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25 Oct 2021

Why pay gaps drive pension gaps, and how to narrow them

Financial wellbeing: a hot topic, but not one that’s often discussed in relation to just one demographic. Rather, the term is used to encompass whole workforces, without taking the time to dig deep into how to provide financial wellbeing for specific microcosms of the workforce.




In particular, careful thought is not often given to how women fare with their finances when compared with men. This is true even though there’s such a long way to go when it comes to the gender pay gap, and how that evolves into the gender pension gap at retirement.

On average, women retire with less than half the income of men. And what is more, research has shown that even during their career, women seem much more uncertain than men about how much income they want in retirement. Coupled with a UK average gender pay gap of 15.5% in 2020, it’s clear that women are at a significant disadvantage when it comes to financial resilience in the short and long term.

So how can employers take the reins and help to narrow the pay gap in women’s earlier career to increase the likelihood of a favourable pension at retirement?

Being a woman can decrease financial resilience

On average, women earn about 15.5% less than men, according to the Office for National Statistics. A smaller income can mean less ability to pay for unexpected emergencies, higher levels of debt, less spare cash to put towards their pension pots, and not only that, a smaller employer contribution towards their retirement as well.

But on top of all these factors, what if some of society’s long-held views of women and their lack of confidence with their personal finances still stand? According to the academic paper, Fearless Woman: Financial Literacy and Stock Market Participation, a shortfall of confidence accounts for a third of women’s lower levels of financial literacy relative to men.

The research concludes: “Particularly in the context of long-term financial decisions such as investment, retirement savings plans, private saving and wealth accumulation, lower levels of confidence can be detrimental to women.”

Women not only experience a chasm in the pay gap, but may not even have the financial confidence needed to accurately plan and manage their finances.

The motherhood penalty

Many women find that their careers are detrimentally affected when they have children. More often than not, it’s the woman who gives up work to ‘pay’ for the cost of childcare, either by giving up work entirely or reducing the number of hours they work.

Many women don’t realise that taking those long career breaks to have children can have a disastrous impact on their pension pot. As a result of lower earnings, women may often try to increase money coming in while they’re on maternity leave by reducing their pension contributions. However, if women cut pension contributions before they go on maternity leave, then their employer doesn’t have to make any contributions while they’re away.

We need to start seeing open discussions between parents around the long term unequal financial consequences when choosing to start a family. Although it may seem ‘none of your business’ as an employer, if women return to the workplace worse off financially than before starting a family, at what point does this start to become a concern?

How can employers help?

So, what can you as their employer do to help narrow the pay gap, increase resilience and prevent the pension gap from manifesting?

First of all, if your pension provider offers financial wellbeing as part of the pension package, or even if you have invested in a separate financial wellbeing service, it’s well worth finding out if they offer specific sessions tailored for women.

Improving female financial capability in areas like how to manage a pension when on a career break, or even how to manage your finances in the event of a relationship breakdown, sound very specific but can be particularly useful for women.

At the very least, signposting useful information such as how to minimise debt, or how to manage personal finances in the event of a crisis can be pertinent for women who may not know where to start when trying to get to grips with their finances. Delivering financial education sessions at work can also help women who are often time poor and who may be able to access these services more readily in work hours compared to when they are at home.

Interestingly, the pandemic may have paved the way for a possible solution. The House of Commons and the Women & Equality Committee have previously said that flexible working lies at the heart of addressing the gender pay gap. Allowing men and women who are raising children to work flexibly affords them the opportunity to work around some of the time constraints that being a parent entails.

And that’s not all, a commitment to flexible working is an attractive benefit when individuals are debating prospective employers – it’s a way of attracting and retaining talent. In fact, when insurer Zurich began offering flexible working options, they saw a 16% increase in the number of women applying for jobs.

Second, employers should be facilitating men taking paternity leave, or encouraging joint parental leave. Currently, a generous scheme offers a few weeks to a couple of months of parental leave. This should be extended to allow both parents to share the full benefits of a comparable maternity leave policy.

For too long, women have had to change their behaviour in order to achieve the levels of income they had before having children. However, employers should recognise that there are simple solutions to help all women and men enjoy more comfortable levels of income after becoming parents.

Finally, each firm with 250 or more employees must publish their gender pay gap each year. Requiring firms to publish the figures shines a spotlight on the issue and helps to track the problem. However, it doesn’t provide guidance on steps to tackle the problem or a solution to pay equality.

Analysing the gaps between employee salaries can help you improve as a firm and give you key indicators of where you can take steps to improve recruitment practices, promotion and internal policies centred on family leave.

This article is provided by Hargreaves Lansdown.

In partnership with Hargreaves Lansdown

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