Explaining the variation in gender pay gap figures

Around 10,000 firms have published their gender pay gap figures in line with the government’s deadline and there have been numerous headlines about those with the highest gaps. But what does the data really tell us? Here, we look at how and why the figures vary, with an emphasis on sectoral variations, as well as the impact that collective bargaining appears to have on the size of gender pay gaps.

Employers’ publication of their gender pay gaps has sparked a national conversation about the relationship between gender and pay. To date 10,249 firms have published their figures. IDR analysis of these shows an average gap of 14.4% between the average pay for men and that for women. There are, however, significant differences by sector.

Financial services firms reported the highest pay gaps, with an average gap of 27%. Firms in water, sewerage and waste services reported the lowest figures, with an average gap of 7%. But no sector has a positive gender pay gap in favour of women, despite many having workforces that are dominated by women. This indicates that one of the key explanatory factors behind the figures is occupational segregation, the social phenomenon whereby women are concentrated in roles that are usually paid less than jobs that are dominated by men. This does not necessarily mean, as some employers have claimed, that discrimination is not a factor behind their pay gaps. It simply means that the published figures cannot illuminate such practice, since the regulations do not require firms to publish data on gender gaps by grade or job, which is the focus of equal pay law and would assist in establishing whether direct or indirect discrimination exists.

In any case, employers have themselves played a part in the process by which women’s jobs have been systematically undervalued relative to men’s. It is likely, nevertheless, that firms have used the process of publication as an opportunity to carry out complete gender pay audits, to enable them to – privately – examine such gaps by grade or job, highlighting their risk of exposure to equal pay claims. And it may be that future governments will require more from employers in this regard. But in the meantime, the requirement for firms to publish figures on the proportions of men and women in each quartile of the company’s earnings distribution provides an important insight into the structuring of workforces by gender and how this has contributed to greater gaps in some sectors and lower ones in others.

Finance firms, for example, have more women in the lowest-earning quartile and more men in the highest-earning quartile, which has the doubling effect of lowering average pay for women and boosting average pay for men (see chart, below left). This is the main reason why finance has the highest gender gap of all sectors.

Hospitality, which tends to be a lower-paying sector overall, shows a much more even earnings distribution for men and women, resulting in a lower pay gap overall at 7.7%. Unlike in financial services, in hospitality broadly equal proportions of men and women fall into each of the earnings quartiles, and this largely explains the lower gender pay gap.

Most other sectors covered by our analysis have more men than women in the highest-earning quartile of the earnings distribution. The sectors with the fewest women in the highest-earning quartiles are construction and mining and quarrying. However, many also show a larger proportion of men than women in the lowest-earning quartile too. This is related to women’s lower rate of labour market participation, which although it has risen significantly in recent decades, still reflects the fact that women bear the heaviest burden of family and caring responsibilities. Two sectors – health and social work, and education – stand out in showing a larger proportion of women than men in the highest-earning quartile. But these sectors also show a larger proportion of women than men in the lowest-earning quartile, counteracting the positive effect on the gender pay gap of having more higher-earning women.

The regulations require firms to publish both the proportion of men and women receiving a bonus and the gap between average and median bonus payments paid to men and women. Overall the proportions of men and women receiving a bonus are broadly similar across all firms and within each sector. For example, in financial services on average 68.6% of men received a bonus compared with 66.9% of women. In hospitality the figures are 24.0% and 23.6% respectively. More worrying however are the gaps in bonus payments – which vary from an average gap of 47.2% in financial services to -76.9% (with the minus figure denoting a pay gap in favour of women) in transport and storage.

Our analysis shows that on average gender pay gaps are smaller at firms that negotiate pay with trade unions than at firms with no union recognition agreement. Using information from our regular monitoring of pay awards we have matched published gender pay statistics from 1,881 firms to those in our database. From this we calculate that the average gender pay gap at firms recognising a trade union for pay negotiations is 11.8% – below that for firms that do not recognise a trade union (13.7%). Why is this? One factor is likely to be that collective bargaining tends to result in more transparent pay structures, and this is usually associated with more equal outcomes.

Our analysis shows little difference in the distribution of earnings for men and women across firms with and without union recognition. This is probably related to factors such as industrial classification or occupational structure, as well as to the fact that women are slightly more likely than men to be union members. But there are significant differences in bonus payments by gender. The average gap in bonus pay in organisations that recognise a trade union is 14.8%, while that at organisations without trade unions is 30.5%. Most of these organisations will be in the private sector, since bonuses do not play a major role in public sector remuneration.

