PENSIONSANDSAVINGS.COM

• Gender Pensions Gap much worse than Gender Pay Gap.
  
• Women lose out in both State and Private pensions because of their social role.
  
• Budget could fix pension system cracks that women are falling through.
  
• Let’s close gender pensions gap and encourage women to take responsibility for their pensions.
  

Ahead of International Women’s Day, I thought it might be timely to write about the shocking gap between men and women’s pensions, which still exists in 21^st Century Britain.

Women are the poor relations in pensions: Studies continue to highlight the enormous disparity between pension provision for men and women. For example, a 2018 study by Prospect showed that women on average have £7,000 a year less pension than men. Office for National Statistics figures show that the majority of the poorest pensioners are women. And analysis of the Wealth and Assets Survey by the Chartered Insurance Institute (CII, 2018) showed that median pension wealth for women aged 65 – 69 was £51,500 – just one third of the £156,500 for men of the same age. The mean average pension wealth was even worse – with women having just £35,700, which is only one fifth as much as men. Given that women live longer than men, in theory they actually need more, rather than less. This gender pension divide has not been adequately addressed by policymakers.

Summary of gender pension gap:

• Women have £7,000 a year less pension than men
• Women age 65-69: mean pension wealth just one fifth that of men
• Women age 65-69: median pension wealth £100,000 less than men

Progress in addressing gender pay gap has not been matched in pensions: The overall gender pay gap (for all ages, including part-time and full-time) is estimated as 18.5%, which is less than half the gender pensions income gap. In fact, when it comes to full-time work, the gender pay gap has been almost eliminated for women under age 40. However, for over 40’s there are significant disparities.

Factors contributing to this pension divide:

• Lower lifetime earnings than men due to family caring responsibilities
• Decades of inequality in the UK pension system
• State Pension has always discriminated against women and still does
• Women have always lost out in workplace pensions and still do
• Women still lose out on divorce

Lower lifetime earnings due to women’s caring role in society: The most obvious reason is that women tend to earn less than men and work for fewer years than men, due to their social role in caring for their families. After having a first child, mens’ earnings will generally keep rising, but women’s do not. In a pension system where pensions are related to earnings, obviously those who earn less than others will have less pension in later life. With lower lifetime earnings, any earnings-related pension will disadvantage women relative to men. Even in later life, after their child-caring years, many women will also find themselves caring for older relatives and more likely to work part-time or retire early to look after loved ones.

More part-time work and lower pay characterise women’s working lives:  Women returning to work in their 40s earn £2 per hour less for each year they have been out of the labour force (CII). A study by the Institute for Fiscal Studies (IFS) showed that, after having a child, six in ten women return to work part-time, rather than full-time. These women earn £9.36 an hour, relative to £14.31 per hour for average full-timers. The study concludes that by the time their first child reaches age 20, the average mother has had three fewer years of paid work and ten years less full-time work.

Gender Pay Gap figures highlight impact of child-caring years on women’s earnings: The table below estimates the Gender Pay gap by age for full-time workers. Until women reach their 40s, those in full-time work earn around the same as men. But once women start returning to work full-time, as their children get older, even their full-time earnings are far lower than for full-time men. This is further evidence of the problems facing women who are trying to build up a good pension. If they earn so much less than men through their later years, as well as earning less while working part-time when their children are young, they are bound to lose out in terms of pensions.

Age                                                        Differential between men and women’s earnings

18-21                                                                                                     0

22-29                                                                                                     1.5%

30-39                                                                                                     1%

40-49                                                                                                     13%

50-59                                                                                                     15.5%

60+                                                                                                         16%

Decades of inequality in the UK pension system leave women with lower State pensions: Historically, women have always been second-class citizens when it comes to pension provision. The National Insurance State Pension originally treated women as being able to rely on husbands for their pensions. This means they often had no State Pension in their own right. The State Pension rules were designed without the needs of women as independent individuals in mind. It was also sometimes suggested that women’s lower pension age than men could help offset some disadvantages, because they might receive less, but would be paid for more years. The gender divide was further exacerbated in State Pensions in the 1970s, with the introduction of an additional earnings-related element in the State Pension, on top of the Basic Pension. This State Earnings Related Pension or SERPS, allowed men to accrue much larger State Pensions than women by virtue of higher earnings. Even with the introduction of credits for child caring years and the State Second Pension (S2P), designed to help women and lower earners, women remained at a disadvantage.

