‘Intrinsic bias’ in DC pension system drives wedge into savings disparity

Hope William-Smith reports

An “intrinsically biased” pension system, the gender pay gap, and the disadvantage caused to women’s savings by career breaks is continuing to cause “stark gender disparity” in retirement wealth, Barnett Waddingham says.

Findings from a study conducted by the consultancy compared the trends of 35,000 members in seven defined contribution schemes and found women have between 25% and 45% less in their pension pots at retirement than men.

Barnett Waddingham found the gender pension gap begins to diverge “most clearly” after the age of 32, with men contributing up to £1,500 more into their pension each year than women. This comes despite men and women contributing the same percentage of their salary.

Career breaks can lead women to have 10% less in their pension savings at retirement compared to a woman with no career breaks, meaning a 35-year-old would need to increase contributions by an additional 1% of pensionable pay to make up this shortfall, the study noted.

Barnett Waddingham also said there are three times more women than men earning less than £10,000 – under the auto-enrolment (AE) threshold – in some schemes.

“While society has evolved, the pension system has not,” said policy and strategy lead Amanda Latham. “Mainly focusing on the needs of the ‘traditional nuclear family’, the design has not changed to reflect the way we live today and as such, the system is intrinsically biased towards men, creating a stark disparity in wealth at retirement.”

“We need to consider fiscal, behavioural, and societal issues collectively, and work to create a more robust and inclusive pensions framework that offers fairer solutions for all.”

A review of AE rules, a review of the state pension, a move to a flat rate of pension tax relief, and allowing couples to pay into each other’s pension plans would help address the disparity in the short and long-term, Latham added.

Policymakers should also begin to collect data on pension savers identifying as transgender or non-binary, she suggested.

“We know the evidence base on inequality of employment outcomes by sexual orientation is weak and inconsistent and what is measured is what matters when we look to create change,” Latham said. “To meaningfully develop a system that works for everyone, data needs to be collected and reported to understand progress and the impacts of policy changes.”

Changing working habits

Women in their forties and fifties “could benefit from information from pension companies explaining what the impact of working either a day or two extra a week would have on their pension savings”, a new report has found.

Findings in consultancy Ignition House’s New Choices, Big Decisions study – published 29 March in conjunction with The People’s Pension (TPP) and State Street Global Advisors – looked at further evidence of the impact of the gender pensions gap such as looking after children, reducing working patterns, and retaining the pattern after circumstances changed enough for them to consider increasing working hours.

The report said the pension industry had to better signpost information to women who work part-time and “set out the ramifications of not having up to an extra two days a week of work” on their saving levels at retirement.

TPP calculated that a woman who chose to return to full-time work aged 42 after 14 years of working part-time could be as much as £1,224 a year better off in retirement than a woman who stopped working at 28 and continued part-time hours throughout her working life.

B&CE director of policy and external affairs Phil Brown said: “This latest research is further evidence of just how stark the gender pensions gap is. The study has given us genuine insight about how people save and plan for their retirement and there are sobering examples of women who now regret that they didn’t fully consider what impact that sustained periods of working part-time would have on them in retirement.

“We in the pensions industry could look to do more to see how women might receive information about how to increase what they save.”

Brown also agreed the government “had to do more” to enable women to return to their roles or work more hours once they have children.

“One of the main ways of doing this would be the provision of better, more affordable childcare,” he said.

Savings under pressure

UK household finances have remained under pressure in the first quarter of 2021 as the effects of the coronavirus pandemic continue to be felt throughout the economy.

In its UK Household Finance Index report, also released yesterday, Scottish Widows noted shrinking income from employment, higher living costs, and squeezes on cash were affecting savers’ plans for retirement.

The provider found around 20% of UK households and saved less for retirement in Q1 this year, while 10% have saved more.

Pensions, stockbroking and distribution director Jackie Leiper said it remained important savers “not lose momentum on building financial resilience for the long-term”.