In honour of International Women’s Day, I’d like to make a statement: “I am not a man”.
There, I’ve said it. This is not me nailing my colours to any kind of binary mast or indeed anything to do with my identity at all. It is to do with the assumptions that the world of finance has made over the years about the way my life would go.
An industry that doesn’t even try
I’m thinking in particular here about pensions – and about the statements I have received over time from various workplace pension schemes and the like. For the past I-don’t-know-how-many decades, the projections that showed me how much pension I might receive if I ever got to that elusive retirement date have made certain assumptions about what is ‘typical’. And, by and large, it has been deemed ‘typical’ for a worker to pay a little bit more into their pension each year all the way through, without a break, until retirement. Which, in my case, will be when my age matches the last two digits of the year I was born (ah, such symmetry).
Now, call me controversial if you will, but I’m going to stick my neck out here and suggest that this ‘typical’ worker just might not have the full complement of X chromosomes. These types of projection take very little account of the way that a woman might approach her career or how her earnings might behave over her lifetime. You could be forgiven for thinking that anything that deviates from a nice straight path with a gentle upwards incline is just too complicated to contemplate. And so the industry doesn’t even try.
A bit of fun, anyone?
Let’s have a bit of fun with this and imagine that we have been tasked with forming a committee of women of all ages and occupations, to design a system from scratch that will provide pension income for people in their retired years. It’s a system that is going to require money – and that will have to come from somewhere. So, we will have to make some assumptions about how to raise this money and how to distribute it. The question is, where do you start?
If your mind has gone blank here, I’m going to help you with a few starting points that might sound familiar. And I invite you to ask yourself if any of them would be ones that you might come up with yourself.
- An individual’s entitlement to retirement income will be based on how much they earn throughout their lives – regardless of how hard they have worked
- The amount of retirement income an individual can build up will be negatively affected by: choosing a career that doesn’t pay well (regardless of its benefits to society); taking a career break or going part time to have children (who are, incidentally, our future); downshifting a career to accommodate family life/care for family members such as elderly relatives; working in an industry that pays unequal amounts to different people for the same job…
- The earlier in someone’s life that they take a drop in earnings (such as during an individual’s child-bearing years), the worse the financial effect on their retirement pot will be (this is because investments need time to grow)
- While an individual is working, all the annual statements they receive about how much retirement income they are building up will assume that there will be no life events that might cause their earnings (and therefore their pension contributions) to fall – in other words, it will be assumed that their salary will grow by inflation each year until they retire
- When working out how much an individual and/or their employer needs to put into their retirement pot, no account will be made for the possibility of an earnings-reducing life event – the responsibility to take that into account will fall to the individual
The situation as it stands
I’ll stop there – you get the idea. When we lay it out like this, it’s hard to imagine anyone thinking that such practices would result in a fair and reasonable outcome for all. Yet this is the situation as it stands. And – despite big moves in the equality landscape and quite a bit of noise about this – very little new has come from the drawing board.
Baffling pension statements
I have run a handful of online session for small groups of young women. A couple in particular stand out where the women were all in full-time work and in their mid-to late twenties – and some of them were on the brink of the kind of life events that can seriously shake a girl’s ability to provide for her future. When I mentioned the baffling pension statements that get churned out every year, not one of these women had thought about the effect that a period of reduced earnings might have on the pension illustration provided.
Shielding our daughters?
Who can blame them? This isn’t something that anyone thinks to point out at the start of a career. I’d like to compare this gap in knowledge with the way generations of women have conspired to shield their daughters and granddaughters from the true horrors of childbirth and the menopause – a sort of collective layer of protection. But, in reality, I’m not sure many people have even thought of it in this way. So entrenched is the idea that long-term finance is designed to fit what was – historically – a male pattern of working, that we have neglected to consider how pension provision is affected by the life events that still have a disproportionate impact on women’s working lives.
What can be done?
So, I’m aware that it’s all well and good to write about this sort of thing, but what in the name of Mike (who he?) can be done about it? I dare to hope that new-school economists and policy makers are all over this sort of thing, but those in charge have had other things to deal with lately and, until there’s more bandwidth for some free thinking, a good place to start might be better information for those starting out in their careers.
The recommended amount to save for retirement?
I want to make it really clear here that I believe that increased education about how pensions work would benefit everyone – not just women. A report by the Pensions and Lifetime Savings Association published in July 2018 found that over half the people asked thought that the government’s 8% minimum automatic enrolment contribution into a workplace pension is the recommended amount to save for retirement – with a third of people believing this would provide a “comfortable” retirement.
8% of not very much
It doesn’t take much mathematical prowess to work out that when contributions into a pension are expressed as a percentage of salary, a low salary means a low amount going in – after all, 8% of not very much is… not very much. Add to that the likelihood of a someone’s pay in some of the earlier years being knocked for six by part-time working or a career break, and that contribution – in real pounds and pence – gets even smaller.
Explain it to the young in plain English
On this note, I believe all of us in the financial services industry – as well as family members and employers – have a job on our hands to let our young folk know in plain English that providing for their later years is going to be, in the main, down to them. And that this requires a basic understanding that what you get out depends on what you put in. So, when someone is considering the financial consequences of starting a family, re-training or travelling the world, we need to automatically be adding “Think about your pension!” to the list of things that need to be considered. Not so that they change their mind. But so that they are informed.
Pension providers could help
I’m straying out of my pay grade here, but I think pension providers could really help with this last point. Wouldn’t it be useful if they routinely included a couple of scenarios in the pension illustrations to show the effect of a period of low-to-no earnings at different stages in a worker’s life? I hesitate to suggest anything that will complicate those statements further, but surely someone could come up with a clear way of accounting for a commonplace life event like having a child. This would cement the idea in young workers’ minds that pension planning is as necessary a task as clearing enough space in the junk room for a cot – and would have the added bonus of allowing couples to make informed decisions about which one of them might be best placed to rein in the earnings for a while to take care of small children.
Utter bamboozlement
As a woman who took a long career break and who, at the start of my working life, found any communication about my pension so unfathomable that I assumed it wasn’t meant to be read by me, I would have really welcomed some better explanations. This was all a very long time ago and yet, still, women are telling me that their pension statement remains a source of utter bamboozlement. And the fact that the retirement income shown in the illustration is based on an assumption that earnings – and therefore pension contributions – will continue to rise smoothly every year without fail – well, that is news to them too.
A few choice statements of our own
We need to be clear about this. And we need to help explain exactly how a pension works. Because, as things stand, I can’t help thinking that if my imaginary committee of women were consulted about the usefulness of a pension statement, they would come up with a few choice statements of their own!
Happy International Women’s Day.
* PLSA Hitting the Targets, Final Recommendations Summary
A bit more understanding
I have been mostly talking here about the pensions that you contribute to in the workplace – or a personal pension. But I do just want to add a quick word about the State pension. This provides a guaranteed income in retirement (currently a maximum of around £9,600 a year) based on:
- The number of years worked – 35 for the maximum
- Income being above a certain threshold.
To their credit, UK governments have actually factored in the ‘cost’ of someone taking time out of the paid labour market to bring up a family. If you have a child under 12 and you register for Child Benefit (even if you’re not entitled to it) you are still building up ‘years’ towards your state pension – the same as if you had been paying National Insurance.
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This article represents the personal opinion of Carole Haswell only and does not represent any opinion of Parallel Lines the Advisor Collective Ltd. Financial decisions should not be made on the basis of this article
- All content is based on my understanding of current legislation, which is subject to change.
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