The impact of children on superannuation

Defining the problem

There is no doubt that, collectively, women are not well off in retirement both in absolute terms and relative to men. The reasons are well documented and can be summarised into the following types:

Lifecycle events

• Bearing and raising children – resulting in career breaks.
• Caring for family members – elderly parents and grandchildren which often results in reducing working hours.
• Retiring earlier than men – often to retire at the same time as their older partner.
• Divorce – about one in three marriages end in divorce.

Demographic barriers

• Gender pay gap – women earn less than men.
• Longevity – women live longer than men.

Attitudes

• Women in leadership – a lack of females in senior management positions and on Boards.
• Undervaluing of part time work and certain female centric occupations, for example, nursing.
• Risk aversion – females tend to invest more conservatively than males.

Women will face some or all of these challenges during their lifetime and the cumulative effect on their retirement savings can be significant.

Lifecycle events, in particular, can have detrimental effects on retirement balances. About 80% to 85% of women today will have children. They face the difficulty of trying to juggle careers and raising a family. Motherhood typically leads to time out of the workforce to raise children. During this time there can be both a cessation and a reduction in superannuation contributions. This career break also typically coincides with the key years for career progression and promotional opportunities. Single mothers (including divorcees) have the same issues but these can be exacerbated due to lack of financial support and shared duties of a partner.

While the total time out of the workforce will vary between individuals, many women return to the workforce part-time while their children are young. Not only do these young mothers often work part time for an extended period, but their income will have stagnated. In addition to missing out on salary increases due to missed promotional opportunities, some may even forgo standard annual salary increases.

Sadly, for many women, they never catch up.

Potential solutions

Ensuring that women in retirement are financially self-sufficient is a complex problem. We expect potential solutions will come from; society as a whole, government initiatives, superannuation funds, employers and, of course, individuals. The best outcome will involve an awareness drive and action from all parties.

Some potential solutions include:

• Employers providing flexible workplace practices and financial support for female staff.
• Superannuation funds through education and advice.
• Individuals who must take responsibilities for their own future.

Justifying employer intervention

Fundamentally, superannuation is a joint effort where employers and employees put money aside in order to provide income in retirement. Employers are trying to provide a reasonable benefit on retirement for their staff. If a proportion of these staff will struggle as a result of genetics, then surely there is an argument to support them more in the same way that insurance cover should be set to cover needs.

This logic underpinned the development of Rice Warner’s Valuing Females package. The basis of the package is that an extra couple of percent can help bridge the gap between a female employee’s balance with and without career breaks and part time work which are two of the factors driving inadequate savings in retirement.

Suitability of retirement tools

At the heart of addressing this issue is the effective provision of information to help with informed decision making. Women have many issues to contend with on the road to retirement, but we do not yet address these in the framework of modern retirement tools. Instead we assume everyone will work every year full time. This makes the process simple but it’s inaccurate. Earning SG on a full-time salary every year of a career simply does not fit the build for all.

Current online financial tools do allow for the manipulation of a retirement projection to some degree. For instance, some factor in periods of no contributions and part time work in motherhood. However, this could be taken a step further by implementing female specific online tools.

There should be a drive by the industry towards designing these types of online tools accompanied by tailoring education programs for specific member demographics. A best practice strategy which leverages knowledge of members’ needs, preferences and attitudes is the most likely to be successful.

Conclusion

This is an issue which may ultimately require structural changes across the industry. Every young woman needs to be aware of the issues so that they can plan early for future events. Any major solutions will take many years to have an impact, but in the meantime there should be a focus on incremental changes which can have a material impact on the retirement prospects of women across Australia.