We know that the gender pension gap is already large at the time of retiring, but it will increase further as many women are destined to outlive both their partner and their pension savings. This is one of the consequences that we are only beginning to see following the global transition towards DC.
Let’s have a second look at the gender pension gap in the UK, now focusing on the pay-out phase. From a recent research report by Pension Policy Institute and NOW: Pensions we know that the gender pension gap is largely explained by two factors: i) the gender pay gap; and ii) women being more likely to stay at home, or work part-time, caring for children and older relatives. But at retirement, when pensions savings become an income, the pension gender gap will continue to grow mainly since women, on average, live longer than men.
The family contract
As outlined in The Gender Pension Gap – Part 1, many women take ‘one for the team’ and stay at home with children and later go back to work part-time. Let’s take a closer look at a couple who is still married at retirement and who is looking forward to spending the rest of their lives together, until “death do us part”.
Today in the UK, the average remaining life expectancy of women aged 65 is 2 years and 2 months longer than for men. For couples near retirement, the wife is on average 2 years and 7 months younger than her husband. This means, in expectation, that a married woman retiring today needs to have enough extra savings to cover almost 5 years as a widow. In the past this was not a problem since a widow’s pension was included in most DB pension schemes.
If such an arrangement doesn’t exist, a married couple can decide to extend their family contract, to cover the widowhood period by purchasing a so-called joint-life annuity which continues to pay out a retirement income as long as at least one of the purchasers is alive. Today, approximately 12 percent use their pension pot to purchase an annuity, and of those only 30 percent are joint-life. There is a gender twist in the annuity market benefiting women. Annuity rates are set using unisex mortality tables, which means that women are getting 1 year and 1 month for free.
With the transition to DC pensions and the introduction of Pension Freedoms, it is, therefore, very likely that a woman in the UK will outlive both her husband and her pension savings by several years and is destined to live out her final years on state pension alone.
The winners’ curse in the longevity lottery
The biggest financial retirement risk is that we will outlive our pension savings. It is not sufficient to have enough savings to meet the average life expectancy of 65, which women in the UK will outlive by almost 21 years. By definition, half of us will live longer than life expectancy, 20% of us will live 8 years longer than expected and 5% will live an additional 13 years. As individuals, we don’t know beforehand who will be winners or losers in the longevity lottery. It is not certain that smoking, drinking and eating cholesterol rich food will kill you, but, arguably, it helps.
The luckier someone becomes in the longevity lottery, the more likely is that he/she will outlive their pensions savings unless they have a life-long retirement income [i.e. an annuity or a DB pension]. A few weeks ago John Ralfe told me that the British Steel DB Pension Scheme, had, in 2017, 119 pensions in payment where the beneficiaries were over 100 years old. The oldest of those was 107. It should not come as a surprise that almost all these centennials are women. The longest living person in the world was Jeanne Calment, a French woman who died in 1997 at 122.
We need a system that works for ordinary people
Auto-enrolment has been a great success helping many women without a pension begin saving for retirement. To narrow the gender pension gap, it is crucial to increase the number of years that women work fulltime so that they can build up sufficient pension savings. But even if this can be achieved, under the current Pension Freedom legislation, the gender pension gap is behaviourally rigged to widen dramatically at older age, due to our behavioural biases.
From a behavioural perspective, we know that many individuals intuitively find a large lump-sum of cash (instant gratification) more attractive than a monthly life-long income (deferred gratification). This impacts women more since the average married woman retiring today is expected to live 5 years longer than her husband and there is also a 50% chance that her lifespan will be longer than average. In other words, it is likely that there will be a lot of life left at the end of the pension savings.
To be able to deal with the pension gender gap at older age, we need better policies and solutions for the retirement period. A practical challenge is that the pension policy debate is dominated by politicians who enjoy a gold-plated DB pension, civil servants with a DB pensions and industry specialists earning multiples of the median income. Typically none of these individuals faces serious pension problems themselves and, therefore, we see a lot of discussions regarding, for example, flexibility and bequest motives that are luxurious problems for the fortunate few.
UK needs to appoint a new pension commission
To deal with the widening pension gender gap at older ages, the UK needs to repeat the success of auto-enrolment reform. Inspired by the work done by the Turner Commission for auto-enrolment, it is about time to appoint a commission for the retirement phase to work on closing this gap that impacts so many people in later life.