Many will have heard of a gender pay gap, but how does this translate to the world of pensions?
Earlier this year, the Department for Work and Pensions (DWP) released its first report on the gender pension gap for private pensions in the UK , aiming to help the industry better understand the issue. Beyond that report, several industry groups have been formed with the goal of providing suggested solutions to bridge the divide and ensure financial security for all retirees, regardless of gender.
What is the gender pension gap?
Broadly speaking, the term "gender pension gap" is used to describe the inequality between male and female pension. The gender pension gap can be defined in different ways. For example, it could be a difference in retirement income, differences in automatic enrolment participation rates between men and women, or the size of their pension pots. There are lots of factors at play which make it difficult to develop a single measure for tracking progress on reducing the gap or setting targets for reducing it.
The DWP's Report on the Gender Pension Gap in Private Pensions
The DWP report defines the gender pension gap in private pensions as "the percentage difference between female and male uncrystallised median private pension wealth around normal minimum pension age [currently age 55] for those individuals with private pension wealth". Uncrystallised in this context means funds which are not yet in payment.
The Report found that, in 2018-20, the gender pension gap for private pensions was 35%, but it reduced to 32% for those eligible for automatic enrolment (AE). The report reveals that this gap varies by age, with the smallest gap (10%) observed among those aged 35-39 and the largest (47%) among those aged 45-49. The report noted that this seems to align with high participation rates amongst female employees who are eligible for AE as compared against the participation rate of AE eligible male employees. However, while the participation gap has closed, the wealth gap continues.
The report also considered the gender pensions gap by the type of pension, noting that the gender pensions gap is smaller for those who hold some defined benefit (DB) pension wealth, and largest for those holding only defined contribution (DC) pension wealth.
The smaller gap in DB schemes may partly be due to the number of private DB schemes, (which men have historically been the primary beneficiaries of) now being closed whilst a number of DB pensions in the public sector (including in relation to the NHS, teaching and local government) remain open and with a significant number of female members. As more private schemes close and more women join public sector schemes, it may be that the gender pension gap in DB schemes will continue to narrow.
On the other hand, it is likely that several factors contribute to this gap in DC pensions, including the gender pay gap, caregiver responsibilities (including that which results in part-time work), and varying levels of financial confidence among men and women. The DC gender pension gap compounds over time. Small differences in contributions and investment returns early in a person's career can lead to significant disparities in retirement income. This cumulative effect can result in a substantial financial disadvantage for women in their later years.
Overall, the report underlined that the gender pension gap remains a challenge and highlights the need for ongoing efforts to close the gender pension gap.
Industry Groups and the Path Forward
Recognising the significance of this issue, a number of industry groups have been working to consider potential solutions and strategies to address and narrow the gender pension gap in the UK. These measures include government initiatives (such as regular reporting by the DWP and changing policies for childcare support and couples' rights), employer actions (such as understanding and addressing any gender inequalities in the workforce, supporting new parents and offering flexible work options), and pensions industry involvement (such as assessing gender pension gaps in schemes and providing financial education on pensions).
A recent report by LCP suggests that the state pension may achieve full equality by the 2030s, and that currently the pension gap is a difference of just £4 per week for new retirees. In addition, for DB pensions, it is projected that the gender pension gap will significantly decrease and achieve near equality over the next couple of decades. However, for DC pension schemes, as noted above, it seems that the gap continues to widen.
Whilst all this analysis of the gender pensions gap should help to inform future pensions policy, such as improvements to auto-enrolment and wider public policy it seems that the debate around gender and fairness in our economy continues.
If you have any queries about anything raised in this blog, please get in touch with a member of the pensions team.
