The European Court of Justice (ECJ) has won itself few friends among either pension providers or UK companies that happen to have final salary schemes, with its latest ruling which outlaws gender as a basis for determining annuities and life contracts. While actuaries deal with the world as it is, on the basis of highly reliable mortality tables which incontrovertibly show that women, on average, live longer than men, the ECJ deals in the idealised world of EC fairytales where all are equal in all possible regards.
Hence when the Belgian courts asked the ECJ to consider whether or not taking gender into account when writing private insurance contracts was proscribed by European anti-discrimination directives, the ECJ scratched its wig and decided it was. That this is a dafter ruling that the EU’s legendary obsession with straight bananas is manifest to all, since insurance is about statistics and probabilities, not about political correctness.
It may not be fair that women live longer than men, or that younger women have fewer motor accidents than younger men, but hey, facts are facts. Not in the world of the ECJ though. From 21 December 2012, gender-based decisions in the insurance services sector in the EU are out. While I find this deeply amusing, finance directors and trustee boards of final salary pension schemes will not. The present consequence of the mortality tables showing that men die earlier, on average, than their female colleagues, is that men enjoy a higher annual income, while women are expected to be drawing their somewhat smaller pensions for a few years more. Everything balances out in the round, as it were.
The industry’s solution will doubtless involve equalising annuities, which will be grossly unfair to some men and rather pleasing for some women who might get slightly larger annuities than they otherwise would have (though the industry might just level everything down). They were not being dealt with unfairly before, since the mathematical logic behind the annuity was flawless. Now there is a reasonable chance that they will be privileged at the expense of their male colleagues, which is “fair” according to the ECJ.
The irritating part for the finance function is that changes which incur time and expense will have to be made to schemes. Trustees will also have an extra duty, namely that of ensuring that the ECJ’s ruling is put into effect. Peter McDonald, pensions partner at PwC, points out that “in general, tax-free lump sums and pension transfer values will also need to be adjusted” – increasing costs and equalising payments, potentially leading to larger pension funding deficits. Proceed with great care.