By Fiona Tait, Technical Director, Intelligent Pensions
The difference between the mean retirement income of men and women aged 65 and over currently stands at an average of 26% across OECD countries, however in the United Kingdom it is even higher than that at somewhere between 34% and 43%.
There are many reasons for this gap, both economic and societal, and the report gamely provides an analysis of them all. Ultimately however, the greatest impact is down to the differences in work patterns between male and female employees. Women in the OECD have on average a career which is a third shorter than that of men and are much more likely to be working part time. On top of this they are paid less for the work they do, with the gender pay gap standing at 13%, a difference that, unsurprisingly, starts to appear between the ages of 24 and 35 when women are most likely to take a career break in order to raise a family.
Third tier pension contributions are strongly correlated with earnings and so women tend to save lower amounts and for less time.
The evidence also shows that when they do save, they tend towards more conservative investment choices and are less likely to enjoy strong investment returns.
Pension scheme design cannot completely overcome this labour divide, but the report encourages policymakers and providers to look at the measures which could be taken to ensure it is structured to at least take into account the particular difficulties it creates.
Possible solutions
The authors of the report suggest 7 key considerations for pension policy and scheme design which would help to boost women’s retirement savings, most of which could be applicable in the UK:
1. Promote access to pension schemes
In the UK, 23% of employed women do not meet the qualifying criteria for automatic enrolment, compared to only 12% of male workers. Abolishing the £10,000 earnings threshold would therefore allow significantly more female workers to start saving for their own retirement.
2. Encourage women’s participation
In all 14 countries surveyed by the OECD, women scored less well in financial literacy tests and this lack of knowledge may be the reason why many do not engage with retirement planning. Targeted educational programmes can help women to appreciate the importance of regular saving and become able to recognise the level of contributions required to fund a comfortable retirement.
3. Improve the level and frequency of contributions
Automatic enrolment has increased the numbers of people saving in the UK but it is generally accepted that they are not saving enough. Creating more flexibility to allow additional contributions from employers and spouses would help to plug the gaps created by career breaks. While spouses can contribute to their partner’s pension in the UK, the tax relief is limited and some countries offer a more comprehensive sharing of pensions during the accumulation phase.
4. Adapt scheme design to match female career patterns
Women who stop contributing during an early career break lose out on the investments which would benefit most from compound returns and leaves them vulnerable to the impact of ongoing charges. Offering low-cost and totally portable pensions, such as mastertrusts, is a positive step.
5. Improve investment returns
Whether because of preference or lack of confidence, studies show that women tend to choose lower risk investments than men. This could be addressed by financial education and also by providing access to more adventurous default investment choices.
6. Increase women’s own benefit entitlement
Pensions are often considered to be joint assets during a marriage, but not so often when it comes to an end. While most OECD countries allow the sharing of pensions in the event of divorce, the proportion of couples taking advantage of this remains low. In 2011-2012, a sample-based study indicated that only 14% of cases resulted in a split of pension assets in some manner. Making sharing the default option would increase the number of women leaving a marriage with a pension in their own right.
7. Increase levels of income in retirement
Another default could be put in place when benefits are taken. The majority of annuities are purchased by men on a single life basis, most likely as this results in a higher initial income stream. In Canada and the Unites States however, married couples may only override the default joint annuity if both partners agree. Indexation options are also likely to benefit women with comparatively longer life expectancies.
Many of these ideas are not new. The Pensions Policy Institute (PPI) raised the issue of automatic enrolment eligibility in 2019, and further pointed out that removing the Lower Earning Limit on minimum contributions would be of particular benefit to lower-paid women.
The PPI also raised the issue of a carers’ top-up policy while the Chartered Insurance Institute (CII) has previously called for more financial education and default options on both divorce and annuity purchase.
Certainly there is no simple answer, and the impact of family life is always going to be present, if not necessarily always to the detriment of the female partner. The UK has come along way with automatic enrolment, but further changes are needed to ensure both men and women have a more equal opportunity to secure their own future.
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