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Pay review: May remains at 2.5%

The median pay award across the whole economy remains at 2.5%, according to our latest analysis. This is the fifth consecutive month in which the median increase has been at this level. Higher awards, i.e. those at or above 3%, continue to account for almost a third of pay outcomes. The latest median, for the three months to May 2018, is influenced by several pay awards of over 4%, for instance at Argos and Centre Parcs, as well as by lower awards in some areas of the economy. Comparatively few increases are below 2% though we have recorded five pay freezes this time.

Continue reading Pay review: May remains at 2.5%

Saga maintains DB pension scheme

Saga has made changes to its defined-benefit pension scheme to contain costs and tackle the scheme’s deficit while keeping it open to both existing and new members for the long term. The company has also improved the terms of its group personal pension. These changes have been informed by the company’s strategy of helping customers and employees lead better lives in retirement. At the same time, the company has facilitated access to other financial products to support staff in managing savings priorities and is helping staff to make more informed decisions when it comes to saving for the future.

Saga is a provider of holidays, financial products and care services aimed at the over-50s. The company, which has more than 4,000 staff in the UK, has long offered a defined-benefit (DB) scheme, the Saga Pension Scheme (SPS), to all its permanent employees and just under half (48%) of the workforce are members. It applies its strategy, of helping people to ‘lead better lives in retirement’, to its employees as well as its customers and regards its pension provision as integral to this. The company also considers a DB pension scheme to be an attractive proposition in recruiting and retaining staff when many other companies are closing theirs.

However, in the two years from January 2014 to January 2016 the actuarial valuation of the DB scheme deficit – the gap between the value of investments and what it has to pay out in current and future benefits – had increased from £15.6 million to a forecast £50 million, while the total cost of future benefits had risen from 18.6% to over 30% of pensionable salaries. Saga therefore had to consider whether it could afford to keep the defined benefit scheme open.

It was felt that, if Saga was able to keep the DB scheme open, it would have to make changes to the scheme as the alternative would involve making cost savings elsewhere that would adversely impact the company’s business plan. Maintaining the status quo would also exacerbate the gap between the amount spent on SPS members and those in the group personal pension (GPP), into which staff who could not afford the minimum 7% employee contributions needed for the SPS had automatically been enrolled. Saga therefore sought to improve the terms of its GPP, which was based on statutory minimum contribution rates, as part of the same review. ‘We had 48% of our staff in a really good scheme and 52% in the GPP,’ explains Karen Caddick, Saga’s Group HR Director. ‘The primary criterion as to which they were in was whether they could afford to pay. We wanted to take some of our pension funding to provide a better pension for GPP members and therefore offer a good pension scheme option for everyone, recognising that affordability would always be an issue for some.’ However, Saga did not wish solely to concentrate on the pension provision as it believed that employees needed help with other financial issues as well.

During 2016 the company conducted a survey, which attracted 1,700 responses, and held a series of focus groups to obtain employees’ views on the existing DB scheme and some of the proposed changes to other benefits – such as increasing employee contributions, or implementing lower accrual rates within the DB scheme or removing the disparity between the level of life assurance cover between those in the DB scheme and the rest. ‘We were surprised at the level of interest,’ says Caddick. ‘We were not surprised that the DB pension is really valued by long-serving employees, however we gained very informative feedback as to why some staff are not in the scheme – many have other financial commitments such as repaying student debt, saving for a house or managing the day-to-day cost of living – and found the level of understanding of their current benefits was much lower than we had anticipated.’

Saga considered the option of closing the scheme to future accrual, just as many other large employers in its position had done, but also explored whether a fundamental change to the scheme might be more consistent with its brand values. The survey and focus groups had also indicated how important it was to employees to know what their income in retirement might be. The company also believed that just closing the scheme to new members would fail to address the immediate cost issue and would ultimately reduce the proportion of membership represented by active members, putting additional cashflow pressures on the scheme.  A key aim of the review was to make the costs of any revised scheme sustainable for the future. Closing the scheme to new members would make this more difficult and would probably only defer the inevitable.

Saga worked with reward consultancy Only People to devise a plan that would allow it to keep the DB scheme open to existing and new members, share the future cost between the company and employees and restructure the future benefits, with a view to limiting the total combined cost of contributions to 20% of pensionable salaries. Under the existing scheme, SPS members contributed 7% of salary with Saga making up the balance (18.6% at the time of consultation) to accrue 1/60th of their pensionable salary by way of pension benefit for each year of scheme membership. Under the new proposals, SPS members would now pay 8.7% for an accrual rate of 1/75th, with the option to trade up to an accrual rate of 1/60th by making higher employee contributions (8.7% plus age-related addition) or to reduce contributions to 7.0% (down from the 7.25% first proposed) by trading down to an accrual rate of 1/90th. Existing benefits earned up to 31 January 2018 would be protected. In proposing such changes, Saga did not seek to reduce its overall spend on pensions and related benefits but to maintain costs at current levels (allowing for a fluctuation of +/- 4% from the target rate of 20%). It also put in place a three-year waiting period before new staff could enrol in the SPS. These changes were aimed at ensuring that the SPS was sustainable.

