Today the State Pension age for women reaches 65 – equal to that of men. This has triggered a debate about continuing inequality in pension incomes.
The trade union Prospect has estimated the ‘gender pension gap’ sits at 39.5% – which means the average gross pension income of women receiving the State Pension is 39.5% lower than that of men. It argues that the lack of an official estimate and reporting requirements mean there is much lower awareness of the issue and its causes, than is the case for pay.
So, what are the causes of the gender pension gap and who is most affected?
John Cridland – asked to conduct a review of the State Pension age for the Government – found that men and women of all generations were set to receive similar amounts of State Pension and that the discrepancies reflected different private pension outcomes.
His interim report said: “Taking a broad look across all current working age groups, men are projected to have around a 25% higher income on average than women in their first year of retirement. This equates to a difference of approximately £3,000 per annum.
“Although the gender gap in pension income is set to narrow for generation X, it in fact widens again for generation Y. This is due to the fact that automatic enrolment’s better coverage and the decline in defined benefit income is offset by the continuing trend of men’s consistent higher earnings and women taking time out of the labour market.”
Have State Pension reforms helped?
The greater progress towards equalising State Pension outcomes reflects a series of reforms intended to improve coverage. In particular, the new State Pension introduced in 2016 is expected to bring forward by a decade to the 2040s, the date at which women’s State Pension outcomes equal that for men. And the reforms have already had an impact. While in February 2018, the average weekly amount of State Pension received by women was 82% of that for men, for those in the new system it was 95%.
However, as the Institute for Fiscal Studies has pointed out: the new State Pension is, in the long-run, less generous than the old one would have been had it continued – particularly for those who contribute for longer – whether through paid employment or caring responsibilities. This increases the importance of private pension saving to achieve an adequate income in retirement.
What about auto-enrolment?
The introduction of auto-enrolment from 2012 has reduced the proportion of female employees with no pension provision – from 50% in 2013 to 29% in 2017. The proportion of male employees with no pension provision fell from 51% to 25% over the same period.
The Wealth and Assets Survey not only indicates that younger women are saving more than before in absolute terms, but also indicates that the gap between the private pension wealth of women and men within the age groups closest to retirement is shrinking over time.
Among 45- to 54-year olds with private pension wealth for example, the median held by women in 2016-2018 was £72,000 and the median for men was £100,000, a difference of 28% – which is 14 percentage points lower than eight years previously. The difference has also fallen among 55- to 64-year olds (from 51% to 40%) over the same period.
Will this be enough?
Although auto-enrolment has been widely hailed as a success, there is also general acceptance that contribution rates will need to increase if people are to have an adequate income in retirement. However, addressing this is not straightforward as there is a risk that low earners faced with higher contributions may opt out altogether.
Furthermore, women tend to have longer retirements than men, so their generally smaller pension pots may need to last for longer. Whether they do so will depend on the size of the pot they have built up, but also on the decisions they make in retirement.
The pension freedoms introduced in 2015 transferred significant additional responsibility for these decisions to savers. Evidence so far is that too many people are taking the path of least resistance with their existing provider, often unaware of where their money is invested or what charges apply.
An improving overall picture should not allow us to lose sight of pockets of inequality – particularly affecting lower paid women. Campaigners have been calling on the Government to address two issues in particular: the position of those earning below the £10,000 earnings trigger for auto-enrolment and those who do not receive tax relief because of the type of pension arrangement their employer operates.
Women and Pensions, House of Commons Library.
State Pension age increases for women born in the 1950s , House of Commons Library.
Automatic enrolment 2010 onwards, House of Commons Library.
Pension flexibilities: the freedom and choice reforms, House of Commons Library.
The gender pay gap, House of Commons Library.
Djuna Thurley and Rod McInnes are Senior Library Clerks at the House of Commons Library.