Equal rights equals equal costs, regardless of the evidence

The European Court of Justice ruling that gender cannot be a factor when insurance companies set annuity rates will create winners and losers, but mainly losers.

With women outliving men by around two years, female annuity rates priced on a gender basis are currently around 4-5 % lower than for men of comparable age.

For instance, a £10,000 pension fund would buy a 60 year old woman today an annual income of £553 compared to £582 for a man of the same age, a difference of 5.24%. (source Moneyfacts 2 March 2011).

Unisex annuity rates

But when unisex annuity rates come into force from 21 December 2012, healthy male annuitants aged 65 could expect to see their rates fall by around 3%, while women’s rates might increase by around 1%.

At age 70, men’s rates might fall by up to 5%, while women’s rates will still only increase by around 1% and at age 75, men’s rates could fall by as much as 7%-8%, while women’s rates might rise by 2.5%, according to Canada Life.

The reason for men losing more than women gain is because men currently purchase the bulk of annuities of the 465,000 annuities sold each year (and with larger pension funds), although this will change gradually as women have longer working lives and build up larger pension pots.

Ros Altmann, director general of Saga says: “With eight in 10 of annuities being bought by men, the vast majority of buyers will receive lower retirement incomes.”

Not necessarily an advantage to women

This will disadvantage many women because joint life annuity rates will also fall by around 1%-2% where the first life is male. Many women reaching retirement today are without substantial pension funds of their own and are dependent on their husband’s joint life annuity for the bulk of their retirement income.

In the, currently rare, cases where a woman is the first life in a joint life annuity, the rate could increase by around 1%.

The same will apply to impaired life annuities. Insurers will have to offer the same rate to men and women of the same age who present with the same medical condition.

More complexity for pensions

The Government Actuaries’ Department’s draw down rates, which govern the amount of money individuals can take from their pensions under so called ‘capped’ and ‘flexible drawdown,’ will also be affected as GAD rates are based on the best rates offered by insurers.

If unisex annuities extend to defined benefit pension schemes, it could be equally damaging as liabilities would have to be valued using gilt rates and higher contributions would be required.

But the expected increases and decreases to annuity rates quoted above are only ballpark figures. How each insurer decides to price its annuities will depend on the specific profile of its annuity book.

Some experts expect insurers to price conservatively at the outset and that there will be an element of profit making in the early years.

That said, the gap between male and female life expectancy is closing rapidly, as men adopt healthier lifestyles (quitting smoking is a major factor), while women’s life expectancy is dropping due to stress, longer working lives and higher levels of drinking and smoking.

So the introduction of unisex annuities by December 2012 may be more a matter of annuity pricing reflecting what is happening to life spans anyway. In the meantime, men thinking about buying an annuity may be well advised to do so sooner rather than later.

Pam Atherton is a freelance journalist