On 1 March 2011 the European Court of Justice gave its ruling on the well publicised Test-Achats case. The court ruled that the use of sex as a factor in calculating premiums and determining benefits payable in private insurance contracts must be abolished.
The decision grabbed headlines in the national press on the potential effects on the motor insurance industry - where females have traditionally enjoyed cheaper premiums when compared to their male counterparts. The potential additional cost of premiums for females has prompted extreme reactions. However, the decision may also have far reaching consequences for the pensions industry. The decision could have a significant impact on scheme funding and the way in which schemes have up until now operated.
Background - European Union Law
Equality of treatment as between men and women is enshrined in EU law as a fundamental right.
The principle permeates all areas of the law including access to goods and services. The Gender Directive follows this principle and confirms at Article 5 that member states are to take steps that, where any new contracts are taken out after 21 December 2007 the use of sex as a factor in calculating premiums and benefits for the purpose of insurance and related financial services must not result in differences to individual premiums and benefits.
However, Article 5(2) of the Gender Directive allows derogation from this principle so that in some member states it is permissible, for the purpose of insurance and related financial services, to apply sex based differences in individual's premiums and benefits if these are based on objective actuarial and statistical data.
The Test Achats case
Test Achats is a non-profit Belgian consumer organisation which in 2008 along with two other individuals brought an action before the Belgian Constitutional Court. They submitted that the Article 5(2) derogation in respect of insurance policies was incompatible with the principle of equal treatment between men and women. The case was referred to the European Court of Justice (ECJ) as it alone has jurisdiction to decide the issue.
On 30th September 2010 the Advocate General delivered her opinion recommending that the ECJ declare Article 5(2) of the Gender Directive to be invalid as incompatible with the fundamental right of equal treatment as between men and women.
On 1 March 2011, the ECJ published its opinion agreeing with the Advocate General that Article 5(2) is invalid. However, the invalidity will not take effect until 21 December 2012 to allow for a transitional period - presumably to allow the insurance industry to adapt to the change.
How does this affect UK pension schemes?
Typically a person's pension pot is used to purchase an annuity when they retire. Currently, there is a difference in the cost of providing the same level of a single life annuity for a man and a woman in equal circumstances - this is because women, on average, live longer than men. In practical terms therefore a woman receives a smaller amount of pension for the same pot of money. It is expected that because of the ECJ decision a male member will receive a smaller annuity income when their benefits are brought into line with those for women.
Pension schemes may be forced to use gender neutral actuarial factors which are used to calculate early and late retirement, transfer values and commutation rates. As well as having a knock-on effect of increasing the costs for schemes, trustees and sponsoring employers may also need to consider whether current actuarial factors can be safely relied upon.
The full extent of developments as a result of the Test-Achats ruling remains to be seen. We wait to see how the annuity market will react and how pricing will be impacted. In the meantime pension scheme trustees need to be speaking to their lawyers and actuaries to assess the likely impact on their schemes.