Gender Income Inequality – Bad at Work, Good in Retirement?

CEO of NOW: Pensions Morten Nilsson

CEO of NOW: Pensions Morten Nilsson

Up until now men’s annuity rates have tended to be higher, thus providing a greater annual retirement income, than women’s because male life expectancy is shorter (78.2 years for males, 82.3 years for females in 2008-2010[1]).  Given the same pension pot, men’s savings don’t have to last as long, so they can take more of it at a time.

However, the European Court of Justice (ECJ) ruling from 1 March 2012 declares this practice discriminatory, and so we can expect a harmonisation of male and female annuity rates.  According to ECJ’s ruling, “taking the gender of the insured individual into account as a risk factor in insurance contracts constitutes discrimination”[2].  In other words, gender cannot form part of the determination of annuity rates in the same way age, location or wealth can, from 12th December 2012 onwards.

Commentators don’t expect rates to meet in the middle, however.  It is far more likely that male rates will simply drop to almost meet the levels of today’s female rates.  Estimates for the reduction in male annuity rates range from 5% to 13%[3].

Obviously, in principle gender equality is a good thing.  Why should men receive a greater retirement income than women?  And the ECJ didn’t really have a choice in coming to their conclusion; “discrimination based on sex [is prohibited] in the access to and supply of good and services” regardless of context.  But the law exists to stop unfairness and irrationality, and in this instance that is exactly what is being created.  It makes sense for rates to be unequal where life expectancy is unequal.

The fact is that all male retirees, and all female retirees who at least to some degree will depend on a male retirement income, will lose out as a consequence of this ruling.  The only winners are single female retirees, and even they are likely to only see a small rise in rates at the expense of big falls for everyone else.

Interestingly, the Association of British Insurers points out that the ruling also leaves the door open for similar legislation in the fields of age and disability legislation in the future[4].  Again, the logic would be sound on first inspection, but in reality would amount to a reduction of retirement incomes for even more people.

Turmoil in the annuity world, furthered by low gilt yields and the looming Solvency II EU legislation, means it is more important than ever to build up as large a pension pot as possible, to protect against annuity price fluctuations and to carefully choose the right annuity.  It will also be up to the pensions industry itself to perform better in order to provide those savings, and mitigate the negative trends currently pervading the end of the retirement saving process.

[2] ECJ, 2011.  PRESS RELEASE: Judgement in case C-236/09 – Association belge des Consommateurs Test-Achats ASBL and Other v Conseil des minstres.  European Court of Justice

[3] This is, 11th February 2011

[4] Money Marketing, 23rd April 2012.  ABI warns over EU gender pricing implications.  Centaur Media Plc

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