The growing gender pension gap

LCP’s research, which looked at state pension inequalities, traditional – or defined benefit (DB) company pensions - and newer – or defined contribution (DC) – pensions came to what LCP said were both "surprising, and some quite disturbing" conclusions. 

It found that the state pension gender gap was closing dramatically and was set to disappear; LCP submitted a Freedom of Information (FOI) request to the Department for Work and Pensions, which showed the gap was down to two per cent between men and women for those who retired last year. 

Among private sector pensions, there had also been a major reduction in the gap between men and women in a DB pension scheme, however this was because men’s pensions were set to decline in value. 

According to LCP, what is more worrying is what it dubbed the "new gender pension gap" opening up in the DC space. It found that even though there have been labour market improvements for women, it will take decades for these changes to feed through into what happens to people at retirement. 

New pensions inequalities

The report – co-written by Alessa Livingstone, Laura Myers and Steve Webb – identified six main sources of gender pension inequality: 

• The gender pay gap, which often translates directly into unequal pensions;

• The caregiver penalty, where the much greater number of women taking on caring responsibilities has a negative effect on their relative pension position;

• The longevity penalty, where women typically need a larger pension pot than men because it has to support them over a longer time period;

• Relationship breakdown, where uneven pension accruals during a relationship are not fully equalised following divorce or the end of a long period of cohabitation;

• Differences in the impact of the rules on automatic enrolment, which mean that, amongst employees, women are more likely to be excluded than men; and

• Differences in financial confidence, with surveys often showing lower levels of confidence amongst women when it comes to investing.

LCP said it welcomed the publication of the first official figures on the gender pension gap, but pointed out that state pensions were excluded, even though these provide more than half of the income in retirement of a typical woman.

It added that DWP figures also focus only on people who have a private pension, and so exclude gender differences in the number of men and women who do not have no non-state pension at all.

State pension: End of the gender gap

The gender pension gap in state pensions has almost been eliminated for the newly retired, LCP said. An Freedom of Information request received by LCP found that in 2022-/23, there was a gap of only two per cent between the state pensions of newly retired men and women, and that full equality is expected to be attained during the 2030s; this is because of the phased introduction of the new state pension, which began in 2016.

Amongst private sector DB pensions, the gap between men and women is set to fall sharply; however, this is primarily because men have in the past been the main beneficiaries of private sector DB, and as the impact of scheme closures works its way through into retirement, male DB pensions will fall sharply.

The report also notes that DB pensions remain open in the public sector where the majority of the workforce in the NHS, teaching and local government is female.

However, among DC members, LCP forecast growing inequalities between men and women.; the research found that there is currently a gap of around £25 per week between the average DC pension income of men and women (based on DC pots being annuitised at retirement), but this gap will rise to more than £30 per week (in current earnings terms) by the mid-2040s.

How to close the gender pension gap

LCP is urging for the Government to continue with the annual publication of gender pension gap statistics, with more commentary on underlying causes and a commitment to tackle them. 

It also wants further steps to reduce the inequalities that arise following the birth of a child, including effective policies on shared parenting and greater provision of support for childcare for the youngest children.

LCP added that there needs to be a focus on the effect of the growing number of cohabiting couples, as gender pension inequalities might persist after the break-up of such relationships, as well as the effectiveness of current legislation around pension- sharing on divorce.

Pay gap reporting

Employers would need to go beyond statutory gender pay gap reporting to more fully understand more fully the pay gaps across a firm, as well as take action to tackle the wide range of underlying causes.

Support also needs to be given to new parents; and to workers with caring responsibilities in later life, with a focus on flexible working and allowing these workers to undertake a period of intensive caring without losing their ability to return to paid work at a later stage.

The pensions industry also needsed to do more to understand the gender pension gap within their schemes to see if more can be done to improve the relative position of women and for schemes and providers to equip both women and men to better understand their pensions, to be empowered to make more informed choices.

New generation 

Laura Myers, LCP partner and one of the report’s authors, said: “Our research suggests that there has been welcome progress in some aspects of the gender pension gap, notably the reduction in inequality in state pensions. But there is a real risk of a new generation of pension inequality if action is not taken.  

“In a world of DC pensions in particular, pension outcomes hold up a mirror to inequalities in the workplace and the different labour market experience of men and women.   Without concerted action – by Government, employers, and the pensions industry – to tackle these underlying causes, the gender pensions gap may be with us for decades to come.”

Kim Brown, chair of the industry-wide ‘Pensions Equity Group,’ said: “Inequalities in pension outcomes need not be a permanent feature of the pensions landscape.   This research shows that progress is possibly in reducing aspects of the gender pension gap, but important differences still remain.   It is vital that government, employers and the pensions industry work together to tackle the multiple causes of pensions inequality.   Only in this way can we make sure that all people can look forward to retirement with confidence.”

Nigel Peaple, director of policy and advocacy at the PLSA, said whether single or in a couple, the good news is that a combination of a full state pension and modest savings in a private or workplace pension will get most people to the level of the minimum retirement living standard.  

"For people retiring today, higher interest rates also mean they will not have saved as much to secure the same level of income through an annuity as just a few months previously.  

Peaple added: “At the minimum pension savings rates currently prescribed under the UK system, many people won’t save enough to achieve the retirement they might expect."

“The key is to change pension policy so that employers help people save more. We are calling on the government to gradually increase automatic enrolment saving from the current level of 8 per cent up to around 12 per cent, starting after the cost-of-living crisis has eased at some point in the later 2020s and finishing in the early 2030s."

“We want to see a move to a 50/50 split, so employers pay in the same as their employees. If the UK does not increase its pension saving, many more people will fail to have the pension income they have hoped for and be left with no choice but to keep working late into their 60s.”