The Problem with Pensions

A decade ago, women could claim their state pension when they turned 60, and men at 65.

With recent changes, the qualifying age for both sexes fell in line with one another, and almost four million women born after March 1950 felt the impact of this as the government increased the state pension age from 60 to 66.

But gender equality wasn’t supposed to be financially painful for women, was it? Yet that’s how it has been described by all those who experienced the sharp rise in the female state pensionable age since 2010. Another significant marker in 2010 was how the number of people (male and female) retiring after the age of 70 had doubled.

Research by the Institute for Fiscal Studies conducted in 2017, found that the increase in the pension age had placed notable pressure on the poverty rate of women in their early sixties. The 1940 Old Age and Widow’s Pensions Act introduced the 60/65 disparity in favor of women in an era of what was known as entrenched gender discrimination. It was an era when women were generally expected to devote themselves to home life and raising children, while men were seen as the main earner of a family.

The earlier pension age for females spilled over into an environment of extreme disadvantage for women in the workplace, when they tended to earn much less in comparison to men and accumulated far fewer years of national insurance contributions.

The past 70 years has however, seen a dramatic change in the workplace structure and with the working age employment rate gap closing.

Then 2020 was upon us.

Recent analysis conducted by Aegon revealed that 15 % of women are likely to decrease their pension contributions over the next five months, compared to 10 % of men, meaning the pandemic apart from everything else, may set us back some years and further widen the gender pensions gap. The research also found that men were more likely to take advantage of possible future economic recovery by investing more into their pensions. That means, men seem to be investing to increase value on their assets, while women are becoming more cautious and holding on to what they have – pushed on by uncertainty.

It would however, be very unfortunate if the equality debate were to overshadow discussion of other, deeper-set problems with UK pensions. Afterall, one of the reasons the state pension gender equalisation debate even gets the attention it does is because it is relatively easy to understand. Far bigger injustices are lurking in the sphere of the private, rather than state, pension.

The introduction of “auto-enrolment” of workers into “defined contribution” workplace schemes in 2012 was a good reform, using people’s natural inertia to nudge them gently toward saving effectively – and the results were quite impressive with the proportion of employees covered shooting up from around half to three-quarters in 2018. This was because there was rampant ignorance and confusion among the public about how the kind of pensions which they were being enrolled, actually functioned.

A 2018 survey targeting employers on the importance of educating their staff, found that around a quarter of people aged 55 and over admitted that they didn’t know how their pensions worked and never even checked their own pension pots.

In a 2016 speech, labeled ‘the great divide,’ the Bank of England’s own chief economist, Andy Haldane, confessed to being baffled by pensions. The same Haldane that said in March 2017 that “Bad managers stand accused of holding back economic growth in the UK by undermining productivity, preventing pay, and living standards rising.

The question has to be, has anything been done to rectify this knowledge gap since?

Well… the government did finally get around to the promised “pension dashboard” so people can monitor their pension pots. To make income drawdown less confusing and help people make well-informed decisions, the FCA also set out several proposals and recommendations recently. And the new rules will be coming into force from August 2020.

But aside from the general importance of saving, it’s evident that through the years very little, if anything, was done in the form of mainstream education until the last decade, that’s why there should be a much broader government-sponsored financial literacy drive to introduce people to the basics of compound interest, inflation, portfolio diversification, annuities, and the fundamental importance of keeping costs down.

On further investigation, and a factor in the new proposals was that the FCA discovered that a third of people who didn’t receive advice currently have their savings invested in cash or cash-like assets – meaning they could be losing out on significant returns. So, the knowledge gap is still there – and still sizeable even today.

Clearly, it’s not just gender equality in the state pension age that’s an issue here, there’s a much broader gender equality in a paralysing sense. And that is believing our pensions are out of our control when they’re not! That’s why all of us – women and men alike – should seek the proper advice and get to work on finding out what we can do today to invest and start producing healthy returns for the future.

Our future!