by Scott Kingsley
The ongoing fight for equal opportunities in the workplace still has some way to go, with a recent report by Scottish Widows showing how the gender pay gap impacts pension savings. Considering that people could be paying towards their pension for more than 40 years, what may seem relatively small differences today can have a considerable impact further down the line.
Understanding the Gender Pay Gap
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.
Average hourly 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%, with a further reduction to 18.4% in 2017 and 14.3% in 2023.
Gender imbalances in the workplace
The Scottish Widows survey also looked at the entire workforce and found that:-
- 25% of working women were in part-time employment – against 5% of men
- 28% of women were forced to take employment breaks – the figure for men was 6%
- 17% of women aged over 30 are not able to save for their pension compared to 12% of men
- 46% of women earn less than £30,000 a year, against 37% of men
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.
How does this impact the gender pension gap?
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.
Is the gender pension gap a significant issue?
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.
But why is there such a gap?
- Pay gap: less in, less out? The gender pay gap accounts for approximately £30,400 of the shortfall.
- Part-time employment – More women in part-time employment account for around £30,300.
- Savings rates – This makes up an estimated £26,100 of the shortfall.
- Employment/career breaks – Centred on childcare and other caring responsibilities, this adds another £12,500 to the gender gap.
Impact on pension funds
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!
Addressing the gender pension gap
While we have seen the introduction of equality legislation and monitoring of the gender pay gap, there is still a lot to do. However, practical action can be taken now to reduce the long-term impact on retirement savings.
Start date for contributions
The more you contribute, the larger your pension fund and income will be, but it’s important not to forget timing. If you 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.
Additional contributions
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.
- £50 a month would see an increase to £317,000 upon retirement.
Due to the cost-of-living crisis and a lower base wage, it can be challenging to find additional pension fund contributions, but a conversation with your financial planner could identify areas to make savings and free up additional funds.
Workplace pensions
Workplace pension legislation sought to address the subject of pension shortfalls in the longer term. This obliged employers to invite new employees into the company’s pension scheme. While there are obvious long term benefits, some people decided against joining their workplace pension scheme because of job security issues.
Whether you stay with a company for months, years or decades, these are contributions from your employer that aren’t being utilised.
Positive lifestyle changes
A changing society in recent years has seen more focus falling on additional areas, such as:-
- Splitting pension fund assets on separation
- More men are taking career breaks
- Shared care responsibility for older family members
- Purchase of joint annuities to guarantee future income
While still relatively minor in the overall picture of the gender pension gap, these changes in society are helpful in the long-term goal of achieving parity.
Scott Kingsley Summary
Even though there has been progress in recent years, for many people, the pace of change is far too slow. An improvement of £23,000 for a 25-year-old woman saving for her pension today, compared to someone retiring today, is a positive move, but equates to a reduction in the gap of £23,000 every 40 years!
There is pressure on the government to introduce more legislative changes, but we will need to see further changes in the workplace and broader society before pay/pension parity becomes a realistic dream.
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Scott Kingsley
