Mind the gender gap – offsetting the impact of parental leave and reduced working hours

Periods of unpaid leave and changes in working hours, along with gender pay disparity, have resulted in a persistent gap in women’s superannuation account balances, compared to men. Employers can gain an advantage in attracting and retaining diverse talent by structuring policies which support new parents in periods of leave and when returning to work, with an additional benefit of helping to close the superannuation gender gap.

WTW has developed four scenarios that illustrate the way that parental leave and working patterns associated with raising young children can impact an individual’s retirement benefit.

We have created a representative ‘cameo’ to create a comparative baseline. Our new parent is assumed to be 30 years old at the time their child is born, have a retirement age of 67 (with no future career breaks until retirement), be on a full-time annual salary of $55,000 and have a superannuation balance of $25,000 to which they contribute 10.5% annually (increasing to 12% over three years in line with the schedule of superannuation guarantee increases), invested in a super fund’s ‘Balanced’ option throughout their working lifetime.

Here, we demonstrate how this person’s retirement benefit could be impacted by:

1. A period of unpaid leave following the birth or adoption of a child
2. Periods of part-time work associated with ongoing care of young children
3. Salary freezes during unpaid leave
4. Reduced salary growth over periods of part-time employment.

We recalculate the retirement superannuation balance for our new parent under the four scenarios above on a cumulative basis. That is, we first look at the impact of taking unpaid leave, then factor in returning to work on a part-time basis, then overlay the impact of the cameo’s salary being frozen for the period of leave. Finally, we apply reduced salary growth after returning to work. The results demonstrate the cumulative impact on the retirement benefit from all factors.

Summary of scenario assumptions

Impact on retirement outcomes

Figure B shows the reduction in the retirement benefit under each scenario. The analysis demonstrates that periods of prolonged part-time service, especially when coupled with reduced salary growth, are more detrimental to retirement benefits than shorter periods of unpaid leave. If all scenarios were to occur, the new parent would see a total reduction in their retirement benefit of 16%.

Extending the analysis to including a second child born at age 35, with the other assumptions maintained, results in a 27% reduction in retirement benefit.

The experience of new parents varies greatly depending on individual circumstances and won’t necessarily mimic this cameo. For example, individuals with a higher earnings base and larger starting account balance will experience a smaller relative impact compared to individuals with a lower earnings base and smaller account balance.

An opportunity for employers

While paid parental leave, including superannuation, is an obvious and important issue to address when considering the retirement outcomes of employees, this analysis clearly shows that a paid parental leave policy is not a complete solution. Establishing polices that address issues associated with raising children also plays an important role. These can include:

• Real and achievable flexible working policies can allow new parents to maximise their working hours
• Policies regarding indexation of salary while on periods of parental leave to prevent the emergence of a pay gap when new parents return to work
• Establishing objective performance measures to help overcome the negative stigma that is sometimes attached to part-time workers.

Just as importantly, a culture must be established that recognises the importance of retaining talent through this process. Without acceptance at all levels of an organisation of the significant contribution that employees continue to offer following the birth of a child, and while working on a part-time basis, there is little likelihood that any policy will be effectively implemented.

At present most unpaid domestic work and caring responsibilities rest with women⁴ and, as a result, they are more likely to access paid parental leave and to work on a part-time basis⁵. However, it’s important that policies are not structured around female employees as doing so often discourages new fathers from taking advantage of available arrangements and further entrenches the view that child-raising is a woman’s domain.

Establishing a more equitable spread of domestic responsibilities early on is more likely to result in an equal share on an ongoing basis. This is one of the largest steps that can be taken towards closing the superannuation gender gap.

WTW can partner with employers to assist in a review of corporate compensation packages, including applying a diversity and inclusion lens across the structure of parental leave entitlements and superannuation arrangements. We can also ensure that digital solutions and calculators delivered via financial wellbeing programs assist in optimising outcomes for impacted employees.

This is one in a series of articles from WTW’s employee benefits team, taking a deeper dive into aspects relating to the superannuation gender gap.