Scott Kingsley, Senior Wealth Advisor
The fight for equal opportunities in the workplace is far from done, and a recent report by Scottish Widows showed how the gender pay gap impacts pension savings. When you consider that people could be paying towards their pension for 40 years or more, what may seem relatively small differences today can have a considerable impact in the long term.
As with all social issues, there are several ways to look at the gender pay gap and how it can impact the level of savings that women can put towards their pensions. First, the UK government regularly calculates the gap between average hourly earnings for men and women across the entire workforce.
It is essential to appreciate these figures do not compare like-for-like jobs but reflect the much higher level of women in part-time employment. As these hourly rates tend to be less than those in full-time jobs, this significantly influences overall hourly pay rates.
In 1997, the gender pay gap across the entire workforce (full-time and part-time employees) stood at a staggering 27.5%. In 2007 this had fallen to 21.9%, and 2017 saw a further reduction to 18.4%, with the rate for 2022 standing at 14.9%.
The Scottish Widows survey looked at the entire men’s and women’s workforce and found that:-
Using the basic numbers, it is statistically likely that the amount of funding the average woman has available to set aside in a pension is lower than for the average man.
Of course, the average woman and the average man don’t exist in reality, and all personal situations are unique, but this article aims only to deal with the bigger picture.
Now, the obvious: all other things being equal, the more you put into your pension fund, the greater your pension pot. Consequently, with more women working part-time, having to take career breaks or perhaps being subjected to pay inequality in the workplace, they often retire with smaller pension pots than might otherwise have been. This has created what has become known as the gender pension gap.
The Scottish Widows survey calculated that the pension gap between a man and a woman retiring today is a staggering £123,000. While the prospects for a 25-year-old woman today are much better, they are still expected to retire with a shortfall of £100,000 compared to a man.
For more context, consider the fact that people are generally undersaving for retirement, male or female.
But why do we have such a gap?
The gender pay gap makes up approximately £30,400 of the modern-day forecast £100,000 shortfall between the pension fund of a woman and a man.
The more significant number of women in part-time employment accounts for around £30,300 of the expected shortfall.
Due to the gender pay gap, inequality/reduced workplace opportunities, women tend to have less money to save towards their pension funds. This accounts for around £26,100 of the shortfall.
Employment/career breaks are predominately centred on childcare and other caring responsibilities, which often fall on women's shoulders more than men's. This accounts for around £12,500 of the estimated pension fund shortfall.
It is forecast that a 25-year-old man today, retiring at 65, would amass an average pension pot of £354,000. However, to put this into perspective, a 25-year-old woman in the same situation is expected to retire with a pension pot of just £254,000. This equates to a shortfall of 28.25%, or to put it another way, they would have to work until they were 81 (16 additional years!) to accumulate the same pension pot!
While we have seen movement in the political arena concerning equality legislation and monitoring of the gender pay gap, there is still much to be done. The primary solutions remain, as always, addressing the social and legislative hurdles.
However, there are practical actions which can be taken to reduce the long term impact when it comes to retirement savings.
Many assume you must make significant contributions to your pension fund to make a difference. True, the more you contribute, the larger your pension fund and income. However, even if you can start contributing relatively small amounts from the age of 20 (as opposed to 25), you will have an additional five years of contributions and the cumulative impact of long-term growth.
Yes, we’d of course prefer that everyone started saving earlier! As we’ve touched on, shortfalls in pension savings are often universal.
Using the baseline average earnings figure of £23,700 for a woman and £26,100 for a man, contributing the same percentage of your wage will not reduce the pension gap. However, it is estimated that paying an additional £25 a month from 25 years of age to retirement would boost a woman's pension fund to £286,000. An additional £50 a month would see an increase to £317,000 upon retirement. Unfortunately, due to the cost of living crisis and a lower base wage, it can be challenging to find additional pension fund contributions at the moment, but a conversation with a financial planner will always yield a forward plan.
The government introduced workplace pension legislation to address pension shortfalls in the longer term. This obliged employers to invite new employees into the company’s pension scheme. As a result, accumulated contributions from the employer and the employee can be significant over time. However, some people decide against joining their workplace pension scheme because of job security issues/uncertainty.
Whether you stay with the company for months, years or decades, these are contributions from your employer that aren’t being utilised. This brings us to the subject of pension consolidation, where you can potentially consolidate several small pension funds from different employers into one pension pot (one area where professional advice is a ‘must’).
In recent years we have seen more focus on additional areas, such as:-
These are positive signs, perhaps simply a fairer appreciation of the balance of both men’s and women’s roles in family life. While still relatively minor in the overall picture of the gender pension gap, they are steps towards parity.
While the current state of the pension gender gap in the UK may seem daunting, it is important to acknowledge the steps being taken to address this issue. Various organisations and government bodies are working to close the gender pay gap and provide better support for working parents and carers.
Moreover, women are increasingly taking control of their own financial futures by seeking professional financial advice and making informed decisions about their investments and pension contributions. As more women enter the workforce and take on leadership roles, we can hope to see a more equitable distribution of pay and a narrowing of the gender pension gap.
It is also important to note that while the gender pension gap is a significant issue, retirement planning should not solely focus on the size of one's pension pot. There are many other factors to consider, such as maintaining good health, building social connections, and pursuing fulfilling hobbies and interests. With the right mindset and support, both men and women can enjoy a comfortable and fulfilling retirement.
It is unfair to suggest there has been little change in recent years, but this change has been slow and needs to be backed up by further regulatory support. The fact that the pension income gap between a 25-year-old woman saving for her pension today and one about to take retirement is estimated to fall by £23,000 is encouraging. However, if the gap were reduced by just £23,000 every 40 years, there is still a long way to go!
Supplementary to regulations and changes in the workplace, it's encouraging to see more women taking financial advice, specifically pension-related advice. As we have previously mentioned, when it comes to tax breaks and allowances, it is as much what you don't do today as what you do today, which can impact your long-term returns. What may seem relatively small changes in isolation can have a significant impact in the longer term and as part of a broader picture.
If you would like to know more about the gender pay gap and the impact on long-term pension returns, please get in touch today.
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