At the same time, Saga also planned to improve its GPP scheme from statutory contribution levels based on qualifying earnings (under which employees currently contribute 3% of qualifying earnings for an employer contribution of 2% – these rates are set to increase to 5% and 3% respectively in April 2019) to 1:1 matching (up to a cap of 10%, depending on length of service). In addition, after 12 months’ service, minimum contributions to the GPP will be based on full basic annual salary, not just qualifying earnings (the earnings bracket used to calculate pension contributions for auto-enrolment – between £6,032 and £46,350 for this financial year). Such a change would entail both employees and Saga paying more into the pension. Saga has also improved the governance arrangements for the GPP, giving it more importance in the overall pension benefit offering.

Saga has also improved its life assurance benefit to four times salary for all and fundamentally revamped its Group Income Protection (GIP) cover. Like many employers, the current GIP benefit provided an income of 75% of salary, less state incapacity benefits, through to retirement, but only for those in the defined benefit scheme. Saga has made this benefit available to all those that have at least 12 months’ service irrespective of pension scheme membership. It has removed the state incapacity benefit offset and reduced the benefit to 50% of salary for a maximum of three years as it felt this would provide better support for the way they wanted to manage long term absence in the future.

Meanwhile, to help support employees with their other financial commitments, the company has launched a savings scheme into which employees (other than those in the SPS) can divert some of their pension contributions, with a matched contribution from the company, allowing them to save for a house or car, for example. Saga also provides a loan repayment scheme under which staff can consolidate their debts and pay them off through payroll deduction, offering an alternative to the payday lenders to which some staff had previously turned.

In August 2017 Saga began consulting staff over its proposals. After taking on board feedback, it arrived at the changes outlined in the box below.

All employees received a letter and consultation pack outlining the proposed changes. The company also set up a dedicated helpline and email address for queries and provided a link to a website where answers to frequently-asked questions could be viewed. The consultation period ran until 30 November 2017 – longer than the statutory 60 days, to encourage staff to engage fully with the process – with a view to implementing the revised scheme in February 2018.

The company also held workshops and provided personal pension illustrations for SPS members, with follow-up ‘surgery’ sessions with the Saga pensions officer and Bruce Sayers of Only People to address any resulting queries on a one-to-one basis. Group HR Director Karen Caddick herself led all 20 workshops. ‘We aim to handle change by taking employees with us. It wasn’t an easy message to deliver – people would be paying more to receive less – but it meant the scheme could remain open,’ she says. ‘We aim to be very open and transparent in all our communications with employees and as such delivering all these workshops was really important. They were very well attended, with at least 50 people at each one from across the SPS and the GPP membership.’

The consultation process resulted in a number of changes. Following feedback from several employees who said they could not afford to increase contributions from 7% to 8.7%, the company has reduced the contribution rate for the lower 1/90th accrual rate to 7% for the first three years (down from the 7.25% originally proposed). Some 150 people have traded down as a result. ‘Providing this option has kept them in the scheme,’ says Caddick.

As a result of the consultation, the company has also increased the pensionable earnings cap to £78,000 from the £70,000 first proposed (under the original scheme this was £145,800) and offered greater flexibility over the changes initially suggested to the group income protection insurance scheme, such that staff can now pay to increase benefits to 75% of salary. In practice, 18 employees elected to increase their benefit. ‘Staff can see we have listened and responded,’ says Caddick.

The revised scheme was implemented on schedule, on 1 February 2018, and while Caddick admits to having been concerned at how employees might react to the changes, in practice only 20 members dropped out of the scheme as they could not absorb the additional cost. The timing of the changes, to coincide with the annual pay review (under which staff received pay rises of 2% on average), may have helped in this regard. As Only People’s Bruce Sayers observes, ‘very few employers have done this so it was difficult to predict what was likely to happen. The fallout from changing from a defined-benefit to a defined-contribution scheme tends to be more predictable.’

While many traded down to the 1/90th accrual option, Saga reports that over 80 employees have opted to trade up to 1/60th accrual or even, especially among those approaching retirement age, to 1/50th. While Caddick describes the new three-year waiting period for SPS membership as ‘unashamedly about containing costs,’ the company encouraged existing staff to sign up before the 31 January deadline, which resulted in around 20 new members joining the scheme. ‘It wasn’t a massive influx but more of a steady trickle,’ she says. ‘The affordability issue is still live.’

