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:
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.
01
All Australian workers are eligible for unpaid parental leave within 12 months of the birth or adoption of a child if they have completed at least 12 months of continuous service with their employer. An additional 12 months is available under certain conditions. Acknowledging that the actual period out of the workforce varies greatly, with many new parents returning to paid employment within a year and some never returning, for this scenario we assume that following the birth or adoption of their child, our new parent takes the standard period of unpaid leave under the National Employment Standards of one year.
While the Government’s Paid Parental Leave Scheme ensures that most parents are entitled to some period of leave paid at the minimum wage, there is no superannuation entitlement. It has, therefore, not been considered for this purpose.
02
Many parents returning to work following periods of parental leave do so on a part-time basis1.
Prior to a child commencing primary school, typically around age five or six, the cost of childcare presents a significant financial barrier to returning to work. As income increases, the Government Child Care Subsidy reduces, resulting in a higher out-of-pocket cost to access childcare. Compounded by an increasing marginal tax rate, parents experience diminishing net returns for increasing working hours. Under this scenario, we assume that our new parent works part time for five years, after completing a year of unpaid leave. Part-time employment has been modelled as a three-day working week, or 60% part-time.
03
Where the salary paid to employees is set by negotiation (i.e. not based on an industry award or covered by a collective agreement), a new parent on unpaid leave is in a vulnerable position when it comes to negotiating salary increases. The Australian Human Rights Commission has reported that some women returning to work have found that their salary was reduced, or that they did not receive a pay increase in line with their colleagues2.
Under the ‘salary freeze’ scenario we assume that, during their period of unpaid parental leave, the new parent does not receive a salary increase. Nor do they receive a compensatory increase on returning to paid employment.
04
Parents who elect to work part-time can experience delays in career advancement and slower salary growth compared to their full-time colleagues, with research observing that part-time workers are sometimes perceived as less committed or deserving of career advancement. Some research indicates that this effect is more pronounced in males than females3.
Under this scenario we assume that, whilst employed on a part-time basis, the new parent receives salary increases at half of the rate that was assumed in the full-time employment comparative baseline.
| Scenario | Assumption |
|---|---|
| Unpaid leave | One year of unpaid leave following the birth of a child |
| Part-time employment | Period of five years at 60% part-time. |
| Salary freeze | No salary increases over periods of unpaid leave |
| Reduced salary growth | Salary increases during part-time employment at half the rate of an equivalent person in full-time employment. |
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.
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:
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.
1 Australian Bureau of Statistics: Labour Force Status of Families, June 2021
2 Australian Human Rights Commission: Supporting Working Parents: Pregnancy and return to work National Review – report 2014
3 The Effects of Part-Time Employment and Gender on Organizational Career Growth. Yvette van Osch, Jaap Schaveling, 1 September 2017
4 Australian Bureau of Statistics: Gender Indicators 2020
5 Workplace Gender Equality Agency (WGEA) Gender Equality Scorecard for 2020-21
