Cicero Policy Briefer

Issue 18, November 2007

The changing face of women’s pensions: the perils facing young women

By Mark Twigg

The position of women in retirement has become firmly established as a major priority area as part of the DWP’s package of long-term pensions reforms. Every commentator has spent the last three years of reform-quite rightly-calling on the Government to ensure fairer outcomes for women in retirement. The latest annual installment in a series of women’s pensions reports, commissioned by Scottish Widows, reveals how pension provision for women is undergoing major changes and that as pensions’ gender gap starts to narrow between young men and women, so will important generational gaps open up between older women nearing retirement and those younger women entering the workplace for the first time.

The reason why the gender gap is set to close is well understood. The package of state pension reforms in the Pensions Act 2007 will reintroduce the link between increases in the Basic State Pension (BSP) and national average earnings (NAEs), and will reduce in the number of years of National Insurance contributions-from 39 to 30 years-which are necessary for women to qualify for a full basic state pension. Equally, we can expect women to do particularly well under the proposed Personal Accounts (see below) which will finally help to close the gap between men and women in terms of private pensions savings.

However, the report outlines a number of key issues which could make a particularly strong impact on younger women:

1. The decline in the role of the State

Whereas 75 per cent of today’s pensioners rely on the basic state pension, this will fall to just 38 per cent of those currently under the age of 30. Personal responsibility will be the key message: People need to save more and work longer. This is not necessarily a popular message, and some will be more able to respond positively than others.

2. Women continue to experience a large earnings gap compared to men

Women earn just 66 per cent of average male earnings in the survey. This is reflected in a similar gender gap in pension savings-women’s contributions are typically just 64 per cent of men’s.

3. Earnings are not the only factor which impact on women

Despite more and more women entering the workforce, even younger women are still much more likely to have child caring responsibilities-one in three women under 30 have dependent children, compared to just one in 10 men. Even where women make it into the workplace, fewer get access to a pension scheme-currently 35 per cent of working women have no occupational pension, compared to just 22 per cent of men. Women are more likely to value ‘soft’ benefits such as flexi-time and childcare arrangements. Employers also contribute more money into male employee’s pension schemes-the typical employer contributions are worth 6.5 per cent of annual salary to a man, compared with just 5.7 per cent for women.

4. Women are more likely to benefit from the new Personal Accounts in 2012

24 per cent of women think that they will contribute to the scheme, compared with 20 per cent of men. Women over 50 may still suffer the impact of means tested benefits, which may make Personal Accounts unattractive.

5. It is clear that women need to change the way they think about retirement planning

Many women over 50 can expect to rely on a spouse. Today, over half of men claim that their partner does not currently have a pension. However, with cohabitation replacing marriage-40 per cent of women will be unmarried by 2030-this picture is set to radically alter. Faced with all these changes, the Report makes clear that so far, women have been slow to react to changes in family and married life:

• One in four women under 30 still think that a future spouse will provide for them in retirement. A similar number of women-26 per cent-are consequently saving nothing for retirement. The report makes clear that younger women cannot afford to bank on either the State or their spouse!
• Women need to think more about pension-sharing on divorce: 78 per cent of couples did not consider the pension arrangements when going through a divorce
• Women under 30 will need to become less risk averse-our findings showed that men are twice as likely to be saving in stocks and shares which generate better long-term returns. The Scottish Widows Report shows that 12 per cent of men under 30 have a stocks and shares ISA compared to just 5 per cent of women.
• To tackle many of the concerns raised by these findings the Report recommends that both men and women will need more information and financial education to help guide them through the changing pension environment. Between one-third and a half of all the respondents could not identify a long-term savings product.

Of course, women over 50 will still have issues to face up to. As half of these women own their home outright, the Report recommends that they need to think about whether they can tap into this asset to help close any shortfall in pension income. They need to consider whether releasing equity will result in them in them losing means tested benefits. They also need to make important decisions about whether to defer retirement-which can greatly enhance their retirement income-and also consider what type of annuity they should purchase (or more crucially what annuity their spouse chooses, given that many married men currently purchase single life annuities which leave their widows with nothing when they die).

So for young women at least, it is time to change attitudes and behaviour. It is no longer the case of what the Government can do to help women, but what can women can do to help themselves.

Mark Twigg can be contacted on +44 (0)20 7665 9537 or click here to email.

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