Thanks to gender pay gap reporting, the disparity between men and women’s pay has been subject to intense scrutiny in recent months. But, the implications of this persistent income inequality on pension saving is often overlooked.
When we examined our own membership, the disparity is already apparent. Currently 25-year-old women have, on average, £197.05 saved versus £213.85 for men of the same age.
Taking into account mean salaries for men and women over their working lives and following auto enrolment minimum contributions, in 40 years these funds will have grown to £50,514 for men and £40,332 for women. So, following these assumptions, women will have 20% less in their pension pot than men by the age of 65.
For 35 year olds and 45 year olds the picture is similar, as the graph below shows.
But the gender pension gap is not just driven by pay differentials, another major contributor is that it’s usually women that take time out to care for children or elderly relatives. For women that take a five-year career break, they will accumulate a pot which is £33,986 – 33% smaller than male counterparts.
So closing the pension gap will require society to both close the pay gap and address some of the structural issues that magnify the effect of lower pay for women. Looking specifically at auto enrolment there are some changes that would help:
- Remove the auto enrolment earnings trigger
According to a report by the Pensions Policy Institute commissioned by NOW: Pensions, over three quarters (77%) of employees earning less than the auto enrolment trigger are women. Over 50% of part-time workers earn less than the auto enrolment trigger and 81% of part-time workers are women.
The report estimates that if the earnings trigger was removed 3.3 million more people would be eligible for auto enrolment, of these, 2.5 million are women.
- Remove the lower earnings band from the auto enrolment calculation
One of the quirks of auto enrolment minimum contributions is that the first £6,032 of earnings isn’t included in the auto enrolment calculation – nor is anything over £46,350.
These earnings bands have a highly corrosive effect on savers’ pension pots and disadvantage everyone but are particularly damaging for part time and lower paid workers who are more likely to be women.
The 2017 auto enrolment review recommended that the lower earnings band is removed “by the mid-2020s” and it’s imperative that this recommendation is carried out.
- Rebalance contributions
When auto enrolment is fully rolled out, UK employers will bear 37.5% of the pension burden with employees contributing 5% with employers contributing 3%. In other countries that have nationwide automatic enrolment schemes or nationwide DC schemes, the picture is different with Italian employers bearing 84.8% of the burden, Danish employers covering 66.7% with Japanese employers covering at least 50% in Japan.
Currently, women are more likely to opt out of workplace pension than men with nearly one in ten women (9%) opting out of workplace pension saving compared to 7% of men. Nearly half (45%) of women we surveyed who had opted out did so because they couldn’t afford it. This compares to 31% of men. Rebalancing contributions so that employers are paying an equal or greater percentage than employees could help to encourage more people to continue saving.
- Auto enrolment pension credit for carers
Taking time out to care for children or elderly relatives has long term implications for pension saving. This is compensated for in the state pension through National Insurance Credits but there’s no equivalent for workplace pension savers.
One solution to this would be for government to pay an auto enrolment credit to those eligible who are taking time out for caring.
This could be funded by a more widespread reform of pensions tax relief – for example the introduction of a flat rate of relief which would also be more likely to benefit women.
Closing the pay gap and supporting women to participate fully in the economy are essential first steps to closing the pension gap but it’s important to fully consider reforms that could be made to improve outcomes for women.
Amy Mankelow, Director of Communications, NOW: Pensions