February 22, 2011 / 1:50 PM / in 7 years

SCENARIOS-Pensions in a gender-neutral market

* Women could get more pension extras, men less

* Prudential, L&G committed to stick to annuities

* Some insurers will still try to work out gender

By Cecilia Valente and Sarah Mortimer

LONDON, Feb 22 (Reuters) - A ruling by the European Court of Justice (ECJ) expected next week could boost women’s retirement income by up to 10 percent and make men worse off, creating upheaval in the insurance sector. Insurers currently pay retired men who have purchased an annuity more than women on the basis that on average they live three years less, according to investment adviser Hargreaves Lansdowne.

European Union Advocate General Juliane Kokott argued in a preliminary finding last September that gender should not count as a risk factor for annuities, saying economic and social conditions also influence life expectancy.

If judges in the ECJ incorporate her views, the gender disparity in annuities would end, which could impact profit at insurers like Legal and General (LGEN.L) and Prudential (PRU.L), unless costs are passed on to clients.

Here are some possible scenarios highlighted by pension experts and lawyers:


Women could in theory see total increases in payouts of pension annuities of hundreds of millions of pounds, said Andy Cheseldine, principal at consultant Lane Clark and Peacock.

The Association of British Insurers has advised its members that “it would be sensible to consider the implications (of such a scenario) for the customers and business” in the run-up to the judgment, expected on March 1, a spokesman told Reuters.

The change, if it means men are paid less per month, could also drive male clients in Britain away from the annuities market.

Furthermore, a forthcoming change in the law will drop the obligation on retirees to buy an annuity with their pension savings. The judgment could make men approaching retirement, especially those with a large pension pot, look for alternatives such as high yielding investments or property that can provide a rental income.

Because British retiress are currently forced to buy an annuity with their pension savings, the UK accounts for about half the global market for annuities, said Cheseldine.

The costs of processing each annuity application would rise too if insurers are forced to base calculations on alternatives to gender, such as lifestyle, leading to a more complex, and therefore costly process.

“There would be a massive amount of investigation in order to determine how long that particular person will live. It is a headache for everybody,” said Zoe Lynch, partner at law firm Sackers.

“Men would lose out by more than 10 percent and women would gain by less than 10 percent,” Cheseldine said.

A swift change would be the “most likely” event, according to Lace Khalaf, a pension analyst at Hargreaves Lansdowne.

Speculation in pension circles has mounted that the change would prompt some providers to pull out of annuities altogether, but both Prudential and L&G, the main British players, told Reuters they would not leave the market, whatever the judgment.

French insurance group Axa (AXAF.PA) declined to comment, while German insurer Allianz (ALVG.DE) was not immediately available for comment.


    The ECJ could accept the advocate general’s suggestion to allow a transitional period for member states to decide what action to take on domestic laws and give companies a chance to adjust.

    The hiatus between ruling and implementation could give companies and clients time to find ways to mitigate the knock-on effect.

    For instance, demand for impaired life annuities, which provide higher than normal income to consumers with a health problem and make up 10 percent of the industry, could rise and impact healthy consumers, Cheseldine said.

    Annuity pension providers could also start finding alternative ways to discover an applicant’s gender without asking directly, another insurer told Reuters, declining to be identified.


    The ECJ could rule that all existing annuity contracts would have to be rewritten to reflect unisex rates, but this would be a “fairly unlikely chance”, Hargreaves Lansdowne’s Khalaf said.

    “If that is the case, there will be an upheaval for insurers and for pensioners,” he added.


    The ECJ usually follows the advocate general’s opinion but it is not bound to do so. The ECJ could in theory declare the European Gender Directive, which inspired Kokott’s opinion, invalid in respect of annuities, leaving matters unchanged.

    Editing by Rex Merrifield, Chris Vellacott and David Cowell

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