Article to be published in Pensions World magazine outlining women’s pension reform
by Dr. Ros Altmann
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The UK state pension system discriminates against women. It was not really designed with the idea of women actually needing their own pensions at all. Over the years, although women have been occasionally offered extra ‘credits’ into the National Insurance system, they have still not been properly treated. Perhaps because women are particularly unaware about financial issues, or perhaps because pensions are just so very complicated, women have not had any champions for their cause, to actually ensure that they are properly catered for in our pension system.
Of course, back in the twentieth century, when pensions were originally introduced, most women stayed at home and relied on a husband for their income. The idea of women needing their own pension was not really considered. But, over time, society has changed enormously, yet state National Insurance pension system is still dreadfully old-fashioned and discriminates against women.
What is even worse is that it is not just state pensions in which women are penalised. They lose out in private pensions too. Women are less likely to have high-paying jobs and generally work for a smaller part of their lives than most men, so they are less likely to be covered by occupational pensions. They will also be less able to save as much as men, due to having lower lifetime earnings. Isn’t it about time we recognised that women must be properly included in our pension system?
Women lose out in pensions in so many ways. If we think about the two main functions of pensions, there is firstly a social welfare function and secondly an investment role. The original idea of a pension was as a form of social insurance, which would ensure that people who were too old to work were not left begging in the streets and can be looked after later in life, without relying on employment. This would normally be thought of as a state responsibility, although some enlightened employers, who tended to have workers staying with them and serving them loyally in lifelong employment, also felt they should look after these employees after they could no longer work. The second function of pensions, as a savings vehicle, has developed over time, and is designed to provide extra private income to ensure a better standard of living in later life. Consumption is deferred while working and the money is invested for the future, in order to enjoy more later. Unfortunately, these two roles of pensions have become confused, with state pensions policy continually trying to offload responsibility for future pension costs onto the private sector and women are losing out in both social welfare and investment elements of pensions.
The major problem is that, unfortunately for women, both the state pension and private pensions depend on earnings from working in the waged labour force. To qualify for the full National Insurance Basic State Pension, people have to contribute for enough years in the waged labour force. If they do not earn enough, or do not work, they do not earn entitlements for the state pension. This results in a situation where women have about 75% of male full-time earnings, about 50% of average male income and usually less than a third of the average man’s pension. In the days when women could rely on a husband, this mattered less, but now that half of all marriages end in divorce and the expectation is that 40% of women will not be married when they reach age 65 in future, it is simply not acceptable to treat women as second class citizens when it comes to pensions. Women’s unwaged work is surely as valuable to society as their waged work, but only the waged work – and only as long as the wages are high enough – count fully towards her pension.
Even when reforms have been introduced, to try to offer women ‘credits’ into the National Insurance system for years spent out of the labour force, the protection of pension rights is incomplete. This means that women’s contribution to society is only partially recognised, in pension terms. If they are caring for others, or working on very low pay, they get lower pensions later. In fact, less than 14% of women have a full Basic State Pension in their own right.
The National Insurance system is full of complexities, strange rules and seemingly pointless exclusions, many of which seem to work against women. Given that women are less likely to accrue occupational pensions, it is surely wrong that they find themselves penalised by the state pension system too.
It is time women’s pensions were brought into the 21st Century, to recognise that all women are valuable members of society, irrespective of their labour force activity, and should be entitled to full recognition in the state pension system. A decent state pension, based on citizenship, paid automatically at the pension credit level of around £110 a week, would be the most sensible way to do this.
It may be useful to outline more detailed examples of the many ways in which women are penalised by the National Insurance pension system rules.
- Women are more likely to be in part-time, low-paid work and those earning below the National Insurance qualifying level (around £82pw) will not accrue state pension (albeit they will also not pay National Insurance contributions). However, having two part-time jobs, giving total income above the Lower Earnings Limit, but each one paying below £82, also accrues no pension at all.
- The ’10-year rule’ is also particularly unfair. The National Insurance system stipulates that anyone who has made contributions for less than 25% of the number of years needed to qualify for the full Basic State Pension, will receive no state pension at all! So 9 years’ worth of contributions could be completely wasted.
- Even women’s caring years are not fully credited. Home Responsibility Protection (HRP), supposedly designed to give women National Insurance credit for time spent caring – only applies to full tax years. Taking off a full year, but from July to July, receives no HRP!
- Women are more likely to be lower rate taxpayers, so they get much less tax relief on any pension contributions they make, which means that they get less help from other taxpayers to incentivise them to save in a pension. We spend over £10billion a year on tax relief for pensions, but most of this goes to higher earning men.
- Women are even discriminated against by the Pension Credit. The calculation of the savings credit element of pension credit assumes that claimants receive full Basic State Pension, before they can receive any savings credit at all. Therefore, anyone without a full Basic State Pension receives no credit in the calculation of their entitlements. Since only 31% of women aged 65-69 have a full Basic State Pension, (compared with 85% of men), many women are discriminated against even in the pension credit! For example, those receiving £20 less than full Basic State Pension, are no better off financially in retirement with a private pension worth under £20 a week. Therefore, £20,000 saved in a private pension, buying an annuity paying £20 a week would get no credit in the pension credit calculations. This interaction of means-tested pension credit, with private savings, also works against women in other areas of private pensions. Many employers and financial advisers are reluctant to encourage lower paid women to join an occupational pension scheme, and advisers are wary of selling pensions to many women, for fear of future possible claims of mis-selling, if the woman ends up losing all the pension in the means-test calculation (two-thirds of pension credit claimants are women). Thus, women suffer both in the state system and in their private pensions too, as a result of the interference of state pensions with the ‘suitability’ of private pensions for the mass market.
- Women receive lower annuity rates than men, because they tend to live longer, meaning that women have to save more than men for the same level of pension. Furthermore, most women would not buy an index-linked annuity, so the older they get, the poorer they get. In addition, men who buy annuities (which will become increasingly common as occupational pensions move to defined contribution arrangements) tend to buy single life level annuities, often because they do not really understand how annuities work. Without advice, men usually choose the highest initial income, without realising their wife will then get nothing from her husband’s private pension when he dies.
This all clearly shows that women in our society are treated appallingly when it comes to state pension policy. Women are still treated as dependent on men, rather than entitled to recognition by state pension payments in their own right. They are effectively being penalised by society for fulfilling roles that society needs them to carry out.
Of course, some of these issues affect low-paid, part-time working men too, but men do not tend to suffer from the same lifestyle factors as women. Men would not normally be expected by society to be the primary carers for children or other relatives. If women in society are becoming more independent, both because of the changing nature of the job market and also because of the increasing number of women who are not married and have no partner to rely on, then surely our state pension system should adjust to new realities. Many women will inevitably lose out on private pensions, due to lifestyle and social factors, but how can it be right to penalise their state pension rights as well?
The UK state pension system must be radically reformed. Further tinkering and tweaking, to try to offer women yet more ‘credits’ will simply lead to additional complications. It is time to sweep away the old rules and give women pensions in their own right. A citizen’s pension, ending the means-testing penalties of pension credit and sweeping away the current crazy complexities, would finally allow private pensions to be sold to all members of society, without fear of mis-selling. State pensions are for social welfare – and women should be entitled to the same welfare rights as men. Private pensions can provide savings vehicles on top, for everyone to save safely for their future. Women need to wake up and realise they are getting a raw deal on pensions. The former Secretary of State for Work and Pensions, Alan Johnson, described women’s pensions in this country as a ‘national disgrace’. He was right. The sooner we address this, the better.