The UK’s retirement system is to a large extent built on occupational pensions, meaning anything that happens with individuals in the labour market is mirrored in retirement – but does the pension system itself make labour market inequalities worse, and how does it need to change to avoid this?  

 

The OECD, a Paris-based group of mainly rich nations, published a report last week offering guidelines for governments “to ensure that retirement savings arrangements do not further exacerbate inequalities between men and women stemming from labour market and other factors”. 

 

 

The report found that women participate less in pension funds and build up lower assets and entitlements as a result, particularly between the ages of 25 to 44, when they are most likely to have children and take on the bulk of childcare duties. 

 

Women are also less able to save because of the gender pay gap, still at 15.5% in the UK last year, but the report found that while labour market inequalities are important drivers of the gender pension gap, “aspects related to the design of retirement savings arrangements also explain much of the gap”.  

 

It cites eligibility rules among others, which can lead to “significant differences in pension plan coverage”, and says there is evidence of behavioural biases when it comes to personal pension plans “that may lead women to save less than men”. 

 

Aside from eligibility based on earnings or hours worked, the OECD also lists other factors in a pension system that contribute to the gender pension gap, such as a break in accrual during parental leave, conservative investments in the default option, absence of automatic pension splitting on divorce, non-indexation of benefits, and the absence of survivor benefits. 

 

The UK pension system falls short on eligibility criteria because auto-enrolment requires an income of at least £10,000 from a single job; women are more represented among low earners and more likely to have multiple jobs paying less than £10,000 each. There is also no automatic pension sharing on divorce in the UK, even though pensions are often one of a couple’s biggest assets. 

 

The OECD makes a whole host of recommendations on how governments can ensure women are not short-changed by their pension system, from compulsion and contributions made by spouses, to more flexible savings arrangements and unisex mortality tables. 

 

 

While the OECD found that, combining public and private pensions, women aged 65 receive 26% less income than men from pension systems, union Prospect’s 2020 report on the pension gap found that in the UK, the difference in average gross pension income between men and women increased from 39.9% in 2017/18 to 40.3% in 2018/19. The gap had already widened a year earlier, having previously started to narrow. 

 

    

“It's going in the wrong direction at the moment,” said Joe Anderton, a pensions research officer at Prospect, speaking at the TUC Pensions Conference 2021 on Tuesday. The difference is starkest in England and Wales with 42.2% and 43.8% respectively, while Scotland’s pensions gap was considerably lower at 33.0% and Northern Ireland’s stood at 34.2%. Anderton explained that part of this is due to sampling, even though the Family Resources Survey which the data is based on covers 19,000 households. 

 

Prospect considers a 6% employee contribution a ‘good’ contribution level but found that just 12% of employees were saving at that level. The issue was even more pronounced among part-time workers, a group that consists mainly of women, and accounts for almost a third of female employment. Just under 10% of women who work part-time contributed 6% or more to their pension, the report found. “The proportion paying in decent levels is very low” among that group, said Anderton. 

 

He identified the £10,000 earnings trigger as a barrier to pension saving for women, who are more likely to be earning below that – particularly as this amount needs to come from a single job, when many low-earning women have multiple jobs. The Pensions Policy Institute found in 2015 that 32% of female employees did not qualify for auto-enrolment, compared with 16% of male employees. 

 

 

Prospect is calling for a statutory requirement on government to report to parliament on the pensions gap and how it plans to address it, and wants to see reforms to auto-enrolment implemented. “The biggest issue is the government acknowledging it’s an issue and reporting on it,” said Anderton. 

 

Prospect is also calling for better recognition of caring duties in the system, such as additional state pension credits - the state pension already includes credits for carers – and more affordable childcare, as well as tackling the net pay anomaly, whereby low earners in ‘net pay’ schemes are at risk of missing out on tax perks. 

 

Continuing inequalities in the labour market and the way paid and unpaid work are divided between women and men raise the question whether pensions should be based predominantly on paid labour as is the case now, or if a wider contribution to society should form the basis, as the pension system in its current form effectively extends unequal reward during working life until death.  

 

Anderton said that “while you have a significant pay gap, you’re always going to have a significant pensions gap”.  

 

He noted that a significant group of people who perform caring duties “just don’t have the possibility to pay into a pension”. Groups like the self-employed face a similar problem, he added. 

 

“A solution needs to be found. It needs to be taken out of the ‘too hard to deal with’ box and looked into,” said Anderton. 

 

Cara Pacitti, an economist at the Resolution Foundation, pointed out that it was “really striking to see how earnings trajectories differ based on taking time out of the labour market”, with lifelong consequences for women. 

 

The state pension overcomes some of the problem through the national insurance credit system, said the Pensions Policy Institute’s director Chris Curry, but admitted that this is dwarfed where the occupational pensions system is stronger. 

 

He mentioned the idea of a carers’ pension where the government pays a top-up pension to carers; this differs from the current system, where those looking after children or adults can build up a national insurance record, although the carers’ allowance does provide some benefits for those who care for someone at least 35 hours a week. 

 

A carers’ pension, if introduced, “helps people with those gaps but comes at a cost”, he said, citing £2bn a year.