ECJ rules against gender-based pricing of annuities

Written by Ilonka Oudenampsen

The European Court of Justice this morning ruled that annuity providers cannot calculate different rates for men and women based on their gender. The legislation will be effective from 21 December 2012 onwards.

A statement from the European Union court said: “Taking the gender of the insured individual into account as a risk factor in insurance contracts constitutes discrimination.”

Men currently receive higher annuity rates than women because statistically they do not live as long. MGM Advantage calculated that a man’s annuity rates could drop by up to 4.73%, while a woman’s could increase as much as 7.77%.

Although the ruling had been expected, many in the pensions industry are disappointed by the decision. Aston Goodey, sales and marketing director at MGM Advantage, said: “The annuity industry has been moving towards pricing that is far more individual and therefore fairer to the customer. While this gender ruling would create winners and losers, the truth is that it’s another blow to the conventional annuity and thousands of people approaching retirement.”

Ian Wright, pensions partner at global law firm Mayer Brown, pointed out that although this is an insurance court case – the case had been brought forward by Belgian consumer protection group Achats – it will also directly affect any pension schemes which insure death benefits or secure benefits by buying annuities.

He said: “It may also raise concerns about whether using sex specific factors under occupational pension schemes remains sensible. Occupational pension schemes commonly use sex specific factors when providing lump sums in exchange for pension or calculating transfers. There is a specific ECJ decision (Neath v Hugh Steeper, 1993) which said this is acceptable, and UK legislation (the Equality Act 2010) reflects this by saying that the use of sex specific factors is acceptable generally under occupational pension schemes.

“Now the ECJ has decided that the use of sex as a factor in pricing insurance business is unlawful, this will raise questions about whether the old ECJ decision (and UK legislation) remains valid, and we expect that UK occupational pension schemes will look to move to unisex factors very quickly.”

Dr Ros Altmann, director-general at Saga, said that annuities will now become more expensive for the vast majority of buyers. “Currently, men buy around eight out of every ten annuities sold in the UK and all of them risk receiving much lower pensions as a result of this decision. This means that future UK pensioners will be even poorer than they otherwise would be. Women's annuity rates are unlikely to improve by much, especially as the majority of annuity purchasers are men.”

She added: “As we are about to embark on a national system of automatically enrolling every worker into a pension scheme which will usually require annuitisation on retirement, this ruling is a blow to our national income. Annuity rates are already offering record-low pensions and they will now fall further for most people. As final salary schemes are nearly all now closed and future pensions will be almost exclusively on a defined contribution basis for private sector workers, this ruling is yet another devastating blow to people's hopes of a comfortable retirement.”

Darren Philp, director of policy at the National Association of Pension Funds, said: "We are disappointed with today's decision as it will lead to a worsening of peoples’ pension incomes. While it is right that annuity providers should not arbitrarily differentiate between men and women, the data shows that there is a clear difference between them when it comes to longevity. It is therefore perfectly reasonable for annuity providers to offer rates on the basis of this difference, as long as it is based on clear evidence.”

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