Services: EU Ruling Update March 2011

The European Court of Justice’s (ECJ) has recently made a decision to put a ban on Gender underwriting with effect from 21^st December 2012. Effectively insurance companies and their actuaries will not be able to use gender as a means of setting the terms of a contract, which could have an effect on the annuity market.

Details are not finalised as to how this may pan out but the general consensus is that this new ruling could be unfair to men. Currently the average life expectancy for a woman is longer than that of a man.  Traditionally annuity rates have reflected this by paying a higher pension or annuity income for a man than a woman, assuming all else was equal. This is based on the assumption that as women live longer and therefore draw a pension for longer, they would receiver lower annuity rates than men.  If rates are harmonised as per the recent ruling then men's rates are likely to be lowered.  The alternative would be to set annuity rates individually, which may result in insurance companies passing on to consumers the extra costs to cover the administrative burden.

The overall outcome of an equalising of rates could be to produce annuity rates that are "better than current female rates but worse than current male rates" which may lead to more volatile pricing over the next few months.

The ruling may make annuities less attractive in the long term and make alternative ways of drawing pension income, such as drawdown, more attractive to some individuals when they come to vest their benefits. We believe that this will increase the need for bespoke retirement planning as all investors will need to shop around or risk ending up with a homogenised standard–issue annuity which may represent a poor deal for them.

TISCO will keep abreast of the developments in this area so that we can advise our clients accordingly as the date for the proposed changes approaches.