How to fix the gender pension gap
Article originally published on the World Economic Forum’s Agenda on September 27, 2021 and updated by Mercer in September 2024.
A global perspective
The gender pension gap exists in virtually every retirement income system around the world. The range is remarkable with Japan having an almost 50% gap whereas Estonia’s gap is less than 5%.[1] In today’s values, on an average this wage gap can represent $8,400 per year in the US and £6,000 per year in the UK.[2]
The following graph shows the gender pension gap for most OECD countries.[3]
Graph showing the difference in pensions between men and women aged 65+ in selected OECD countries with Japan showing the highest percentage difference and Estonia showing the lowest.
Causes of the gender pension gap
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Employment related
There is a direct relationship between the pensions arising from occupational pension schemes and employment patterns. Women’s pensions are lower for the following reasons:
- Shorter careers due, on average, to a slightly later start in the labor force and/or career gaps for childbirth, and earlier retirement.
- More part-time work, which might be choice driven but is often to cover the requirements of the parent and/or caregiver role.
- The long-term effects that limited employment for a number of years has on promotion opportunities and pay progression.
- Lower average salaries for full time women workers (as of March 2024, the gender pay gap sits at 16%)[4], which is perhaps one reason why 48% of employers cite the pursuit of pay equity as a driver of their pay transparency strategy.
- The average wage in women dominated industries, such as as hospitality, health and education is lower than in industries dominated by men.[5]
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Pension-design related
There are several design features that aggravate the gender pension gap which include:
- Eligibility restrictions which require a minimum salary and/or a minimum number of hours to be worked.
- Payment of contributions and/or the accrual of pension benefits may not be required during periods of paid maternity or parental leave.
- Retirement payout options may be limited for women if they require a minimum accumulation or a minimum eligibility period.
- Gender-specific mortality tables lead to smaller annuities for women due to their lower mortality rates.
The following adversely impact women because of their longer life expectancy:
- The absence of survivor’s benefits when pensions are paid.
- The lack of indexation of retirement income benefits.
- Switching from Defined Benefit (DB) pensions to Defined Contribution (DC) arrangements, where the same accumulated cash sum may generate a smaller lifetime income for women.
- Draw down/withdrawal models may mean that the income will run out for women before they die.
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Socio-cultural issues
Characteristics within many societies and cultures may aggravate the pension gap. These include:
- The absence of affordable and appropriate quality childcare, which restricts the work opportunities for women.
- The impact of childcare costs on the ability to make additional voluntary pension contributions as these costs are often paid directly by women, leaving them less disposable income for savings.
- Within DC arrangements where investment choice is available to individuals, women are often more risk averse, which can lead to lower returns over the long term.
- Lower levels of financial literacy amongst women in some cases which can also affect their financial decisions.
- Communication and other campaigns from pension providers often ignore needs that are specific to women and use language that does not appeal to women.
- Pension rights accrued during a partnership may not be evenly split on divorce or separation.
- Women may prioritize current spending on the family home and others over themselves and/or longer term saving for retirement.
- Gender stereotyping can lead to educational differences (for example, in math and sciences) and an expectation that women do more unpaid family work.
- Given the variety of causes and compounding effects of the gender pension gap, there is no single solution. Rather, this pressing issue needs to be tackled from several perspectives and by multiple stakeholders.
Managing the value of benefits and pensions within the EU Pay Transparency Directive
The introduction of the EU Pay Transparency Directive[6] widens the scope of the traditional pay review: Employers in the EU and European Economic Area must calculate the value of benefits and pensions as part of their pay transparency obligations. This poses a challenge given the intricacies of employee benefits and pensions, which vary by individual, country and legal entity. With no guidance within the directive, employers will have to rely on national legislation or their own judgement.
To make the process easier, employers can take these three initial steps:
- Build an inventory of all pensions and benefits
- Develop a valuation process of the benefits
- Review data storage, management and reporting capabilities
How to fix the gender pension gap
Bear in mind that it takes a lifetime of saving to finance a pension. For those already in later life therefore, there will be some serious catch up to do.
Here are the key calls to action for relevant stakeholders, according to Mercer and the World Economic Forum:
Short-term actions
- 1 HR leaders
- 2 Pension leaders
- 3 Women themselves
- 4 Governments
Easy wins
- Enable more flexible working arrangements and more sharing of parental leave.
- Introduce targeted financial wellness seminars. Include the small actions women can take now such as sharing child-rearing costs.
Easy wins
- Remove eligibility thresholds and restrictions from pension plans so low earners and part timers can join.
- Pay contributions for paid parental leave and carers leave.
Easy wins
- Don’t go into denial on financial matters. Be interested in your money and make it work harder.
- Lobby for and attend financial education seminars. Ask for support with financial advice. Investments benefit by growth over time, so don’t wait too long.
Easy wins
- Enact enabling legislation to make all jobs flexible. Improve pay rates for low income roles.
- Improve and expand affordable and appropriate childcare options for mothers and fathers.
Long-term actions
- 1 HR leaders
- 2 Pension leaders
- 3 Women themselves
- 4 Governments
Strategic decisions
- Remediate gender pay gaps – this is one of the most important things you can do.
- Remediate career differentials that can lead to pay gaps.
- Introduce personalized models to show the impact of different working arrangements and career gaps on pay and pensions.
Strategic decisions
- Introduce unisex rates on annuities, make sure survivor benefits are built in and index all pensions.
- Ensure that communications contain the best language to engage women.
- Create greater awareness of the implications of divorce on pensions.
Strategic decisions
- Discuss savings, expenditure and pension arrangements with your partner. Ensure you have scope to save for your own pension.
- Improve health factors that will affect your healthy life expectancy.
- Ensure your job role is on the growth trajectory. For example, P&L roles, customer-facing and supervisory roles tend to have higher promotion rates.
Strategic decisions
- Introduce catch up provisions for pension contributions to fill career gaps.
- Ensure pension rights form part of divorce proceedings.
- Introduce pension credits for carers.
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