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The pensions savings gap

Martin O'Gorman, VitalityInvest Pensions Technical Analyst

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On 6 November 2018 the state pension age for both men and women in the UK was equalised for the very first time at age 65. Originally set at 65 for men and 60 for women, the gradual increase in retirement age for women means that women who turn 65 on 6 November will be the first to have to wait for as long as men to qualify for their pension. 

Why the change...

Significant improvements in life expectancy alongside an increase in the average age of the general population are two of the key reasons for the change in state pension age. These factors also need to be considered in relation to a projected decline in the working population relative to the number of pensioners. In 2014 there were 3.2 people of working age for every person of pension age, but this ratio is projected to fall to 2.7 by 2037. The net result is a projected reduction in tax revenues at a time of higher public expenditure, meaning some change was inevitable. Equalisation regulation that was implemented over 25 years ago has been accelerated both in 2011 and again in 2014, so that from December the state pension age for everyone will begin increasing, eventually moving to 67 by 2028. 
These changes come at the same time as the value of the state pension continues to evolve, but the impact of the changes to state pension age are still the subject of ongoing debate. Women against State Pension Age Inequality (WASPI) have said they will continue to support a call for compensation for those who were unaware that their state pension age was going to rise. Debbie de Spon, a spokesperson for WASPI explained "Equalisation is not just about the age you reach retirement, but also your ability to generate a full state pension entitlement, and pay into a private pension, to have any hope of security in retirement,". 

The impact…. 

The problem identified by WASPI was also captured in a recent House of Commons Library Briefing paper, which highlighted that state pension outcomes for women have tended to lag behind changes in their social and economic position. The average weekly state pension amount received by women was 82% that of the average for men: on average women received £126.72 per week, compared to £153.97 for men. For recipients of the new state pension, introduced in 2016, the difference is smaller: women’s average amounts under the new system have been 95% of those for men. 

The Government did seek to lessen the impact of the changes to state pension age by softening the impact of phasing in the new retirement age, at a cost of £1.1 billion, but the 2011 changes impacted around 2.6 million women.

Alongside the issue with state pensions, the discrepancy in private pension outcomes for women and men has a number of similar underlying causes: women currently earn on average less than men across their working lives and are more likely to take career breaks. As a result women are likely to have lower workplace pensions, they may not be eligible for auto-enrolment into a workplace scheme if they undertake part-time work, and low earners – mostly women – often pay 25% extra for their workplace pension. 

Furthermore, women are expected to live longer than men on average. With most private retirement provision today being funded through money-purchase-type arrangements, women (on average) need to save more than men to fund the same level of retirement income from a particular retirement age. Set against this, Vitality’s data gathered from over 10 million life years’ of customer experience shows how individuals’ lifestyle and biological characteristics have a significant bearing on their life expectancy. This shows the criticality of developing financial plans based on individuals’ particular circumstances. It also reinforces the relationship between healthy living and savings.

All of the above issues highlight one of the key problems with pensions – how do you address effective outcomes and apply fairness across a fragmented system? There is no easy answer to this question – making changes to benefit one sector of society potentially impacts other sectors. But there are some other ‘quick wins’ that could be implemented that would also help to close the pensions savings gap. The two most obvious are:
  • Change the way tax relief is provided to low earners in net pay arrangements so they are not paying disproportionately more for their pension savings, and 
  • Reduce the auto enrolment thresholds so as to support more part-time earners with their need to save. 
The implementation of the Single Financial Guidance Body should also be pivotal in the drive to improve financial awareness across society if it can be used successfully and the Pensions Dashboard will be a key component to improve consumer engagement in pensions.

In addition, product providers should work with financial advisers to develop products and tools that allow advisers to create financial plans for their clients that not only take account of gender differences but factor in lifestyle choices and health circumstances too.

VitalityInvest is a trading name of Vitality Corporate Services Limited. Vitality Corporate Services Limited is authorised and regulated by the Financial Conduct Authority.