Caddick also says that reactions to the improved GPP offering have been positive and she anticipates that members may now increase their contributions following future pay reviews.  ‘They seem excited about the GPP and see that they will get more out of it if they put more in.’ Saga now plans to continue a high level of communications around its financial benefits to maintain interest and ensure its employees are making informed decisions about how and where to save in the future. Saga will also be able to gauge reactions to its pension provision changes through its latest employee opinion survey, which was launched soon after the changes took effect.

Pension provision at Saga – the main changes
Employees must now have three years’ service to join the Saga Pension (DB) Scheme. They could previously join from day one
SPS default accrual rate reduced from 1/60th to 1/75th of salary
Additional voluntary contributions now result in accrual rates of either 1/60th or 1/50th of salary (previously 1/50th or 1/45th)
New option to reduce future accrual rate from 1/75th to 1/90th of salary
Pensions now uprated in line with CPI (up to 2.5% a year) rather than RPI (up to 5% a year)
New members of scheme no longer eligible for death in service ‘spouse’ pension
Option to exchange spouse pension for additional lump sum benefit worth two times salary (existing members)
Pensionable earnings cap reduced from £145,800 to £78,000
Member contributions increased from 7% to 8.7% of pensionable salaries (for 1/75th accrual basis, with Saga matching this contribution) or 7% for reduced accrual rate of 1/90th
Introduced 1:1 matching (based on length of service and capped at 10%) for members of GPP – representing an increased contribution on the company’s part
Death in service benefit increased to a ratio of four times salary regardless of pension scheme membership/length of service – intended to be more equitable and clearer than previous arrangements
Facilitated access to alternative financial products ‘that might be more relevant to current money goals and aspirations’ and allow GPP members the flexibility to redirect some pension contributions (above the statutory minimum) into some of these, such as savings schemes – possibly also matching contributions into these
Improved access to information about financial products
Restructured group income protection insurance benefit and extended eligibility to all employees with at least 12 months’ service, regardless of pension scheme membership
Provided a loan repayment scheme whereby staff can consolidate loans and repay through payroll deductions

Pay settlements: broader picture of pay awards emerges

The median pay increase across the economy remains at 2.5% in the three months to the end of April 2018, according to the latest monitored figures from IDR. The proportion of higher awards at or above 3% has increased with these awards accounting for almost a third of all the awards monitored in this period. This compares to just under a quarter of awards recorded at this level in our look at the figures in the three months to the end of January.

Continue reading Pay settlements: broader picture of pay awards emerges

Pay settlements: March remains at 2.5%

For the third consecutive month the median pay award across the whole economy remains at 2.5%, according to our latest analysis. This trend, monitored for the three months to the end of March 2018, is also evident in the private sector with the median remaining at 2.5%. A consistent median of 2.0% has also been seen within the not-for-profit sector.
Continue reading Pay settlements: March remains at 2.5%

Proposed NHS pay deal: swings now, roundabouts later?

The NHS pay offer is a significant deal that signals the end of the 1% cap on public sector pay rises and as such includes genuine improvements for existing staff. However it also involves future changes that may be less welcome for some. Under the proposed deal, headline rises for those at the tops of their bands are accompanied by changes to the pay structure which mean that staff who have not yet reached the tops of their pay bands would receive significantly higher earnings increases – via progression pay – over the course of the three-year deal. But from 2020 progression for new employees would be more limited than currently. Continue reading Proposed NHS pay deal: swings now, roundabouts later?

Bonus schemes: a flexible means of linking pay to performance

Bonuses remain an integral – albeit discretionary – element of the reward package on offer at many employers, particularly within the private sector: according to the ONS, the combined value of all bonuses paid in Great Britain reached a record level of £46.4 billion in 2016/17. Our recent survey of 30 mostly large employers across the manufacturing and primary sectors and private sector services looks at the design and typical payout levels of 41 bonus schemes – from comparatively simple all-employee schemes to more complex arrangements covering senior managers (eg Board members or executive team members).

Continue reading Bonus schemes: a flexible means of linking pay to performance

IDR accredited as Living Wage employer

We are pleased to announce that Incomes Data Research has today accredited as a Living Wage Employer.

Our Living Wage commitment will see everyone working at IDR, regardless of whether they are direct employees or third-party contracted staff, receive a minimum hourly wage of £8.75 in the UK or £10.20 in London.

The Living Wage is estimated to be the level of hourly pay necessary for a minimum socially acceptable standard of living. It is voluntary and separate to the statutory National Living Wage, which for over 25s is currently £7.50 per hour.