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Financial wellbeing: why pay gaps drive pension gaps and how to narrow them

On average women retire with less than half the income of men. What can employers do to narrow the pay gap in their early career to increase the likelihood of a favourable pension at retirement?

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in. These articles are intended for employers and HR professionals, not for individual investors.

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, but doesn’t dig deep into how one size doesn’t actually fit all.

There’s such a long way to go when it comes to the gender pay gap, but it’s important to understand how that evolves into the gender pension gap at retirement and how women can make the right moves to close their own financial gaps.

It’s a sad fact, but on average, women retire with less than half the pension income of men. Coupled with a UK average gender pay gap of 15.5% in 2020, it’s clear that there’s more that needs to be done when it comes to supporting women and their financial wellbeing.

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

Pay attention to the wage gap

The first step is to prevent gendered salary gaps from happening. 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 pension pots, and not only that, a smaller employer contribution towards retirement as well.

But research from Fidelity has shown that when it comes to saving and running household finances, women come out knowing more than they think. However, the research caveats their findings, citing a ‘lack of confidence’ when it comes to women making their own investment decisions.

So where might the confidence gap come from?

Nerves could play a part. According to an academic paper, a shortfall of confidence accounts for a third of women’s lower levels of financial literacy relative to men. In the study, when participants were asked about investment, retirement savings plans, private saving and wealth accumulation, many women answered ‘don’t know’ initially, but when forced to give an answer in a subsequent version of the questionnaire, actually chose correctly.

This gap in investment confidence could have the potential to erode women’s financial empowerment particularly when women often earn less on average over the entire course of their career than men.

Taking a career gap

Planning the arrival of a new baby is an exciting time for most families but sometimes there’s a hidden worry in the shape of maternity leave and career gaps for some.

Women are less likely to return to work full time after having a baby and are more likely to take on unpaid childcare than men. This can have long-term impacts on finances and confidence, as potential pay insecurity and an even higher wage gap creates a perfect storm.

As a result of lower earnings, increasing money coming in while on maternity leave makes sense. But it shouldn’t be at a cost to a woman’s pension. If women topped up their pension contributions before they left for maternity, they benefit from tax relief and their employers continue to make contributions. This can help build back some of the confidence that could be lost whilst also working on closing the pension gap.

Remember, you can’t usually access the money in your pension until you’re 55 (57 from 2028). Tax rules change and benefits depend on personal circumstances.

Highlighting the government reliefs women are eligible for when they do have a baby, can help to reduce the number of women stopping or opting out of their pension.

Open discussions between partners around their finances when choosing to start a family can also be helpful. 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?

Our Financially Fearless community is designed to give women helpful tips and tools about their finances.

Read more

How employers can help

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

  1. Make financial wellbeing accessible
  2. First of all, if your financial wellbeing 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 requesting 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 during a life-changing event can have a truly positive impact on women’s financial empowerment.

    But at the very least, signposting useful information such as how to minimise debt, or how to manage personal finances at specific life milestones can help boost financial resilience. Delivering financial education sessions at work can also help women who may find it more convenient to fit these around their work schedule.

  3. Stay flexible
  4. 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 on the number of women applying for jobs.

    Interestingly, the pandemic may have paved the way for a possible and more permanent solution. The House of Commons and 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.

  5. Pave the way for parental leave
  6. Encouraging the uptake of paternity, or joint parental leave can also have a positive boost on women feeling financially empowered. 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 their maternity leave policy.

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

  7. Keep an eye on your own pay gap
  8. Finally, each firm above 250 or more employees must publish their pay gap each year. Requiring firms to publish the figures shines a spotlight on the issue, but doesn’t provide guidance on steps to tackle the problem or a solution to pay inequality. Even if you’re not required to publicly publish your pay gap, reviewing it regularly can be a worthwhile task.

    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.

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Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in. These articles are intended for employers and HR professionals, not for individual investors.

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