News analysis: Battle of the sexes continues for annuities

Gender differences can continue for annuity rates in trust-based pension schemes, but not so with contract-based DC plans, says Nicola Sullivan

Annuity rates for members of trust-based pension schemes can continue to be determined by gender, after confirmation from the European Commission that trust-based schemes are exempt from a European directive that makes it compulsory for insurers to adopt the same prices for men and women as part of the employment relationship.

However, contract-based defined contribution (DC) pension schemes, such as group personal pension plans (GPPs), and any arrangement where the contract is between an insurer and an employee, are affected by the directive.

Historically, the 2004 European Council directive on implementing the principle of equal treatment between men and women in the access to, and supply of, goods and services, which stipulated that customers could not be discriminated against in terms of gender, included a concession allowing men and women in pension schemes to be treated differently as long as it could be justified actuarially.

John Lawson, head of pensions policy at Standard Life, said: “When this directive was implemented in the UK, one of the conditions in demonstrating it was that the Institute and Faculty of Actuaries had to compile tables showing, statistically, that the incidences of mortality for men and women were different, and therefore we could justify different rates for annuities and life assurance.”

However, last year the European Court of Justice (ECJ) ruled that no insurance product, including annuities and life assurance, should be allowed to discriminate on the basis of gender. Carole Avis, finance and product director, workplace savings at Legal and General, said: “In March 2011, the ECJ ruled taking gender into account when assessing risk would be unlawful from 21 December 2012.”

But in a communication document published on 22 December 2011, the European Commission confirmed that the ruling would only cover private insurance and contract-based pensions. The document stated: “Some insurance products, such as annuities, contribute to retirement income. The directive, however, only
covers insurance and pensions, which are private, voluntary and separate from the employment
relationship, employment and occupation being explicitly excluded from its scope.”

Lawson said the exemption may make trust-based schemes more popular among organisations with
largely male workforces. “Employers that may have male-dominated workplaces may think to themselves:
‘hang on a minute, we might as well [use a trust-based scheme] and offer a decent annuity rate’,” he added.

Gary Crockford, technical services manager at Buck Consultants, said: “On balance, women live longer than men. It is a physical difference between men and women. Where you can prove that, to then say we have to ignore it for the purpose of pricing a risk when an annuity is being prepared seems a little daft.”

But the exemption for trust-based schemes appears to go against what pensions minister Steve Webb is doing to
create a level playing field with contract-based arrangements, said Crockford. For example, Webb has made moves to prevent pension contributions put into trust-based schemes from being refunded, as is the case with contract-based schemes.

“Along came the European Commission and said there is a vast difference between trust and contract-based schemes,” said Crockford. “If you are a man, you are, on average, going to die younger than a woman and will probably want to be in a trust-based scheme because you will want gender-based factors to get a bigger annuity.

Read also Workplace pensions exempt from compulsory unisex insurance pricing

Read more about trust-based pension schemes