Updated 31 March 2022
The average woman with a degree will be around £5,000 a year worse off in retirement than her male counterpart, according to analysis of new ONS statistics on the gender pay gap. Article by Nick Green.
The income inequalities faced by working women will follow them into retirement, the latest government figures reveal. Lower average earnings mean that women are much less able than men to build up substantial pension pots over their working lives, resulting in a similar shortfall in their potential retirement income.
According to the Human Capital Estimates Report from the Office of National Statistics (ONS), a female graduate will earn approximately 70 per cent less in her lifetime than a male graduate. While a man with an undergraduate degree will earn around £1,116,000 across his whole career, a woman with the same degree can expect only £803,000 due to factors such as career breaks, part-time working and discrimination (including lower pay for jobs that employ large numbers of women). Across all workers (graduates and non-graduates) the difference is even starker, with working women earning around 40 per cent less than men over their lifetimes.
As big an obstacle as it may be during a woman’s working life, this disparity in earnings holds a further, hidden threat. Workplace pensions are built up over several decades, based on a percentage of a worker’s earnings. Lower earnings mean lower contributions, a shortfall which in the long term will be magnified by compound interest. In other words, female graduates can expect to retire with much smaller pension pots than their male counterparts.
Thanks to auto-enrolment, every qualifying employee automatically becomes a member of a workplace pension scheme, and contributes a minimum five per cent of their salary into this. The employer must contribute a minimum three per cent, making a total of eight per cent of salary going into each worker’s pension. This money is then invested in the scheme’s pension fund, with the growth compounding over time.
This is where even a small difference in income can balloon into a large one. (Note that all the figures that follow are approximate, being based on averages over a working life.)
The average male graduate (with lifetime earnings of £1,116,000) would see an annual salary of £26,264 – eight per cent of which would be £2,101. Assuming a 44 year career and pension fund growth of 4 per cent, the male graduate retires at 65 with a pension pot of £252,600.
The female graduate, on the other hand, has an average salary of £18,250 and an annual pension contribution of just £1,460. On the same assumptions, this builds up into a pension pot of £175,600. So we have two identically qualified people, but one with a pension pot £77,000 larger than the other.
This difference in pension savings becomes even starker when we see what it means in terms of retirement income.
It’s possible to estimate the income level that these respective pension pots could generate, and for how long. For example, if the male graduate with the pension pot of £252,600 were to use a drawdown scheme, and this scheme achieved an average growth rate of 4 per cent (reasonable, but not guaranteed), then he could take an income of £1,400 per month, or £16,800 a year, for 22 years. This would be comfortably the length of the average retirement, though he may well live longer. Assuming he also received the full new state pension, his total income could be £25,567 for those 22 years.
But what about the female graduate? Retiring with her smaller pension pot of £175,600 she could choose to take the same income of £16,800 a year – but it would last her just 13 years (given the same basic assumptions). If she wanted her pension pot to last the same 22 years, she would have to reduce her annual income to £11,760 (or £20,527 if the full new state pension is added on).
Going by these figures, it’s clear that the female graduate will be poorer in retirement by around £5,000 a year – or 30 per cent less income from her workplace pension.
Knowing that their workplace pension is on course to deliver a lower income in retirement, is there anything women can do to improve their situation in advance? There may be. The ONS report into the gender pay gap reveals that the level of inequality changes dramatically across women and men’s working lives. Both sexes tend to be paid similar rates in their 20s and early 30s, but then the pay gap widens abruptly as women may have children, reduce their hours or work part-time. The gap is greatest at the age of 48, but after the age of 50 it begins to narrow again.
Having this knowledge can put women in a stronger position when it comes to pension saving. Bearing in mind that their income may dip sharply in their late thirties and early forties, they can potentially increase their pension contributions during the earlier years. This also has an additional benefit, in that early contributions will grow more than later ones, due to compound interest.
For example, an increase of just one per cent in pension contributions between the ages of 21 and 33 could make a significant difference to the final size of a pension pot. Even supposing contributions revert to seven per cent at 34, the female graduate’s pension pot is boosted by over £10,000 to £185,749. This translates to either an extra year of income at the male graduate’s level (£16,800 a year) or £12,600 for the full 22 years – £840 more per year than she would otherwise have received.
Increased contributions in the early years may not fully offset the effect of pay inequality on pensions, but can alleviate it to some extent. Commenting on the ONS report, Gemma Rosenblatt of campaign group the Fawcett Society said, ‘The cumulative impact of the gender pay gap leaves women with a significantly lower lifetime income and pension pot than men – this simply isn’t fair. Government needs to require employers to publish action plans setting out how they will close their gender pays and monitor progress.’