One thing after another: What shapes unequal outcomes in retirement in the UK?

Will future UK pensioners face “a system that is too unequal”?

The new Pensions Commission has been asked to examine “how to improve retirement outcomes, especially for those on the lowest incomes and at the greatest risk of poverty or undersaving”. The Commission's Terms of Reference explain that “as things stand, future pensioners will face… a system that is too unequal” and highlights groups potentially at greater risk including women, unpaid carers, lower earners, the self-employed and people renting in later life.

Here at the Standard Life Centre for the Future of Retirement, our mission is to help everyone achieve long-term financial security, so we welcome the fact that this is part of the Pensions Commission’s remit.

However, financial insecurity in retirement is rarely driven by a single factor. It more often reflects multiple constraints that accumulate, overlap and reinforce one another.

People’s lives are complex. Over the course of their lives, many people face multiple types of disadvantage, whether as a result of individual characteristics (such as gender or ethnicity) or life circumstances (such as unpaid caring or unemployment).

This means that policy makers and the pensions industry should not think about different ‘at risk’ groups in isolation from each other, but remember that they often overlap.

There are also a range of contributing factors to unequal outcomes in retirement. Some of these are due to specific policies within our private pensions system, such as the fact that employees are automatically enrolled into workplace pension saving, but the self-employed are not. Others are due to wider types of inequality, such as the gender pay gap.

To explore this topic further, we co-sponsored new research from Daniela Silcock Pensions Research. The research, titled Stacked Disadvantage, uses 20 original qualitative interviews as well as a review of existing evidence. The report uses the term ‘stacked disadvantage’ to describe how multiple characteristics and life circumstances combine and persist, shaping pension participation, savings, housing security and reliance on means-tested financial support.

 

Financial outcomes in retirement reflect people’s lifetime experiences

The research identifies three different types of characteristics and experiences:

• Primary characteristics, such as ethnicity, gender or lifelong disability
• Life course experiences, such as education, access to paid work, and unpaid caring
• Acute crises, such as homelessness or relationship breakdown

In combination these influence retirement outcomes, such as finances and housing.

“I'm providing childcare and we live with my husband's gran. She wasn't living with us, but she’s become quite elderly now. My husband's side of the family just feel like she’s at that age where she should be looked after and cared for. I am just providing some support to her, you know, just cooking food and stuff because she's not so able anymore. My husband is the eldest sibling, so it kind of falls on him.”

2nd generation Bangladeshi Muslim woman, low income, aged 40 to 44, unpaid carer

These disadvantages can accumulate over someone’s life. As a purely illustrative example, somebody providing unpaid care for a family member might spend more time out of work than a non-carer. This lack of career history might increase their likelihood of having a low-paid insecure job, and consequently not saving into a workplace pension for part of their working life. They might then experience divorce when approaching retirement, meaning they couldn’t rely on a spouse’s pension savings, potentially leaving them facing a very difficult financial situation in later life.

 

When does ‘stacked disadvantage’ most affect people?

• Education and early adulthood – people who face challenges in childhood may have lower educational attainment, which in turn may reduce their chances of finding and staying in secure work as an adult.
• Early working life – parts of the pension system, such as Automatic Enrolment, work best for those in stable jobs with single employers. People with low, variable or multiple incomes, or in insecure or self-employed work, are more likely to have intermittent saving, or miss out on workplace pensions altogether.
• Becoming a parent – particularly affecting mothers, and for some leading to reduced hours or exits from work and breaks in pension saving.
• Unpaid caring and ill health – these can affect people at any stage of life, but people are most likely to provide unpaid care in their 50s and 60s.
• Later working life and transition to retirement – recovery from financial shocks may become harder in later working life, for example as a result of redundancy or divorce.

One interviewee was previously an unpaid carer for her mother, and became self-employed partly as a result, which has disrupted saving for retirement. In the interview, she talked about how she isn’t currently saving into a workplace pension:

“A couple of years ago, I started doing part-time deliveries, like Uber Eats. So I’m currently working in the gig economy. It pays the bills, it runs my car. [But there’s] no pension, that is one of the downsides. Granted I’ve got freedom, I can choose my hours. But there are no benefits – pensions is one, but we don’t even get sick pay. That’s why I feel the government could do more to help the self-employed.”

Black Caribbean woman, aged 45 to 49, former unpaid carer

Another interviewee is disabled in his 60s, and he says this constrains his options for work – which also in turn limits his options for saving into a pension:

“I’m a 62-year-old disabled man who nobody's going want to employ and take a risk on. With an awful lot of retraining, I could possibly do something, but I still wouldn't be confident of getting a job and whether I could actually hold it down from the point of view that my condition is too unpredictable.”

White man, aged 60 to 64, disability, low opportunity area

 

What does this mean for the Pensions Commission and policy makers?

The research argues that, without change, current patterns of unequal outcomes in retirement are likely to persist.

The report proposes the idea of using stress testing in pensions policy design. Stress testing highlights where policy works for stable work patterns but fails for people facing ‘stacked disadvantage’. Embedding this in policy design could improve retirement outcomes for everyone.

The report also suggests some policy ideas to explore, including:

• Making systems easier to use and improving take up, for example by prompting people at key risk points such as leaving a job.
• Extending pension coverage in low paid and insecure work. We recently explored employers’ attitudes to adapting Automatic Enrolment in our research report Defying inertia: Employers’ role in boosting pension saving beyond the auto-enrolment default.
• Improving access to guidance regarding work, finance and retirement decisions in later life, including providing alternative routes via trusted settings such as employers, housing providers and community organisations.

It is also important for policy makers to consider how inequalities in the private pension system interact with the State Pension system. We know that the State Pension makes a material difference to people’s lives, especially for people with low income or wealth who may have experienced ‘stacked disadvantage’. The higher State Pension age (currently rising to 67) will extend a period of ‘pre-retirement poverty’ for some people. In our recent research, we found that 13% of 65-year-olds have gone without basic essentials in the last year, compared to only 4% of those aged 67, which illustrates how important the State Pension is for preventing financial hardship. Read more about people’s perspectives on the State Pension in our report One more year: Are people ready for a State Pension age of 67?

Stress testing policies to see if they will work for people facing ‘stacked disadvantage’ is a vital tool for the Pensions Commission – and will help ensure it achieves its long-term objective of improving retirement outcomes for all, including those at greatest risk of poverty or undersaving.

Read the report from Daniela Silcock Pensions Research: https://pensionsresearch.co.uk/overlapping-disadvantage