Close pension gaps through targeted investing

As part of the “Women and Investing 2024” study, UBS highlights the importance of a good investment strategy to help women achieve their retirement goals. This is because pension gaps can be partially closed through targeted investing. When it comes to wealth accumulation for old age, women face various challenges. For example, women live on average five years longer than men and they are also more cautious investors, being less willing to take risks on the financial market. The gender pay gap also still exists, due to part-time work, career breaks or missed promotions.

According to the study, there is a direct link between lower earned income and lower payments into the pension system. Women in Switzerland earn an average of 18 percent less than men, which underlines the importance of a targeted investment strategy in order to be able to close possible pension gaps.

Since the benefits of all three pillars of the Swiss pension system depend to a certain extent on earned income, a lower income often means lower pensions for women. According to statistics on the newly retired from the Federal Statistical Office, in 2022 women’s total pensions from pillars 1 and 2 were an average of around 24 percent lower than those of men.

Similar results can be found in OECD countries, with very significant differences between individual member states in some cases. The highest pension gap of 47.5 percent is in Japan and the lowest, 3.3 percent, in Estonia.

The reasons for this gender pay gap are manifold. Around half of this difference can be explained by objective factors such as education or industry affiliation.

However, women are also underrepresented on boards and in management positions due to “missed promotions,” for example, because they work part time or take career breaks. According to the Federal Statistical Office, the proportion of women in these better-paid positions is 37 percent. The study highlights other challenges for women in their careers and factors that explain some of the wealth differences, including career choices, part-time work or career breaks. In addition, women are still mainly responsible for child-rearing and running the home, as well as unpaid care work.

The differences in income often begin for women around the age of 30 – i.e., at an age when many have already started a family or are about to do so. As “Women and Investing 2024” makes clear, this gap will not be closed before retirement because even after the period of starting a family, career progress and income development are significantly lower for women than for men. In international comparison, women’s incomes peak on average at the age of 44 – for men, they are highest at 55.

Women tend to opt for less risky investments than men, so their potential returns may be lower. This, in turn, can have a negative impact on the performance of their investments and, subsequently, on their already lower retirement income.
Women’s retirement income can also be lower than men’s because they are more likely to retire early.

It is therefore crucial that women deal with their finances and long-term financial planning. This is also because women’s willingness to take risks increases if they have sufficient financial knowledge and thus have the certainty that the investment strategy they have chosen will help achieve their goals.
And: according to “Women and Investing 2024,” women who invest are often more successful than men.
 

It’s important that women take care of their financial planning and retirement provision at an early stage.
Regarding investment strategy, women should answer two questions:

1. “How do I want to invest?”
2. “How much risk am I willing to take?”

Both questions are closely connected, because depending on the risk appetite, different investment classes will be selected for the investment portfolio.

In the case of a conservative, risk-averse investment strategy, the focus of investments is on fixed-income securities (bonds). Only a small percentage is invested in stocks.

For a medium risk appetite, a balanced investment strategy is a good idea. This means an even split between investment in stocks and bonds.

For women with a higher risk appetite, an aggressive, opportunity-oriented investment strategy is the right choice. Here, the focus is on equities and only a small percentage is invested in bonds.

The principle behind these basic investment strategies is simple: the higher the equity component, the higher the potential returns and risks. Conversely, investment risks decrease with the size of the bond component, which is associated with lower potential returns.