Gender and annuity pricing in the EU

In a previous post we discussed the possibility of gender being banned throughout the EU as a rating factor for insurance pricing.  This has now come to pass — on 1st March 2011 the European Court of Justice ruled that gender may not be used in insurance pricing according to European law.  So what will happen now?

In the short term, annuity pricing itself will not change.  Insurers can continue to use gender in annuity pricing until 21st December 2012.  After that date, unisex insurance pricing will be in force.  This will lead to all sorts of unintended consequences.

Although pricing will not change in the short term, behaviours will change, possibly quite radically.  Men approaching retirement age with a personal pension will consider bringing forward their retirement plans — there is no sense in retiring on expensive unisex annuity rates if you can bring things forward and get fair-priced rates.  Equally, women approaching retirement might be tempted to defer until after 21st December 2012 for the reverse reason — there is no sense in getting fair-priced annuity rates if you think you can get a bit extra.

Sadly, the women in the above example may well be bitterly disappointed.  Free lunches are invariably an illusion in the world of annuities.  As it happens, unisex annuity rates stand a good chance of being almost identical to fair-priced female rates.  The reason is that there is another, much deeper pool of retirement savings which can easily swamp the annuity market: defined-benefit pension schemes.

Defined-benefit pension schemes promise an income in retirement, but larger ones are free to either self-insure or buy annuities for their pensioners.  Many schemes do both.  Now consider what will happen under unisex annuity pricing.  If a unisex annuity rate is cheaper than the female rate, then pension schemes could selectively buy out female pensioners, a point I made before the House of Lords Sub-Committee in 2004 and echoed again this week by the Society of Actuaries in Ireland.  The effect would be to change the business mix in the annuity market: lots more female lives, fewer male ones.  Insurers will be only too well aware of this, and will price accordingly.  The safest price for them to charge is one based on female rates.

Other behaviours will change as well.  Somewhat closer to home, I normally make a personal-pension contribution around this time (March is the last month before the tax-year end in the United Kingdom).  Since this ruling means I won't receive a fair-priced annuity on retirement, I see little point in making my usual pension contribution.  If other men come to the same conclusion, it will make it harder for governments to switch from public to private provision for retirement.  The ECJ judgement is only one day old, but the unintended consequences have already begun.