On 1 March 2011 the European Court of Justice (ECJ) gave its ruling in the Test-Achats case. The ECJ ruled that the use of sex as a factor in calculating premiums and determining benefits payable in private insurance contracts must be abolished.
The decision grabbed headlines in the national press on the potential effects on the motor insurance industry, where women have traditionally enjoyed cheaper premiums than men, especially at younger ages. However, the decision may also have far-reaching consequences for pension schemes.
Background – European Union Law
Equality of treatment of men and women is enshrined in EU law as a fundamental right. This principle permeates all areas of the law including access to goods and services. The Gender Directive followed this principle and required that, from 21 December 2007, the use of sex as a factor in calculating premiums or benefits for the purpose of insurance and related financial services must not result in differences to individual premiums and benefits.
However, Article 5(2) of the Gender Directive allowed member states to apply gender-based differences in individuals’ premiums and/or benefits if these were based on objective actuarial and statistical data.
The Test-Achats case
“Test-Achats” is a non-profit Belgian consumer organisation which in 2008, along with two other individuals, brought an action before the Belgian Constitutional Court. They submitted that the Article 5(2) exemption was incompatible with the principle of equal treatment between men and women. The case was referred to the ECJ as it alone has jurisdiction to decide the issue.
On 30 September 2010 the Advocate General delivered her opinion recommending that the ECJ declare Article 5(2) of the Gender Directive to be invalid as incompatible with the fundamental right of equal treatment as between men and women. On 1 March 2011, the ECJ published its judgment, agreeing with the Advocate General that Article 5(2) is invalid and that any new insurance contract entered into after 21 December 2012 will have to have premiums and benefits calculated on a unisex basis.
How does this affect pension schemes?
In a Defined Contribution scheme, typically a member’s pension pot is used to purchase an annuity when he or she retires. Currently, there is a difference in the cost of providing the same level of single life annuity for a man and a woman in equal circumstances because women, on average, live longer than men. In practical terms therefore a woman receives a smaller amount of pension for the same pot of money. It is expected that, because of the ECJ judgment, a male member will receive a smaller annuity income when his benefits are brought into line with those for women.
However, if a member purchases an annuity with an attaching spouse’s pension payable after his death, the effect on pricing should be almost negligible (assuming a spouse of the opposite sex).
The judgment did not apply specifically to actuarial factors used in Defined Benefit pension schemes. However, there is speculation that schemes may be forced to use gender-neutral factors to calculate early and late retirement pensions, transfer values and commutation rates. As well as having a knock-on effect of increasing costs (in requiring an additional review of a scheme’s factors), the trustees and sponsoring employers may also need to consider whether their current actuarial factors may be relied upon.