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Annuity edge

With a savings gap of £27bn in the UK, the current generation of working-age people are not making proper provision for their retirement, particularly woman. The ABI&#39s pensions and savings index shows that 46 per cent of working women are not saving enough for their retirement.

Demographic projections reveal a serious problem for most developed countries. Mortality tables show that people are living longer and making greater claims on pension funds but birth rates are falling, meaning there are fewer people of working age to generate the wealth needed to sustain pension funds.

Last November, the EC proposed a directive on equal treatment between men and women. As far as insurance is concerned, the directive would outlaw differentiation on the basis of sex in setting premiums. This may sound entirely reasonable. After all, have we not had sex discrimination legislation in the UK for almost 30 years? However, the ABI has analysed the impact of the directive and the findings are unsettling. The directive runs contrary to the interests of those it is designed to protect.

Current industry practices do differentiate between men and women but only where those differences are justified objectively, with motor insurance the most obvious example. Insurers take a number of factors into account in setting motor insurance premiums including the type of car, the owner&#39s postcode, the experience of the driver and gender.

Ninety-seven per cent of convictions for dangerous driving are for men and younger female drivers are statistically a much better risk for insurers than young male drivers. This is reflected in younger women paying about 25 per cent less for motor insurance than their male counterparts. In view of claims statistics which show the much higher risk of younger male drivers causing a serious accident, this seems fair.

If the EC&#39s proposals were accepted and insurers could no longer use gender as a factor in calculating motor insurance, premiums for younger female drivers would increase and premiums for younger male drivers would be reduced. Effectively, safer female drivers would be subsidising more reckless male drivers. The move scarcely sends a positive signal on equal treatment or road safety.

Supporters of the directive point to the annuity gap between male and female pensioners and suggest that unisex annuity rates would encourage women to save for retirement. As with motor insurance, life insurance companies use a combination of published data and their own experience to price annuities. The key factors taken into account are gender, age, type of annuity and size of lump sum.

As women on average live longer than men – figures from the Government Actuary&#39s Department show that life expectancy at age 65 is 15.93 years for a man and 19.02 years for a woman – the same size pension fund produces slightly less retirement income for a woman. For example, average annual income from an annuity at age 65 for a pension pot of £10,000 is £712.50 for a man and £600 for a woman. Annuity rates differ but men and women should receive broadly the same return from their pension pot, the difference being that a woman&#39s return is spread over her longer lifespan.

It is difficult to predict how individuals would react if the proposals were accepted and unisex rates applied in the annuity market. The differences between male and female rates are less stark than in motor insurance but the ABI fears the directive would not be the incentive for female saving that its supporters suggest.

A woman aged 60 with a pension pot of £10,000 buying a single-life, inflation-linked annuity might expect to receive £37 a month. A unisex rate might produce less than £2 a week extra – an increase of only 7 per cent. These enhancements are unlikely to make even a slight impact on the savings gap, let alone bridge it.

We believe the best way of raising the level of female annuities is by encouraging women to save more and earlier through incentives and education. If a woman were to save an extra £10 a month from age 25, she could buy an annuity at age 60 and receive £92 a month – an increase of 145 per cent. The message is a simple one. It pays to save.

Hugh Savill is head of European and international affairs at the ABI


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