Belgium is not just famous for its chocolates. Not many people know that actress Audrey Hepburn ranks among its famous offspring (alongside the creator of the Smurfs). So let's do things the Belgian way. Time to settle down to watch Breakfast at Tiffany's with a large box of pralines and a smooth glass of Stella Artois…but not until we have considered the implications of the "Test-Achats¹" case (which was also born in Belgium, in case you are wondering).
EC Council Directive 2004/113 is concerned with implementing the principle of equal treatment between men and women in the access to and supply of goods and services. In Test-Achats, the ECJ considered a provision in this Directive which allows Member States to permit differences in the calculation of individuals’ premiums and benefits for the purpose of insurance and related financial services, where the different treatment is based on gender based risk factors. The ECJ ruled that such a provision, which enables Member States to maintain – without temporal limitation – an exemption from the rule of unisex premiums and benefits, is contrary to the objective of equal treatment between men and women. As such the provision is to be considered invalid from 21 December 2012².
The impact on occupational pension plans
The Test-Achats judgment concerned differences in the treatment of men and women in the calculation of premiums and benefits for the purpose of insurance and other related financial services. This will have a direct impact on the provision of annuities used to secure members’ benefits under occupational pension plans. As women normally live longer than men, annuity providers currently tend to offer a higher level of benefits to men. From 21 December 2012, they will no longer be able to pay different levels of benefits based on the sex of the annuitant.
Is this judgment wide enough to catch occupational pension plans to prevent them from applying sex based actuarial factors to benefit calculations such as early and late retirement factors, cash equivalent transfer values and commutation rates? Currently under UK legislation, the Equality Act 2010 allows a sex based distinction in such actuarial factors, as an exception to the principle of equal treatment between men and women. The exception reflects the provisions of a different Directive to the one considered in Test-Achats – Directive 2006/54 (also known as the Equal Treatment Directive).
For now it would appear that pension plan trustees can rely upon UK legislation to continue with the practice of applying gender based actuarial factors, where this is permitted by the Equality Act 2010. In time, this practice could be the subject of further case law or the relevant legislation could be amended, bringing it into line with the ECJ judgment in Test-Achats. We would therefore advise trustees and sponsoring employers to keep a close eye on developments, as although this ruling does not have direct impact on the use of gender based actuarial factors, it may indicate a general direction of travel. If it transpires that the use of sex based actuarial factors in pension plans is incompatible with the principles of equal treatment between men and women then trustees and employers will need to take action to achieve unisex factors or may be faced with allegations of sex discrimination.
Here are some action points for the trustees of occupational pension plans, arising from the Test-Achats judgment.
- Where annuity quotes have already been obtained – confirm with the annuity provider that these quotes will not alter in view of the ECJ decision.
- Consider issuing communications to members with money purchase benefits – warning them of the likely changes to annuity rates (this may be of particular importance to those approaching or considering retirement). Emphasise the importance of taking independent financial advice and the availability of the open market option.
- If contemplating a buy-out or buy-in of liabilities, consider the impact of the Test-Achats decision on the pricing of annuities and, following on from this, the timing of the exercise.
- Although we feel that it is too soon in general for pension plans to take action to equalise actuarial factors it would be prudent to consider funding implications with the Actuary and then take a view as to whether any pre-emptive action is both desirable and feasible. Specific legal advice would also be needed.