How women have lost out in National Insurance State pensions:

• State Pension assumed women could rely on husbands’ pensions
• State Pension introduced earnings related element that was more generous for men
• State Pension excludes low earning women if they earn below £118 a week
• State Pension credits for only full years of caring, not partial years
• New State Pension sees women lose extra years of accruals that were allowed in S2P
• Women who don’t claim Child Benefit they’re not entitled to lose their State Pension entitlement for that year

New State Pension leaves women at risk of lower pensions – there can be no excuse for this!: The National Insurance pension system was radically overhauled in 2016, with the introduction of the new State Pension. This is a flat-rate State Pension with no earnings-related elements. When it was introduced, the gap between women and men’s State Pensions was over £30 a week, but under the new system there is still a gender pension gap of £10 a week, which is not expected to be closed until the 2040s. This is partly because of the vestiges of the old system, but it is also because women are still more likely to lose out in the State Pension than men. Under the old State Pension, women who stayed at home would be credited for both the Basic State Pension and the State Second Pension (S2P). The amount of S2P received would continue to increase every year, with no upper limit, so people could receive 45 or more years of S2P. Under the new State Pension, no further accrual of State Pension is allowed after the 35-year limit is reached, which will further disadvantage low earners, mostly women.

Women still falling through cracks in State Pension system: There are cracks in the qualification criteria that disadvantage certain groups, and it is mostly women who are falling through these cracks. The problems facing women include low earnings and the Child Benefit means-test. To receive a full new State Pension, people need a full 35-year National Insurance record. When women take time out to care for children or others, they are supposed to be credited towards their State Pension. However, the system of credits is not working as it should and results in many women being left without any credit. Only a full year of caring will qualify for a credit towards the State Pension. If a woman takes over a year out of work for caring, but that does not include a full 12 months from April to April, she receives no credit on her NI record. Women who know they are not entitled to Child Benefit because their partners are earning over £60,000 a year, which disqualifies them for the benefit under the new means-testing rules, will not be credited for their time at home with their children unless they actually claim the Child Benefit they know they are not entitled to. Many women are unaware of this loophole and they are losing years from their NI record that may reduce their State Pension later on. And women who earn less than the Lower Earnings Limit (LEL) for NI -those earning less than £118 a week) in any one job – will not receive credit towards their State Pension. Even if they have three jobs, each earning below the LEL, they will have no recognition in their State Pension. However, if they earn between £118 and £166 a week, they will pay no NI contributions but still be credited for the State Pension. The unreasonable inflexibility of NI rules penalises thousands of women. If they stayed at home, or were unemployed, or if they earned a little more, they would not have to pay any NI contributions but would be credited for their State Pension. The Government has promised to address this for many years, but still nothing has been done. Such anomalies have no place in a 21^st Century system and Government should fix this urgently.

How women have also been losing out in private pensions: In private pensions, too, women have historically been treated as second class citizens.  Especially as women’s earnings are lower than men’s, the earnings-related nature of private pensions is bound to disadvantage women. These disadvantages have been compounded by past rules that saw part-time workers excluded from pensions altogether and as soon as a woman got married, she could be required to leave her workplace pension scheme, as it was again assumed that she could rely on a husband’s pension. Some of these historic disadvantages have been removed, but women will still have lower private pensions than men for many reasons.

Why women are likely to receive lower private pensions than men:

• Private pensions are linked to earnings, so if women earn less than men they will have less pension
• Auto-enrolment excludes those earning below £10,000 a year – mostly women
• Auto-enrolment in Net Pay schemes force women earning under £12,500 a year to contribute 25% extra for their pension, reducing take-home pay and raising opt-out risks
• Women are at risk of losing pension-sharing on divorce

Women lose out in earnings-related private pensions but are losing out in auto-enrolment due to £10,000 earnings threshold: In addition to receiving less State Pension than men, women are even more disadvantaged in private pensions. Workplace pension provision has been radically transformed by auto-enrolment, but unfortunately this still leaves many women at risk of lower pensions than men. So how do women lose out in auto-enrolment? The number of women eligible to be automatically enrolled is far lower than the number of men, because only those earning more than £10,000 a year in any one job are eligible. Women who have more than one job, but earn below £10,000 in each, are excluded from auto-enrolment. It is estimated that dropping the £10,000 threshold would bring in three million more women to workplace pensions.

