Will encouraging women to invest help close the gender pensions gap?

There’s good news in the latest Scottish Widows Women and Retirement report. Published last week and marking the 20th year of the report, it shows that the policy changes introduced over the past two decades, such as automatic enrolment, are having a positive impact on the gender pensions gap. But the report also highlights that there have been some missed opportunities too.

For those expecting to receive a defined contribution pension, women are on track to have a £130k smaller pension pot than men. To fully close the retirement income gender gap, we need to address the structural inequalities on employment, caring responsibilities, investment support and divorce, which are all significant contributors.

The gender gap in retirement income means that the average woman has less pension and other long- term savings than men. The average woman is currently on track to receive £12k of annual income in today’s money in retirement, compared to £17k for the average man, equating to a 30% gender gap on annual retirement income. The report from Scottish Widows also shows that 42% of women and 35% of men are currently on track for not even a minimum lifestyle, and to face poverty in retirement.

How can we close the retirement income gap?

While positive progress has been made over the past 20 years, if we continue progress at the same rate it will still take another 20 years to close the gap. These are some of the areas that need addressing to help speed things up.

Reform automatic enrolment

Pension participation rates have more than doubled for eligible female employees since the policy was introduced in 2012. Since then, an extra 4.6 million women have started saving into a pension. Consequently, the gender gap in participation rates for eligible employees has essentially disappeared. This will likely benefit younger generations of women more, as there‘s more time for their increased saving to accumulate into a larger pension pot.

However, one of the key factors driving the gender pension gap is that employment still tends to look quite different for men and women. Women are more likely to be working part-time (38%) compared to men (14%), meaning they’re still more likely to earn less.

This means that many women who are not in full time work might not qualify for automatic enrolment, which only kicks in if someone earns more than £10,000 per year. About 1.4 million women earn less than the threshold and so are not eligible for automatic enrolment, which means their employers do not have to automatically enrol them into a pension scheme.

We believe that automatic enrolment should be extended to more workers by lowering the threshold for eligibility, as well as reducing the age requirement from 22 to 18. This would ensure that more women on lower incomes or working part time would automatically save into a pension, and that they would have a longer period of saving.

We’d also encourage the UK Government and businesses to consider allowing those earning under £10,000 to opt out of their own contributions, while still receiving employer contributions.

Address the barriers to childcare

Although progress has been made on sharing childcare responsibilities, the majority of it still rests on women. Women are 36% more likely to be providing unpaid care than men, and are more likely to take a career break or a part-time role to fit around the children.

The lack of affordable childcare, combined with women earning less on average than men, leads to more women making career sacrifices to care for their children.

Nursery childcare for children under two costs, on average, £14.5k annually in the UK. This is equal to 58% of the take home-pay of the average person, making it unaffordable for many. While policies have recently come into force which aim to improve access to childcare, accessibility still remains an issue. Greater childcare access would allow more women to stay in the workforce, reducing career breaks and improving long-term earnings and pension contributions.

We need to continue to overhaul the provision (and cost) of childcare to support women returning to work, as well as do more to equalise parental leave.

Make pensions part of divorce proceedings

Only 16% of couples split pensions in divorce. The average divorce age is 47 for men and 45 for women, and by then men's pensions are typically worth much more in heterosexual marriages because they’ve had less time out of work to raise children. Often couples discuss the family home but leave pensions - usually someone’s second biggest asset after a home - untouched, which can leave women shortchanged in the future. In fact, pension assets were not discussed in nearly 60% of divorce proceedings last year.

We believe there is merit in the government exploring the idea of a 'family pension plan'. The UK Government can reform rules to allow employees to choose their own pension, and providers could be allowed to offer a plan that a couple both contribute towards. This could be a powerful complement to wider reforms, ensuring a shared pension asset between couples that they can use in retirement, or to split if they needed to in case of divorce.

Secure State Pension access

This higher proportion of women in part time work and the fact that women are more likely to take career breaks not only means that many women might not be accumulating a private pension, but the reduction in years worked could also disqualify them from receiving a full State Pension. Recipients of the State Pension are required to have worked for 10 qualifying years to get any State Pension, and for 35 qualifying years to get the full State Pension.

Women are more dependent on the State Pension in retirement than men, but women can also be less likely to receive the full State Pension if they take breaks from paying national insurance, such as when caring for children. It’s important for women to consider State Pension eligibility when planning their finances and making decisions about work and savings.

For example, women should consider applying for National Insurance credits if they have years where they’ve not earned £12,584 but have been looking after a child under 12. More needs to be done to educate women about State Pension entitlement earlier, as there’s a risk of a shock later in life if they’re not entitled to the pension that they had been expecting.

Encourage family – rather than individual - financial planning

Women also miss out when their partners buy single annuities. 85% of annuities are purchased on a single life basis, but these do not provide an income to the surviving spouse after the death of the annuity holder.

Given that men tend to have a bigger pension pot, to be older, and to die at an earlier age than their spouses, many women will lose a significant source of their retirement income when their partner dies. It’s important that individuals plan retirement finances with their partner and dependents in mind, for example through a joint, rather than single, annuity.

Close the gender investment gap

The gender gap in investment behaviour is significant across all ages, but especially for young women. Only 34% of women aged between 18-24 say they invest outside of pensions, compared to 64% of men of the same age. This is of particular concern given the value that saving early and compound growth can bring. £1000 invested when someone is 20 could be worth roughly £2,500 in today’s money by the time they reach 65, compared to roughly £1,700 if they waited until they were 40 to invest it.*

If more women invested as part of their holistic saving approach, then more would be on track for better retirement outcomes. Investing more when young can also be a way for women to offset the impact of potential career breaks on their investment pots.

Women who invest are less likely to make regular changes to their portfolio, and for the typical investor, making fewer regular changes could be helpful. Making frequent movements can be costly (in fees) and risk returns by mis-timing the market. Since women tend to be more patient investors than men, they could end up making better returns.

But women generally feel less confident in managing their finances, and especially so for managing pensions1. More women also feel that investing is not for people like them (49%), compared to the 41% who feel that investing is for them. More women would consider investing if they had the right advice, resources and greater support. Commonly cited barriers to investing include understanding potential risks and rewards better, (36% for young women) and access to official financial advice (31% for young women).

To help combat the investment gap, more should be done to help empower women to invest. The Government should review the advice guidance boundary to allow new tools to give free guidance and support to people with their holistic savings decisions. These tools could create personalised and directive guidance conversations. Technology should be used to greatly reduce the cost of providing a full advice service to those with less assets, to the point that there is no need for an additional charge to be presented to the customer at the point this support is required. We welcome the Advice Guidance Boundary Review.

* Assuming 2% real rate of return on your investment after fees.

What’s next?

We’ve come a long way over the last 20 years, but there’s still progress to be made. If we can implement changes like empowering women to invest, addressing the barriers to childcare and reforming auto enrolment – to name a few – then we have a good chance of closing the gender pension gap completely.

After all, women who are active investors and in the workplace will not only create a thriving and prosperous economy today, but will also ensure a more secure retirement, too. In short, then, closing the gender pension gap isn’t just about helping individuals; it’s about benefiting the whole of society – now and for the future.