Cicero Policy Briefer

Issue 2, July 2006

A woman’s worth: how will women really benefit from the Pensions White Paper?

By Dr Oonagh McDonald

The proposed reforms of the state pension are, on the face of it, good news for women. They recognise that many of the assumptions of the post-war Beveridge system, in which most men were expected to work and pay contributions from the age of 16 and women were expected to rely on their husbands for support, are old-fashioned and increasingly irrelevant to the ways in which society has since changed.

However, one aspect has not changed – and that is the role of women as carers, not only of children but also the disabled, the chronically ill and, increasingly, of elderly parents. The changes for women carers are long overdue. Facing poverty in retirement, having struggled to look after elderly parents or the disabled or chronically ill, was too much to bear.

The measures proposed by the Government will, according to the White Paper, help to ensure that a far wider range of unpaid social contributions is recognised for the purpose of building entitlement to state pensions. It will bring about an immediate and considerable increase in the number of women retiring on the basic state pension – around 70% of those reaching state pension age in 2010, rather than roughly half without the reform. The Government, however, has postponed the introduction of these reforms until after the next election, which will have to be held in May 2010 at the latest. It is therefore difficult to see how women due to retire in 2010 will benefit from reforms which are long overdue.

Women’s state pension records are already improving, largely as a result of the introduction of Home Responsibilities Protection in 1978. Women’s pension entitlements are, on average, also catching up with men’s. Women’s earnings are improving as well, though there remains a significant gap between average male and female earnings: many women continue to cluster in low-paid but traditionally feminine jobs, and have little opportunity to acquire the skills or education to either improve earnings or take the further step of moving into non-traditional, but higher-paid jobs. Crucially, though, the fact that women are earning more and no longer depend on a husband’s or partner’s earnings or pension provision is still not acknowledged by the financial services industry: one has only to look at their advertisements, which will inevitably depict a man making financial decisions on behalf of either himself or his family, rather than a woman making her own decisions.

With regard to the state pension, the Government shows its concern for women’s pension provision. But when it comes to personal pension provision, that concern vanishes. The Government is apparently either ignoring or ignorant of the statistics which show that a woman will receive less income in retirement from their personal pension plans than a man will. Here is an illustration:

A man and a woman, both aged 65, have £100,000 with which to purchase an annuity. They both buy a level annuity at the best rates on the market at present. They both die at the age of 85, which is more probable than the woman outliving the man. The man receives an annual income of £7,116 and a total income of £142,000.32p. The woman receives an income of £6,636 per year and her total income over the period is £132,720, which is £9,600 less than the man.

Murmurs and mutterings regarding actuarial tables can be heard at this point. But here are a couple of points to be considered. First of all, the same actuarial tables apply to defined benefit schemes, but there, following the Barber judgment of 1990, the tables are set aside so that men and women receive the same pension for the same contributions. This is a very serious issue. It means that as time goes on and private sector defined benefit schemes disappear, there will be a great divide between public sector and private sector pension schemes on this as well as other grounds (such as inflation-proofing). Once people realise what is going on, resentment is inevitable. There are signs of this resentment already, but as yet it is not as forceful as it could be, as the fact that a woman gets less annual income than a man is not revealed in any of the accompanying documentation.

What is the best way out of this problem? What is the best way of meeting what the government claims is the desire of many people for a secure income and for women to obtain as much income as possible from their savings regardless of their sex?

The answer is to let people choose how they wish to deploy their pension pots. The Canadians dealt with this issue over 20 years ago by allowing people to choose to annuitise or to place their pension pots in a Registered Retirement Income Fund, invested by specially registered fund managers with the possibility of changing fund managers if they wished. In Canada, pensioners are required to take a certain percentage of the fund in income each year. In the UK we already have an appropriate means of ensuring that the fund is not spent all at once in our arrangements for Self Invested Pension Plans, which are subject to upper and lower limits of income withdrawal based on the Government Actuaries Department estimates, and reviewed every three years.

The Canadian system has been in existence long enough for us to see that the ‘experiment’ has worked. With this approach, not only are people given a choice but both the insurance and the fund management industry have the opportunity to provide a wider range of products, and insurance companies will not be faced with ever-increasing demands placed on their capital by solvency requirements and increasing longevity risk. But alas, when it came to personal retirement income, the Government put its blinkers back on – and will thus do all the women saving through the system of ‘personal accounts’ a great disservice.

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