Low earners in Net Pay schemes have to pay 25% extra for their pensions which may mean more opt out: Workers have no control over the pension scheme chosen by their employer. Unfortunately, many employers are enrolling their staff into schemes which are not suitable for their lowest earners. Well over one million women are affected by this problem. Their employer is deducting money from these women’s salary to contribute to a pension scheme that operates on a ‘Net Pay’ basis. If the employer used a different scheme, which administered the contributions on a ‘Relief at Source’ basis, those earning less than £12,500 a year (the personal tax threshold) would not have to pay the 25% extra contribution. They would only pay £16 a month into their pension and the Government would add an extra £4 a month to it in a RAS scheme. But in a Net Pay scheme, these low earners have to pay £20 a month, instead of just £16, leaving them with less take-home pay and the same pension. This extra salary deduction could well lead to more of these women opting out of their workplace pension over time. Around three quarters of the low earners affected by this problem are women. This problem needs to be urgently addressed because even if they find out that they are paying 25% extra than they need to, these women cannot reclaim the money. The Treasury has promised to remedy the injustice, but has so far rejected all proposals for fixing it. Employers, pension trustees and the Regulator have all failed to take responsibility for this situation and only one provider, Now Pensions, has attempted to help these low earners receive some recompense. I have tried to introduce an amendment in the Pension Schemes Bill to address this issue, by putting responsibility on providers and the Regulator to ensure workplace pension schemes are suitable for those being enrolled into them, and can offer good value for money. Forcing some members to pay 25% extra for their pensions cannot possibly represent value for money.

Women tend to have less confidence in finance and lower financial education: It is important to employer women to take responsibility for their pensions. The level of financial awareness is very low and workplace financial education is urgently needed to help women plan for their later life. With increasing numbers of women approaching retirement being on their own, either because they never married or are now divorced, it is clear that having their own pension is increasingly vital. The Money and Pensions Service is planning to improve workplace financial education and particular emphasis should be placed on helping women.

Women lose out in pensions on divorce: Another serious issue, which needs urgent recognition, is the impact of divorce on women’s pensions. The Government introduced the excellent idea of pension sharing on divorce, to help women share their former partner’s pension. But the lack of financial awareness and the inadequacy of protections for divorcing women, is leaving many at risk of losing out significantly when their partner fails to adequately share their pension. Sometimes, the husband does not provide the correct value for their pension and, if the wife cannot afford good legal assistance, or just trusts that the value given by their husband is correct, they may be seriously short-changed. Women also opt to take a share of the family home, rather than the partner’s pension, without realising that the pension could be worth far more than the house. Even when the partner has achieved a legal pension-sharing order, it is possible for women to lose out because their ex-husband may transfer their pension out of the scheme without her knowledge. Trustees are not required to alert the ex-wife to this, leaving some women at risk of not receiving the share of pension they are entitled to. With the Pension Schemes Bill going through Parliament at the moment, I have laid an amendment calling on trustees to ensure they get consent of a partner who is entitled to pension-sharing, before agreeing to allow a member to cash-in or transfer their pension.

So what does Government need to do?: In this week’s Budget, the Chancellor has an opportunity to announce that he will address the flaws in the pension system which are currently putting women at risk of worse pensions than men.

Starting with the State Pension: The following cracks in the National Insurance State Pension system should be fixed, as there can be no excuse for disadvantaging women in a flat-rate State Pension:

• Ensure everyone earning below LEL is credited for National Insurance State Pension
• Allow all women to be credited for State Pension even if they don’t claim Child Benefit
• Ensure part-years of childcare still count towards the NI State Pension record

And on Private Pensions:

• Fix Net Pay problem, so low earners no longer have to pay a 25% surcharge for their pension
• Reduce auto-enrolment thresholds so those earning under £10,000 pa are auto-enrolled

Further measures: These further measures would all be helpful in closing the gender pensions gap and improving the outcome for women’s financial security in later life.

• Improve workplace financial education to help women understand pensions
• Consider ways of helping women and partners contribute to pensions during caring years
• Encourage stay-at-home women to ask partner to make pension contributions
• Protect women’s pensions more robustly on divorce
• Ensure more women understand the importance of having money for later life care needs as well as pensions

Time to focus more on closing the gender pension gap: International Women’s Day is a good time to focus on the problems facing women in later life. They are still likely to be financially less secure and they are also at greater risk of poverty in old age than men. As the gender pay gap has narrowed significantly over the years, now is the time to focus more on the pensions gap. With a rapidly aging population and millions of babyboomers now reaching their seventies, the need for good pensions – and the even more expensive costs of later life care – will grow significantly in coming years. Progress has been made, but there is much further to go before we can ensure women’s risk of later life poverty is more fairly addressed. I hope the Government is listening and will introduce some of these measures in the Budget this week. Women’s lives are not the same as men’s and society expects women to do more of the caring. That should not mean they then lose out so heavily as a result.