In recent months, much attention has been given to the Women Against State Pension Inequality (“WASPI”) campaign where women born in the 1950s have been actively campaigning against the increase in the state pension age from 60 to 65 and the lack of personal communication from the government to these women about these changes and what it would mean for their finances. This has brought the issue of gender inequality in pension legislation to the fore. But, John Cridland’s recent review of State Pension Age noted that while the new State Pension will deliver equally for both men and women, it is in fact the bigger issue of occupational pensions that are providing men with higher total pension income than women. The review finds that female pensioners are typically £60 a week (£3,000 a year) worse off than males, and that the situation will have got worse by the time Generation Y retires.
Reasons for the inequality
So why the disparity? Cridland observes that women typically earn less than men over their working lives so have less going into their pensions. They are also more likely to take career breaks to care for children or elderly relatives and are more likely to work part time.
How auto enrolment reflects the disparity between men and women
Auto enrolment has a key part to play in bringing more people into pension saving but a recent report from the Pensions Policy Institute commissioned by NOW: Pensions revealed that while seven million workers have been enrolled a further six million workers have missed out.
The report says 3.3 million of the people disbarred from auto enrolment have been so because they earn less than £10,000 pa and over three quarters (77%) of employees earning less than the auto enrolment trigger are women.
In addition, over 50% of part time workers earn less than the auto enrolment trigger and 81% of part-time workers are women.
So at a time when there’s a greater focus than ever before on ensuring equality, we find that our shiny new pension system is doing little to improve outcomes for women.
The disadvantages of being a part time or a low paid worker in regard to pension
The other sleight of hand in auto enrolment is that not all earnings are included in the auto enrolment calculation for pension contributions. The legislation specifies that only earnings between £5,824pa and £43,000pa have to be included.
This disadvantages all workers but particularly part time and the low paid. For example, somebody earning £10,000pa will not benefit from the headline 8% contribution but in fact only 3.4%, because over half the earnings are excluded. The position improves at higher earnings levels, but even somebody earning £40,000pa will receive just 6.9%, not the headline 8%.
These rules date from the start of automatic enrolment over four years ago, and were put in place to help smooth the launch of the radical reforms that came in with strong cross party support.
The opportunity for a change
But Richard Harrington, Pensions Minister, now has an opportunity to make changes, as he has a statutory obligation to conduct a review of auto enrolment in 2017 and DWP has started preparatory work on this. Our research shows that if he extends auto enrolment to all workers and includes total earnings then he can significantly improve outcomes for all savers but particularly women and part time workers.
Over a lifetime of saving, a full time worker earning the national living wage and making auto enrolment minimum contributions can expect a pension pot of £33,100 at retirement. But, if contributions were made on every pound of earnings their pot would increase by 87% and total £62,200.
For somebody who takes a break to look after children from aged 26 to 32, works part time until 54 and then goes back to work full time, the uplift is greater. If contributions were made on every pound of salary, then their pension pot would increase from £11,400 to £21,400 – an 86% increase. However, this would increase even further to £33,200 if the auto enrolment trigger were removed, a 190% increase on the current situation.
Tackling this covert sexual discrimination now is imperative before it becomes embedded in our pension system.
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