In a landmark judgment published this week1, the ECJ ruled that sex cannot be used as a risk factor in pricing the cost of, or the benefits from, private insurance contracts. The judgment will have consequences for the pensions industry, beyond the well-publicised effect on car insurance premiums.
Test-Achats concerned a derogation from the Gender Directive (2004/113/EC). The Directive provides a framework for combating discrimination based on sex in the access to goods and services. Specifically, Article 5(2) of the Directive allows Member States to permit, for the purposes of insurance and related financial services, sex-based differences in individuals’ premiums and benefits if these are based on objective actuarial and statistical data.
The case came before the ECJ following an action brought in Belgium by the Belgian consumer organisation, Test-Achats, and two private individuals. They submitted that the Belgium law applying the Article 5(2) derogation, albeit only for insurance policies, was incompatible with the prohibition of discrimination on grounds of sex which is enshrined in EU law as a fundamental right. The Belgium Court referred the case to the ECJ.
The Advocate General Opinion’s, delivered in September 2010, recommended that the ECJ should declare Article 5(2) of the Gender Directive invalid. The Advocate General noted that although the derogation in Article 5(2) was intended to take into account the specific characteristics of insurance, the use of sex as a basis for premiums and benefits was discriminatory and based on differences between men and women that were purely statistical. As put by the Advocate General, discrimination “is only permissible if it can be established with certainty that there are relevant differences between men and women which necessitate such discrimination”.
The ECJ has followed the Advocate General’s Opinion and declared Article 5(2) invalid on the basis that “taking the gender of the insured individual into account as a risk factor in insurance contracts constitutes discrimination.” Article 5(2) will continue to have effect until 21 December 2012 to allow for a transitional period.
Pension insurance-based products
The annuity market will be directly effected by Test-Achats.
In the UK, a person’s retirement savings are usually used to purchase an annuity when they retire. Gender has been historically used in pricing annuities.
As women, on average, live for longer than men, they receive a smaller annual pension for the same pot of money. It is expected that the ECJ’s decision will result in men receiving a lower annuity income when their benefits are brought into line with those for women. By contrast, women may gain slightly from the drop in men’s annuity income.
It should be borne in mind, however, that unisex pricing of annuities is not a new concept to the annuity industry. An individual’s protected rights pension pot must already be priced on a mandatory unisex basis.
For those individuals who already have an annuity contract in payment, although Article 5(2) will now be invalid from 21 December 2012, the prospective effect of ECJ’s decisions indicates that it did not intend there to be a re-pricing of the annuity income.
As well as future annuities, and dependent on how insurance companies choose to implement Test-Achats, there will doubtless be a knock-on effect on buy-outs, longevity swaps and a number of other insurance-based products associated with pension schemes.
Actuarial factors in pension schemes
The effect of Test-Achats on benefits within occupational pension schemes is less straightforward. Some commentators have argued that scheme trustees should switch to unisex actuarial factors, others think that the decision does not go beyond insurance policies.
Although the judgment is silent on the point, the Advocate General’s Opinion, in commenting on the previous ECJ’s decisions in Neath and Corollol (which held, obiter, that the use of gender-based mortality tables did not infringe the equal pay principle), pointedly said that the ECJ in those cases had not (because it did not need to) commented on the overriding principle of the prohibition of discrimination on the grounds of sex under EU law.
It is likely to be only a matter of time before a similar attack is made on the use of gender-based actuarial factors in pension schemes. This would have a wide-ranging effect on transfer values and commutation factors, potentially increasing further the costs for schemes.