Closing The Gender Pay Gap In Pensions

• Description of the programme:
• The study:
• Key findings:
• Points to consider:

Description of the programme:

Recent reports, including research from the Organisation for Economic Co-operation and Development (OECD) and the European Commission, have given the ‘gender pay gap’ in pensions considerable attention throughout Europe. The European Commission estimated that the gender gap across the entire EU-27 population (aged 65 and above) stood at 40 per cent in 2011. However, cross-national variation is huge, ranging from just three per cent in Estonia to 46 per cent in the Netherlands. In 2011, wide-ranging pension reforms in Norway mirrored central features of famous Swedish and Italian reforms of the 1990s, involving the adoption of the notional defined contribution (NDC) approach, in which the accumulation of pension rights is directly linked to earnings over the entire life course.

A number of redistributive components are built into the Norwegian system, including a ceiling on annual earnings, a gender-neutral annuity divisor, generous child credits, a possibility for widows/widowers to inherit pension rights from a deceased spouse, a targeted guaranteed pension with higher benefit rates to single pensioners compared to married/cohabitating pensioners, and a tax system that is seen as particularly progressive in its treatment of pensioners and pension income, and encouraging gender equality

The study:

This 2019 peer-reviewed article from the Journal of European Social Policy uses an advanced statistical modelling technique known as microsimulation to study the distributional effects of the reformed Norwegian pension system, with a particular focus on gender equality.

The authors conduct an analysis to investigate how different components of the Norwegian national insurance pension system impacts on the gender gap in pensions and on general inequality in the distribution of pension income among one cohort of pensioners, all born in 1963.

The analysis is conducted using an established Norwegian microsimulation model, that simulates lifetime trajectories for the entire Norwegian population. The model simulates a wide-range of processes and life-events, including demographics, educational choices, differing incomes and pensions. The 1963 cohort is selected, as it is the first cohort whose pensions are completely determined by the new regulations.

Key findings:

• The authors estimate that for the 1963 cohort, a hypothetical ‘actuarially fair’ pension system, (where the premium is equal to the expected claims) would produce a gender gap of 43%, while the actual reformed system is projected to produce a gender gap of only 7% after taking account of income taxation.
• Compared to the baseline system, the instigation of a gender-neutral annuity divisor (the system that determines the annual pension amount) reduces the annual pensions received by men and increases the annual pension received by women. Altogether, the overall effect is a decrease in the gender gap by 12% to 31%. This is the most substantial contribution to closing the gender gap.
• The earnings ‘ceiling’ reduces the average benefits received by both men and women, but the reduction is more severe among men. The result is a reduction in the gender gap of a further 7% to 23%.
• The system of child credits has a further significant effect in narrowing the gender gap by 7%, while being able to take over pension rights from a deceased partner is estimated to close the gap a further 3%.
• The guaranteed pension (both undifferentiated and with higher benefits for single people combined) reduces the gender gap a further 4%, while realignment of income taxes reduces the gender gap still further, by another 3%.
• However, the authors surmise that while the reformed system in Norway works relatively well in terms of addressing the gender gap in pensions, this is partly due to benefit components that disincentivise women to work and reward couples who choose an unbalanced sharing of informal and formal duties that conform to more traditional gender roles.
• They suggest that an alternative policy route towards equal pensions would be to introduce a system for sharing pension accruals between spouses/cohabiting couples. They conclude by suggesting that an exploration of the policy and social outcomes for sharing pension rights would be a worthy theme for future research.

Points to consider:

Methodological strengths and limitations:

• The authors emphasise that the results presented in this paper only refer to one particular cohort (born in 1963). There are a number of assumptions made about behaviours and social patterns that would not hold true among later cohorts.

Relevance:

• This report is relevant to all stakeholders and policymakers who are interested in influencing the policy environment regarding the gender pay gap and pension equality for women. It is particularly relevant to researchers looking at similar regulatory environments to Norway, or those looking to introduce similar policies to the pensions landscape in their own jurisdiction.

Generalisability/ transferability:

• The authors state that their findings cannot be generalised to other countries that have adopted a similar NDC framework, such as Sweden, Latvia and Italy. This is due to the Norwegian system containing a particular set of redistributive mechanisms unique to Norway that work in favour of reducing the gender gap.
• While this is a different environment to the UK, this work may be of some use to policy makers interested in pension reform.