Back to news 4 February 2013

Gender pricing for annuity contracts - how it affects pensions

In the recent Test-Achats case, the European Court of Justice (ECJ), the highest Court of Law in the European Union (EU) ruled that, with effect from 21 December 2012, an exemption in the European law which permits insurers to use actuarial factors based on the member's sex to assess risk, and therefore set premiums by reference to the sex of the person in question, will no longer be valid.

Purchase of annuities

Although the ECJ judgment is expressly directed at the insurance industry, not at occupational pension schemes, it will affect annuities as these are purchased by a member from an insurance company (an annuity is a policy providing regular income which is purchased from an insurance company with pension savings at retirement). Therefore, an annuity purchased on or after 21 December 2012 by the member directly will have to be based on sex neutral factors.

How will this affect the cost?

At the moment, annuities for men are generally cheaper than for women. This is due to the simple fact that women generally liver longer than men and so their annuities have to be paid over a longer period. But with gender neutral pricing this will change, with the result that annuities for men are going to become more expensive. Government research has shown that the average annual payout from an annuity for a man (based on a £100,000 pot at age 65) is £6,642 while for a woman it is £6,243. After 21 December 2012, the average annual payout for a man will decrease by up to 10% but unfortunately women's rates are unlikely to improve much either, as men still purchase eight in ten annuities.

Actuarial factors in defined benefits schemes

Currently occupational pension schemes are allowed (under EU and UK law) to use sex-based actuarial factors to determine, for example, funding requirements, transfer values and commutation (as well as for the purchase of in-scheme annuities). These actuarial factors used by trustees of pension schemes are covered by a separate pension scheme-specific European law and so the Test-Achats judgment (which relates to insurers rather than pension schemes) did not cover them. If sex-based commutation factors were to be replaced in the future with unisex factors this could mean smaller lump sums for women, while replacing sex-based factors for converting pots, including AVCs, into scheme pensions could mean smaller pensions for men.

The Government had concluded that it is possible for pension schemes to continue to use sex based factors and acknowledges concerns that the ECJ judgment may result in a "two tiered" annuity market, with consumers getting one price from an insurance company and another from their scheme. Unfortunately, this confusion makes it likely that there will at some stage in the future be a test case challenging the use of sex based actuarial factors within pension schemes.

Watch this space!