The EU gender equality directive will make it unlawful to use gender as a differentiator in insurance and other financial products. From 21 December 2012 women will receive the same annuity rate as men when converting their pension pot into income.
Although current mortality figures show women still generally outlive men (the gap is reducing), this can no longer be used as a reason to price differently.
What will be the overall impact of the new rule as far as pensions and annuities are concerned?
Applying the rules
Not all pension schemes and retirees will be affected. Some confusion still exists about the way the ruling applies to work-based pension schemes and other types of pensions.
The equal treatment directive applies to occupational pensions and still permits gender-specific pricing, while the gender directive, which does not, applies to other types of pensions.
However, the European court of justice (ECJ) judgment and official guidance on the application of the gender directive suggest that if an annuity is purchased using funds held in a work-based pension scheme and without the involvement of the employer or the scheme, the purchase would fall under the scope of the directive and therefore would be subject to gender-neutral pricing.
In principle, this creates an incentive for female members of an occupational scheme to use the open market option but a disincentive for male members.
Providers are expected to launch unisex rates, with women better off by around 1% to 2% and men losing out by slightly less.
Many more men than women buy annuities and this has been an influential factor when pricing for unisex rates.
It is also important that women resist deferring the purchase of an annuity purely to obtain a unisex rate. Any modest increase in income could easily be reversed due to the real and immediate prospect of falling annuity rates in the prevailing economic climate.
HM Revenue & Customs (HMRC) has issued revised guidance on the use of Government Actuary’s Department (GAD) tables for drawdown, stating that until it becomes clearer how annuity providers will apply the ECJ judgment, the maximum drawdown pension for both men and women aged 23 and over (known as table 1) should be calculated using the higher male table 1 rates from 21 December 2012.
This will apply to the calculation of the maximum drawdown amount where the commencement or review of an individual’s benefits takes effect on or after 21 December 2012. It means: women will be able to take a higher drawdown pension income than before; men will see no change in the maximum drawdown pension they can receive and drawdown providers can continue using the existing table 1 rates but for more of their customers.
This applies equally to occupational money purchase schemes offering drawdown and personal pensions.
Recognising the enormous pressure on drawdown rates created by plummeting gilt yields, on top of the reduction in maximum income from 120% to 100% of GAD last year, HMRC decided on a damage-limitation exercise for the time being.
If opting under scheme rules to crystallise benefits via drawdown from 21 December 2012 until further notice, male members will be no worse off and females better off.
In a supplementary communication to the Association of Member-Directed Pension Schemes, HMRC said the change was intended to be a temporary solution to prevent the potentially negative impact of the ECJ ruling on men’s drawdown income while minimising higher costs for providers until the outlook is clearer.
HMRC said because of the uncertainty, the government had decided it would be premature to determine any permanent change just yet.
We can only hope that any permanent change will be announced as soon as possible.
Nigel Orange is technical support manager, pensions, at Canada Life.