Minimising the hidden retirement cost of maternity leave

Samantha Jagdessi | 10 November 2023

Samantha Jagdessi is the head of consulting strategy & best practice at Old Mutual Corporate Consultants.

The failure of many employers to pay employees during maternity leave and the impact this has on their retirement fund contributions presents a growing challenge for women.

Women often only find out during their maternity leave that contributions to their employer-sponsored fund are reduced or paused, negatively affecting their savings for retirement.

The consequences of inadequate retirement savings are severe for anyone. Qualifying for the state pension is based on your means and at around R2 100 a month, it is hardly sufficient to maintain a comfortable lifestyle.

The consequences of having inadequate savings are exacerbated for women by the fact that they generally live longer than men. Even if they had the same savings amounts at retirement, a woman’s annuity would be lower because she is expected to live longer.

Consequently, many women face a higher risk of economic challenges and financial uncertainty in their later years.

Working world skewed

The situation only amplifies an already gender-skewed working world. According to the Stats SA Quarterly Labour Force Survey for the second quarter of 2023, South Africa’s labour force participation rate increased by one percentage point over the past year to 59.6% in the second quarter of 2023.    

But this average is made up of a 64.9% participation rate for men compared with 54.3% for women - a gap of 10.6 percentage points. This means that only 54% of women of working age are either employed or looking for work. 

Labour legislation gives women the right to take four months off to give birth, recover and bond with their newborns. Employers must hold their jobs but are not obliged to pay them during this time off.

Recent data from the 2021 RemChannel Employee Benefits survey shows that a troubling 23% of participating employers don’t offer fully paid maternity leave, resulting in contributions to retirement funds being halted during that two to four-month span.

Some 25% of employers only partially compensate women during maternity leave with between 30% and 50% of their regular earnings and during this time both their and their employer’s contributions to the employer-sponsored retirement fund may decrease or temporarily cease, impacting the overall growth of their retirement savings.

Financial security threat

This can lead to a substantial gap in retirement savings as a result of compounding over the years.  

Maternity leave and how prepared women are for retirement are connected and significantly affect women's financial security and overall well-being.

The way in which retirement savings are based on income has inadvertently placed women, especially those who take maternity leave, in a precarious position. Factors like the gender pay gap, career breaks for caregiving responsibilities and extended life expectancies only deepen the chasm.

On average, women earn less than men, so they have less to save for retirement. Women also tend to have more career interruptions, often related to raising children. These interruptions impact their ability to accumulate retirement savings and qualify for employer-sponsored benefits. Women also typically have a longer life expectancy than men, meaning their retirement savings must stretch further. 

Addressing the challenges 

Fortunately, solutions are on the horizon. Progressive employers are now re-evaluating their maternity leave policies, and considering more accommodating policies such as:

  • Maternity pay at 100% of salary - this means women do not have to make use of temporary absence provisions and suspend contributions towards retirement funding during their maternity leave. They then have no break in savings or coverage. Full paid maternity leave also reduces financial stress during an emotional time, enables paid domestic care arrangements to continue and facilitates the employee’s return to the labour force (and higher participation by women). This has been shown to positively impact economic growth and GDP over time. 

  • Hiring pregnant employees with no minimum service period, enabling greater mobility of women within the economy.

  • Paid paternity leave which encourages a fairer division of household work and over time reduces the impact of absent fathers in society, resulting in improved family structures and more cohesive societies.

  • Paid leave regardless of whether children are adopted or the result of assisted reproduction (surrogacy).

  • Support for work-life harmony.

  • The ability to augment contributions at any stage with voluntary higher retirement contribution categories to compensate for a failure to preserve or maintain contributions in the past.

Secondly, women are being empowered through improved financial literacy. Comprehensive educational resources and active promotion of retirement planning could be vital to narrowing the gender retirement gap.

It would also help if policymakers re-examined the existing retirement framework. By refining the system, they can better shield women during maternity leave, ensuring a brighter financial future for them. 

Other initiatives such as flexible work arrangements that reduce the need for extended career breaks and encouraging spousal involvement, shared caregiving responsibilities and financial planning within households, should also be considered. 

The dialogue around women, maternity leave, and retirement savings in South Africa is pressing. As the nation grapples with these complexities, it remains to be seen how policy and society will respond, forging a path toward equality and financial security for all.