Realist, not conformist analysis of the latest financial, business and political news

We’ll Never Get The Gender Pay Gap Right Without Dealing With Pensions

As any even casual acquaintance with the economics of income and wages will tell us pensions are simply deferred wages. The amount that you or I earn from going to work on any one day is the total amount of money – in fact, compensation, so including things like free choccies if we work in a choccie factory – that we gain from having gone to work that day. That will be, obviously enough, our wages for that day. But also, and crucially, the pension accrual we gain from having gone to work that day.

Say, just as an example, your pension accrual is 1/40th. A not unlikely number in some defined benefit systems. That is, for every year you work you get a pension of one fortieth of your wage. Leave aside inflation here and also leave aside career high earnings, career average. Well, actually, if we say career high you can in fact be earning more in pension than you are in wages.

Say you’re taken on as an apprentice on spit per week. Then you rise to become Clerk of Works or summat. The pension accrual from those years on spit wages could well be higher than the wages you were earning.

For yes, you only get 1/40th of the wages in accrual. But you might draw that pension for 30 to 40 years. That’s why near all defined benefit pensions systems in the private sector are closed, because of the value of those promised pensions.

And getting 1/40th for 40 years is 100%. More if we put inflation back in but we can’t be bothered to do the maths for that.

That is, your wages might be, dependent upon lifespan, only half of what you actually gain over the lifetime from having gone to work that day.

At which point, this career:

[perfectpullquote align=”full” bordertop=”false” cite=”” link=”” color=”” class=”” size=””] Rosemary Squires MBE, 90, found fame in the Fifties and Sixties as an international jazz, big band, cabaret and concert singer and recording artist. She performed with big bands such as Ted Heath, Geraldo and Cyril Stapleton, the Max Harris and Kenny Baker jazz bands, and was a regular on the BBC Light Programme (now Radio 2) on Melody Time and Workers’ Playtime shows. She starred in her own radio and television series, and appeared with Michael Bentine, Clive Dunn, Arthur Haynes, Ted Ray and Reg Varney. She also worked in America with Danny Kaye and Sammy Davis Jr. [/perfectpullquote]

No, we’d never heard of her either. But what was her best financial decision?

[perfectpullquote align=”full” bordertop=”false” cite=”” link=”” color=”” class=”” size=””]Rosemary Squires: ‘My best financial decision? Marrying a man with a police pension'[/perfectpullquote]

That police pension – perhaps the widow’s portion of it – has been paying out for some 40 to 45 years. Good luck to her and all that. But we’re simply never going to be able to understand whatever gender pay gap there may be without including pensions in our calculations.

And the thing is women tend to live longer than men, draw their pensions for longer, yet it’s illegal to charge them more of their wages for that pension accrual.

So, by a proper calculation of lifetime incomes it’s not even certain that there’s a gender pay gap at all. Which makes the political kerfluffle over it more than a little odd.

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5 years ago

Just for the record, I was a pension actuary, now retired. A very generous defined benefit plan would cost 5-10% of pay per year to fund (excluding police or fire, whose early retirement ages drive the cost up considerably). So we’re talking about adding 5-10% to salary for a generous plan compared to a mediocre 401(k) or profit sharing plan that might be 2-4% employer funded. It’s not as big an impact as suggested above. One other note – in the U.S. DB plans have been disappearing more because of cost and accrual volatility than sheer cost. Also due to… Read more »

5 years ago

Excellent points, Mr. W.

Bernie G.
Bernie G.
5 years ago

What do you mean, you’ve never heard of her: the girl is a legend. …We used to hire Kenny Ball bands for the annual works do.

Quentin Vole
Quentin Vole
5 years ago

40ths would be a very unusual rate of accrual for a DB scheme. 60ths or 80ths is much more common. Anyone accruing enough pension to equate to 100% of salary at retirement, would almost certainly exceed government limits and be subject to additional taxation.

But that bit of pedantry doesn’t affect the argument, of course.

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