In its Top up the pots: Achieving adequate retirement incomes with automatic enrolment report, conducted with the Pensions Policy Institute and published in June 2019, Which? proposesd that new mothers should be awarded a ‘new parent’ £2,000 pension top-up payment in order to counteract the motherhood pension penalty, where mothers who take time out of the workforce to accommodate childcare commitments are unable to save an adequate retirement income.
The report found that female employees who take time out of work in order to have children potentially save £15,000 less into their pension than full-time working women; this equates to a retirement income of £68,000, compared to £83,000 for a female employee who does not take time off for childcare.
In comparison, the average male employee can save around 27% more into their pension pot than their female counterpart, having an estimated pension pot of £114,000. This gender pension gap increases to 40% when a woman takes time out of work for childcare responsibilities.
Jenny Ross, money editor at Which?, said: “Since its introduction, automatic enrolment has successfully drawn in millions of new savers to workplace pensions, but the motherhood penalty, which already impacts women’s income, threatens to leave those who choose to work reduced hours due to childcare responsibilities significantly worse off in retirement.
“If the government is committed to pension equality, it should introduce a £2,000 pension contribution for first-time mothers, and also raise the minimum contribution rate for all middle-income earners to ensure they can retire with an adequate pension pot.”
Which? recommends that each household should be able to choose which parent or guardian’s pension scheme the top-up contribution is paid in to. In the event that no scheme is nominated, the payment would be made into an account with the National Employment Savings Trust (Nest), the auto-enrolment pension scheme set up by the government.
The report stated that the pension bonus should form part of a wider set of workplace pension reforms; this would include increasing the minimum pension contribution for auto-enrolment from 8% of monthly earnings to 12%. This could improve individuals’ pension pots by around £50,000. Which? also suggested that 8% remain as the minimum pension contribution for low income staff, to avoid over-saving and financial hardship, and that employees be allowed to opt-down to an 8% contribution level, if they wished.
Steven Cameron, pensions director at Aegon, added: “It’s great to see this report shine a light on the impact motherhood can have on the pensions gender gap. Hopefully it will help to raise awareness about the wider financial impact of parenthood and trigger conversations among expectant parents.
“However, a government giveaway is unlikely to be the answer. A woman’s ability to save for retirement is often interrupted by unavoidable career breaks, mostly to raise a family. While the introduction of shared parental leave will start to make a difference to this, there are several other factors that need to be addressed.
“Some women might not be returning to work due to the lack of affordable childcare, to the detriment of their pension savings. And for those who do return to work, they might return part time. Women can be disproportionately excluded from automatic enrolment if they earn below the £10,000 earnings threshold. Some women may have several part-time jobs and while their overall earnings may be above £10,000, if no single job pays more than £10,000, they are excluded entirely from automatic enrolment. Government data in 2016 showed that 31% of eligible female [employees] earned less than £10,000 a year.