and say we’ll match what you pay in to a pension up to a certain level.
It might incentivise people to put in more – and it is better to save regular contributions than a lump sum, because you will benefit from fluctuations in the markets,” he says.
Aegon head of pensions Kate Smith thinks the key policy change would be to broaden the auto-enrolment criteria to include those who earn less than the current £10,000 earnings threshold.
“Some may have several part-time jobs and, while their overall earnings may be above £10,000, if no single job pays more than £10,000, they are excluded entirely from automatic enrolment,” she says. “This one change could make all the difference to a woman’s ability to save for retirement.”
The People’s Pension director of policy Gregg McClymont says there are no easy answers to the ‘motherhood penalty’ but there are things we can do to narrow the gap.
He says that to tackle pensions inequality, not only are changes to auto-enrolment required to bring in more lower-paid women, but better provision of affordable childcare will enable those who want to do so to keep working or work more hours.
“Raising the profile and status of part-time work is likely to be necessary,” he says. “Many mothers want to split their time between home and work and this should not be a barrier to climbing the career ladder. Getting this right is not easy but it should be on the policy agenda.”
Intelligent Pensions technical director Fiona Tait has a similar view. She points out women who work part-time tend to be given positions with less responsibility and lower pay.
“Government policies to encourage employers to support job-sharing at more senior levels would help to address this and allow parents to retain their earnings capability when they do return to full-time work,” she says.
Broadening auto-enrolment criteria could make all the difference to a woman’s ability to save for retirement
Walker Crips Wealth Management chartered financial planner Katie Machin adds that many women choose to become self-employed, so the flexibility of work meets their childcare commitments. “The current auto-enrolment legislation does not pertain to the self-employed, and therefore many will not actively contribute towards a pension. Perhaps a review of this legislation could include a review of pensions for the self-employed,” she says.
Adviser view: Carla Brown, partner, Oakmere Wealth Management
I’ve seen statistics that show around three-quarters of people who earn less than the earnings trigger for auto-enrolment are women, so changes to the auto-enrolment criteria would represent a big policy change.
However, drawing a parallel with government contributions to child trust funds, incentives do get people investing.
If there was a £2,000 incentive for new mothers, it would help motivate them to save – but the cost could be a problem.
From a financial planning perspective, we use cashflow planning to look at long-term income and expenditure, highlighting any financial pinch points. It’s about educating clients that although they are right to focus on their children, what about the rest of their lives?
The here and now
Considering potential policy changes that could help mothers’ pension pots in the future is all well and good – but women’s futures are being affected now by what they do in the current environment.
Tait suggests women who are considering starting a family maximise their pension contributions while still working full-time and resume as soon as they are able to on their return.
Smith says women need to take ownership of their financial planning and should do as much research and planning as possible as soon as they are considering starting a family, including finding out what maternity pay they will get from their employer. “To protect their retirement savings from taking a hit, some women might want to consider increasing their pension contributions before they go on maternity leave, especially if their employer matches their contributions,” she says.
Smith also suggests women seek financial advice and points out that employers can sometimes help with this. “Some employers provide employer-arranged pensions advice. This reduces the costs of advice, as there’s a tax exemption on the first £500 worth of pensions advice to an employee in a tax year. It’s worth looking into.”
Some women might want to consider increasing their pension contributions before they go on maternity leave
Sandro Forte, founder of advice firm Forte Financial, says existing provisions could help – for example, the ability to carry forward and increase state pension benefits by paying voluntary class 3 NICs.
“Could this be more about a lack of understanding of the possible options rather than a lack of opportunity?” he says. “It is also important to consider what is practical in financial terms. A call for a £2,000 pension contribution would be widely welcomed, but would this be supported by the Treasury?”
Forte says perhaps a more practical solution would be to allow pension sharing in much the same way it is permitted in divorce proceedings. “Pension sharing would help to deal with the problem while presenting some great tax-planning opportunities to increase household income in retirement, by reducing the effect of tax through the use of the personal allowance for both individuals,” he says.
Adviser view: Jamie Smith-Thompson, managing director, Portafina
Why do we continue to shout about the gender gap in pensions without providing a suitable solution? It’s refreshing that Which? and the People’s Pension are starting to challenge this and look for ways to improve things.
Unfortunately, some of the recent headlines surrounding the gender gap in pensions could well do more damage than good. Rather than creating pension fear and a feeling of inferiority, would the better message be that it is possible to save for the future, and that saving via auto-enrolment is a good place to start?
Most importantly, we need to make financial advice readily available to everyone. If pensions aren’t equal, we need to make sure that, as advisers, our services are attainable to all, regardless of pot size.