Getting even - levelling the pension gender gap

It’s a home truth that Irish people are not saving sufficiently for their retirement. Especially women —​  In addition to the gender pay gap, the statistics show that a pension gap exists between men and women. 

The reality is that women may need to contribute significantly more than men to their pensions to have an equal income in retirement. The reasons for this can apply to men also, but on the grander scale research indicates that these issues have a greater general impact upon women.

Longevity

Women typically live longer than men and so need a larger pension pot to be able to support their income needs in retirement. Actuarial assumptions typically suppose that a woman who retires at age 65 will live three years longer than a man who retires at the same age.

Reduced working hours

We’ve seen lots of changes in our working models over the last two years with hybrid working now looking like the new normal for many people. For some, working from home allows more flexibility with additional quality time of an hour or two each day enjoyed in place of the daily commute. For others the daily responsibilities of caring for family continue as they have always done. Women tend to remain the primary care givers to children and aging family members, moving in and out of this role throughout their lifetimes. Reducing actual working hours and taking extended  leave periods e.g. maternity leave can reduce the capacity to contribute to a pension. This is compounded by the loss of growth that would have accumulated over the years.

The impact of off-ramping on earnings power

Many women take an off-ramp at some point in their career, taking time out of the workforce to care for others. The more time a woman takes out, the more dramatic the decline in her future earnings potential when she decides to return to work. In an educated workforce where constant upskilling is a requisite the cost of timeout can add up. The Centre for Work-Life Policy estimated that taking one to two years out of the workforce can decrease earnings potential by 14% and an absence of over three years can reduce earning power by almost 50%.

Case study

Say for example, we compare Matthew and Jane, both 25 year-old young professionals with long-term successful careers in front of them. Both start out on the same salary at the same age, with their salaries increasing by 4% year on year, and both contribute 15% of every pay cheque to their pension invested in the same moderate risk strategy achieving a return of 6% per annum. They would like to have two thirds of their final salary as income in retirement at age 65.

When planning for retirement, the fundamentals remain the same for both Matthew and Jane – save an adequate amount during working years, and invest wisely so these assets can provide sufficient income in later years – but Jane may face the unique challenges discussed above.

Equal is not always equitable

In reality, the sums may work out a little differently – just adding longevity to the equation means Jane has to save more to be able to meet her income needs for her longer life expectancy. A further 1% pension contribution (a total of 16%) during Jane’s working life is needed to meet the additional three years income requirement.

This is amplified if Jane decides she would like to ‘off-ramp’ at age 30 to be able to take care of her young children for a five-year period. For example, let’s assume Jane significantly reduces her working hours resulting in a salary reduction of 50%. She makes 15% pension contributions of her revised pay cheque and then goes back to work full-time at the end of the five-year period on the same salary as before she reduced her hours. Compared to Matthew who has taken no time out Jane’s salary is now 20% lower than Matthew’s at the age of 35 attributed to the off-ramping impact on her earnings potential. In this case, to make up for this impact we calculate that a 20% pension contribution throughout all her 40-year working life is required for her to be able to meet her retirement goal, i.e. to maintain an income of two thirds her salary in retirement based on her life expectancy. That’s a whole 33% more than what Matthew has to contribute over his 40-year working period i.e. Matthew contributes 15% over his working life while Jane must contribute 20% to essentially put them on an even keel going into retirement.

The maths of this scenario is exacerbated if Jane decided she wanted to cease working entirely for a period, therefore ceasing pension contributions altogether.

This is a simple scenario, excluding any tax considerations and revenue requirements, but it might not be that far from home for many working families. Personal considerations likely take priority when families make decisions in regards to care-giving and work-life balance, but the financial implications of any decision should be taken into account. Having a financial plan in place can help give context to decision making.

Figure1: Making things even

Pension contributions, as a percentage of current income, required to meet income needs in retirement.

Source: Davy, 2022

Pensions can be complex. Albeit, they remain the most tax-efficient way to save for retirement. Speaking to an adviser can help you understand the best way to save for retirement increasing your confidence in meeting your retirement goals.