Women to be hardest hit by proposed university pension scheme changes
This guest blog by Martin Heneghan, Jo Grady and Liam Foster explains why any movement towards a defined contribution pension system poses a direct threat to women’s income in retirement. As university staff are on strike to protect their pensions, it is important to remember the proposed cuts will hurt women more than men.
University staff have taken the difficult decision to take industrial action against their employers as a consequence of the imposition of a significant cut to their income in retirement. University and College Union (UCU), estimates pension cuts will leave university staff on average nearly £10,000 worse off per year, totalling £200,000 over 20 years. However, this cut will not be spread evenly; women are set to be more adversely affected than men. Here we outline the proposed changes to the Universities Superannuation Scheme (USS) and demonstrate that they pose a direct threat to the adequacy of women’s pensions in particular.
On average, women have a smaller pension than men in any system. This is partly a consequence of gendered discrimination in the labour market, which means women earn less than men. As research from Grady shows, it is also a result of gender blind pension systems that ignore the gendered occupational life course, taking the experience of men as default when formulating pension policy. Women are more likely to leave the formal labour market for caring roles, which reduces both their income over the life course and their career progression. Also, when they do return to the labour market, they tend to take up part-time work, due to caring responsibilities. We also know that the ethnic pay gap, leaves BME women with even lower salaries, and lower pension incomes. None of these intersecting inequalities is reflected in occupational pension systems that are gender and ethnicity blind, and recognise only paid employment as a way to accrue pension income. In a defined benefit final salary scheme, men on average have a higher income at the point of retirement and therefore a higher pension. Some of this is mitigated in the current defined benefit USS scheme, which is a proportion of the average income, rather than the final salary. However, given that women earn less over the life course (not just in universities, but in general), their average salary is smaller and their pension less generous. Under the proposed USS reform, these gendered effects will be exacerbated.
The proposed changes will shift USS members from a defined benefit (DB) to a defined contribution scheme (DC), this switch transfers risk from the employer to the employee, with individual pension scheme members directly taking on more risk. However, there is substantial evidence that women are more risk averse in investment decisions than men. Research conducted about the Australian university superannuation fund (UniSuper), found that women made more conservative investment decisions and as a result received smaller pensions than men. This warning from the Australian university sector should be heeded by those in the UK committed to gender equality, as it could beckon a growing gender gap in retirement income here in the UK. This risk adversity by women is not surprising as those on lower incomes are usually the most risk averse, and given it is women who tend to earn less than men, they are unlikely to want to engage in risky investments with their pension. Furthermore, asking people to be their own pensions investment manager is not gender neutral. As research from Foster and Heneghan shows, there is a gendered difference in how men and women engage with financial information, so encouraging university workers to become financial decision makers cannot ignore these wider structural forces that influence individual decisions.
DC schemes also fail to offer the maternity coverage that DB schemes do. In DB schemes, women receive full maternity coverage on the DB part of the pension scheme. If their maternity pay is less than the pre-maternity salary, the employer makes up the shortfall to keep contributions records as if the maternity leave had never been taken. Employer contributions are also paid for up to 39 weeks of maternity leave (note that women who take one year of maternity leave see their pension reduced!). For those who also take advantage of the USS 1% match into the university investment builder, any shortfall in salary is not made up by the employer. With the proposal to transfer all pension contributions into the investment builder, if the current terms were kept as they are, women who take maternity leave would be adversely affected.
In addition to the removal of benefits and coverage the DB gives women, the switch DC also presents women with larger administration costs. Mainly because in a DC system the cost of administration is usually borne by the individual, whereas in a defined benefit one the cost is usually borne by the employer. In a DC scheme, the administration is more complex, and therefore, more costly. It often requires an individual fund manager for each account. These costs can have a dramatic impact on the value of a pension plan. This is particularly problematic for women and lower earners, as it means that a larger proportion of the accumulated fund is devoted to administration charges.
It is also worth remembering that the establishment of DB pensions was not the product of employer benevolence, successive generations of workers – both male and female – have actively worked to improve pension rights. Furthermore, whilst it is true that DB pensions offer certainty and income security in older age for employees, they also offer advantages to employers. A DB scheme was, and remains, a way to foster loyalty from employees. For a firm that had made a substantial investment in training its workforce, it wanted to ensure this investment was contained in the firm. Do universities not want to do the same? It was also a way to keep job opportunities open to younger workers, by offering income security to older ones. The push for increased flexibility in the labour market, and wider economy, has seen policy makers encourage DC schemes, so that workers can take their pension pot with them to a new firm. However, there are strong reasons to suggest this is not the way the university sector should seek to operate. For research and teaching staff, the sector has likely already made a substantial investment in their training. Offering a DB pension system is a way to enhance retention of academic staff. For women, this is particularly important. There is already significant precarity in an academic career. Short term contracts and geographical relocation are increasingly prevalent. Given that this precariousness also happens at a time when many women are beginning a family, the withdrawal of certainty in retirement, may be the final straw in their decision to leave the profession for good. In addition, the oversupply of PhD graduates is well documented. Reducing the pension income of those close to retirement will likely see them stay in the labour force for longer, further exacerbating the mismatch in the supply and demand of PhD graduates.
We must also remember that a pension is a deferred wage. It is not free money in retirement. A guaranteed and predictable pension in retirement is payment of income foregone during employment. Moreover, considerable financial sacrifice is made in obtaining a postgraduate degree, a doctoral degree and then entering a precarious labour market, and the promise of a stable and meaningful pension in later life, helps offsets those sacrifices. In a patriarchal society it is a reasonable assumption these sacrifices are even greater for women, and greater still for women of colour. Women who have navigated all the challenges that forging an academic career places in front of them, should not have their income security in old age threatened.