By Dale Critchley, Workplace Policy Manager, Aviva
A host of figures which reflect household surveys of pensioners, average pension pots, contribution rates, and pension incomes. This inconsistency is a barrier to assessing progress. It would be useful to have a single methodology which measures the Gender Pension Gap – like that prescribed by the Office for National Statistics (ONS) for the Gender Pay Gap.
While the figures are inconsistent, the message is clear - women are not building-up the same size pension pots as men over their working lives. And the gap is huge. The PPI points to various reasons but different working patterns is singled out as the biggest influence, with many women opting to work part-time .
For most people, the cost of working part-time means a reduction in contributions paid into their pension. If a person opts to reduce their full-time working hours down to three days a week, they might expect their pay and their pension contributions to reduce by 40%.
However, because of auto-enrolment (AE) thresholds, it’s not quite that simple.
A person earning £30,000 opting to reduce their hours by 40% would see their pay reduce by 40%. However, because of the lower qualifying earnings threshold (LET) under AE, their pension contributions would reduce to around 50% of their full-time value. A worker earning £20,000 would see their pension contributions reduce by over 58%.
Employees reducing their working hours would need to significantly up their pension contributions to match the shortfall. In more generous workplace pension schemes, higher employee contributions would be required to close the gap. For example, where the employer pays 10% and the employee pays 5%, the worker will need to increase their contribution percentage threefold (15%) to maintain the value of full-time contributions for a three-day week. In qualifying earnings schemes, the increase is larger. For example, if pay reduces from £20,000 to £12,000, employee pension contributions would need to increase from 5% to 16.11% to make up the difference.
Pension contributions are unlikely to be a deciding factor when considering whether to work part-time. What is important is that people understand the long-term impact on their pension before making that decision. This is crucial to good financial planning. People might consider upping their pension contributions, but this would be carefully balanced against disposable income – particularly with inflation rates at record highs. Some parents may consider sharing the caring responsibilities to help spread the long-term financial impact.
The biggest change government could make is to remove the LET. It has the potential for the biggest impact on closing the Gender Pension Gap because it would mean women in a pension scheme getting a contribution from the first pound they earn. It can be implemented without the need for legislation and has already been promised by government for the “mid-2020s”. However, this target date can only be achieved if a road-map is agreed now. Employers and employees need time to plan. The clock is ticking and the longer it does, the less there will be in the pension pots of part-time working women.
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