Despite some wishful thinking from the pensions industry, the ruling upholds the opinion delivered by the Advocate General on 30 September 2010.
The Gender Directive already requires Member States to ensure that gender-based differences in premiums or benefits will not arise in insurance contracts entered into after 21 December 2007. However, the Directive allowed Member States to decide before 21 December 2007 to continue to permit proportionate differences in premiums and benefits where gender is a determinative risk factor based on relevant and accurate actuarial and statistical data; such Member States were required to review their decision by 21 December 2012 and report to the European Commission. There was thus no explicit time limit on this derogation of the Directive.
Although the ECJ recognises there is evidence that men and women tend to behave differently or have different life expectancies etc, it observed that gender is not the only factor affecting insurance companies’ risks. The ECJ decided that using gender as a risk factor is not consistent with the principles enshrined in the Charter of Fundamental Rights of the European Union which include the prohibition of any discrimination on grounds of gender and require equality between men and women to be ensured “in all areas”. [The ECJ's words - the mind boggles!]
Although the Advocate General proposed there should be a transitional period of 3 years from the date the ECJ gave its judgment, the ECJ ruled that the derogation of the Gender Directive must end by 21 December 2012 (the deadline for a first review by Member States), which is less than 2 years away.
So, all Member States will have to legislate to prohibit insurance companies from discriminating between men and women for contracts entered into after 21 December 2012.
Young women drivers will have to pay more when it comes to such things as car insurance or life assurance and men will suffer when it comes to buying an annuity, particularly a single-life annuity.
How will this affect occupational pension schemes?
There will clearly be an indirect effect on members of DC schemes who need to buy an annuity when they reach retirement. However, although annuity providers are suggesting that single-life annuities will become dearer for men and cheaper for women, the effect will not be so noticeable when members buy a joint-life annuity with a spouse’s annuity built in.
There may also be consequences for the trustees of DB schemes in terms of the cost of group life cover or the bulk purchase of annuities either for a buy-in or buy-out, but this is less likely (in this it is the trustees doing the purchasing and their gender is not an issue).
But what about direct effects?
At present, occupational schemes have an explicit exemption from the requirements of the Equal Pay Directive and are permitted to use gender-based actuarial factors. However, the arguments applied by the ECJ in reaching its ruling on the derogation of the Gender Directive are capable of extension to the Equal Pay Directive, although the ECJ did not comment on this.
It thus seems likely that the use of gender-dependent factors in DB schemes for such things as commutation of pension into cash, early or late retirement and transfer values will be deemed unlawful. Of these, it is commutation factors that will be affected the most, with men gaining at the expense of women if an attempt is made to achieve cost-neutrality compared with current gender-based factors.
The biggest problem, though, may be for those schemes that allow members to surrender part of their pension when they reach retirement in favour of a larger pension for their spouse (or an additional pension for a dependant) payable following their death.
Comments and conclusions
At least for wealthier male members of DC schemes who will be able to satisfy the “minimum income requirement”, there should be a way of side-stepping the expected hike in annuity rates by taking advantage of the anticipated end to compulsory annuitisation and using income drawdown arrangements. But this will only benefit the few.
From an actuarial perspective, it is hard to see the logic behind banning the use of a risk factor that can have a significant bearing on the cost of providing insurance. Although the ECJ is not accountable for its decisions, its judgment is based on political ideologies as captured in the European Council’s Directives – or at least the judges’ interpretation of the Directives as drafted by European politicians.
Occupational pension schemes are better placed than insurance companies in that they have a well-defined membership and so are less exposed to the risks of selection. In many cases it should thus be possible to minimise any extra costs that may arise from being forced to ditch gender-based actuarial factors, although careful thought will be needed when setting unisex factors.
However, exceptions include schemes that have commutation rules that require the actuary to certify that the lump sum represents equivalent value to the pension foregone, in which case levelling-up to female factors may be required. Schemes that allow pension to be surrendered in favour of spouses and/or dependants may seek to discontinue that option.
Even if unisex factors have to be used when members exercise options, it should still be possible to continue to use gender-based mortality tables for valuation and funding purposes.
Many schemes already use unisex factors, particularly for commutation and early or late retirement. Those that do not (or not across the board) will have to review their practice in due course (but see below).
It will be interesting to see what changes the Government makes to UK legislation in light of the ECJ’s ruling.
We hope the Government would limit the retrospective impact of any ban on gender-based factors so that unisex factors only have to be applied to benefits accrued after a certain date. This would be good news for schemes that had already been closed to future accrual.
