The pensions pay gap: What are the long-term consequences of unequal gender pay rates? | Fieldfisher
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The pensions pay gap: What are the long-term consequences of unequal gender pay rates?


United Kingdom

A House of Lords debate on 22 November 2021 outlined how differences in gender pay rates create lasting imbalances in people's lifetime incomes and economic freedoms.
The persistence of the gender pay gap even after people have retired from working life is frequently overlooked in the context of delivering equal pay and conditions for UK workers.

During a House of Lords debate on 22 November 2021, following a question posed by Lord Sikka, a Labour life peer, about the government's efforts to tackle entrenched gender pay inequality, the pensions gap was highlighted as an issue of major concern.

The pensions gap, it was noted, contributes to societal imbalances and curtailment of economic freedoms in later life for those who have lost out on access to pension benefits during their working lives, for a variety of reasons.

According to some estimates, the gap in pension payments between men and women is at least twice the size of the working age gender pay gap.

What creates the pensions pay gap?

There are a number of reasons why the gender pensions gap exists and why it is larger than the pay gap among working age people of different genders.

These include:

1. Historic influences

Pensions are correlated in amount to historic as well as current earnings, so pensions reflect the historic gender pay gap as well as the current gender pay gap.

Differences in gender pay rates have continued despite the 1970 Equal Pay Act. The persistence of those differences is reflected in the gender pensions gap.

2. Career breaks

Career breaks are likely to result in lower pensions as pension contributions and pensions benefit accrual will generally be lower or non-existent during the period a person spends away from their career or job.

Statistical and anecdotal evidence indicates this is likely to impact disproportionately on women, who are more likely than men to take career breaks for raising families.

3. Earning thresholds

The threshold earnings of (currently) £10,000 per annum for pensions automatic enrolment is also likely to impact disproportionately on women, who make up a higher proportion of workers in low-paid and part-time roles (often linked to family or other caring responsibilities) compared to men.

As well as not being automatically enrolled in a workplace pension, workers earning £10,000 a year or less are likely to find it more difficult to set aside a proportion of their earnings for pension savings.

4. Part timers

Although the law has since been rectified, following a series of court cases culminating in Preston v Wolverhampton Healthcare NHS Trust (which, in the House of Lords in 2001, was concerned with limits on claims by part-time workers to lost pension rights) and in the Part-time Workers (Prevention of Less Favourable Treatment) Regulations 2000, to ban the exclusion of part-time workers from occupational pensions, the past exclusion of part-time workers (the majority of whom were female) has left a legacy of pension income inequality.

5. Pension benefit reforms

Sex equality reforms in pension benefits have generally benefitted men.

In the 1990 Barber v Guardian Royal Exchange case, the European Court of Justice highlighted that female members of defined benefit (DB) pension schemes had a lower normal pension age than male members (typically 60 for women and 65 for men).

This meant that before 1990, female members of DB schemes could draw full unreduced benefits at age 60, whereas male members had to wait until age 65. The European Court of Justice in the Barber case held that this was unlawful.

The principle of equal pay for equal work was applied to require that male members have the right to draw full unreduced DB pensions at age 60 for service from May 1990, where female members had this right.

Ultimately, most UK DB pension schemes equalised their normal pension age at 65 (or higher) for both men and women for future service, so that both men and women had to wait until 65 to draw full unreduced DB benefits.

However, for most UK DB schemes there remained a "Barber window" between 1990 and the date of equalisation of normal pension age, in respect of which both male and female members were entitled to draw full unreduced pensions at age 60.

6. DB v DC pension schemes

Since DB schemes tend to be older than DC pension schemes, DB schemes seem likely to reflect to a greater extent historic inequalities in access to pensions and therefore to have a higher proportion of male than female members.

Generally, DB schemes provide greater benefits for members than DC schemes. Accordingly, a preponderance of male over female members in DB schemes will have reinforced the gender pensions gap.

How is the pensions gap being rectified?

Following the publication of a call for evidence on, and a review of, the pensions gap between July and October 2020, the government published its response in October 2021.

The headline outcome was the government's commitment to allow individuals making pension contributions to net pay schemes to claim a top-up payment from 2024-2025, aimed at equalising pension outcomes for all lower earning pension savers.

According to the government's analysis, up to 1.2 million individuals, 75% of whom are women, could benefit from this scheme by an average of £53 a year, regardless of how their pension scheme is administered for tax purposes.

This scheme is therefore of only modest benefit and does not address the historic causes of the current imbalance.

The law has required equal pensions for part-time workers since 2000 under statutory regulations and before that under case law.

Pensions inequalities for part-time workers ought to be reduced in line with this. Automatic enrolment has benefitted employees generally in terms of their pensions, but those who opt out of automatic enrolment tend to be predominantly the low paid, and therefore more likely to be women.

A version of this article first appeared in Employee Benefits.

This article was authored by Jeremy Harris, pensions partner at Fieldfisher Manchester.