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European Court of Justice Ruling on gender equality will impact on pension annuities

Published on 15/10/2010

London - An adviser to the European Court of Justice (ECJ), the European Union's highest court, has opined that insurance companies may not charge men and women different rates for products. The decision has far-reaching implications for UK pension annuity policies, in which men are currently offered bigger annuities than women, for the same sized fund, because they are assumed to live shorter lives. If the opinion is ratified, male DC pension holders are likely to see their annuity costs rise while the cost for women might fall.  The advisory opinion was issued by an Advocate General to the ECJ on 30 September. The Advocate General’s statement says that “…many other factors also play an important role in the evaluation of insurance risk. Thus the life expectancy of insured persons is above all strongly influenced by the economic and social conditions of each individual such as, for example, the kind of and extent of the professional activity carried out, the family and social environment, eating habits, consumption of stimulants and/or drugs, leisure activities and sporting activities.”  According to Deborah Cooper, Head of Mercer’s Regulatory Research Group, “Essentially, the position is that gender, like race, is beyond the control of the person so the Advocate General considers it inappropriate to use it as a factor to determine the cost of an insurance product. But there’s a lot of evidence that suggests gender is correlated with risk factors relevant to insurance. The obvious example is mortality, where women on average live longer than men. Whilst the Advocate General is correct to say that some of this difference may be due to social or lifestyle factors, insisting that it is ignored entirely could give rise to unintended consequences. For example, insurance companies could require stricter underwriting tests, making insurance more expensive for everyone.” The annuity a man or woman can purchase will depend on market conditions at the time and the annuity’s characteristics. If a level joint life annuity is purchased, the difference between men and women’s pensions will be small, but if the annuity is for a single life, or allows for pension increases in retirement, the difference becomes greater.  The different annual incomes that could be purchased with a £50,000 pension pot, by someone now aged 65 – based on Mercer’s estimate of current annuity prices are shown below.  The ‘joint life’ annuity assumes a dependant’s pension of 50% with the full pension amount continuing to be paid after the purchaser’s death (assuming the dependant is still alive). Increasing annuities are assumed to increase at 3% per annum.

Single life, level   £   3,300 pa
Single life, increasing   £   2,400 pa
Joint life, level   £   3,000 pa
Joint life, increasing   £   2,100 pa

Single life, level   £   3,100 pa
Single life, increasing   £   2,200 pa
Joint life, level   £   2,900 pa
Joint life, increasing   £   2,000 pa

The amounts are given for illustrative purposes only and should not be assumed to indicate actual annuity prices available from insurance companies, or be used to inform any investment decisions.
At this stage, the opinion has still to be ratified by the European Court of Justice. Once ratified, the judgment becomes law and will have to be enforced in all EU member states.  According to Dr Cooper, the ECJ rarely countermands initial opinions. “Although any changes are unlikely to be retrospective and a transition period has been recommended, this is likely to cause further administrative headaches for pension schemes, since the same logic is likely to be applied to the calculation of transfer values and other member options. Trustees and employers are still having to cope with the legal minefield created by the Barber and Coloroll judgments in the 1990s, which have resulted in huge unintended costs for very little membership gain. Further changes to Equality legislation are unlikely to be welcomed, no matter how eloquently argued.”
Mercer / Expatica

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