My first lesson in sexual equality took place in 1968 when, as a young trainee with Guardian, I came across my first branch manager. He had a simple approach to talking to staff and all were called by their surname, regardless of sex. A man ahead of his time, perhaps.
I had a classical insurance training. One of the first principles I was taught was that a person pays to the common insurance fund according to the risk they represent and that underwriters have developed a number of ways of evaluating risk and pricing accordingly. This has led to women paying less for life and motor insurance and more for health insurance and annuities.
From the underwriters' viewpoint, each risk is priced and does not have to make any assumption as to the proportion of male and female lives taken into the fund.
My training took place over 30 years ago. Life has moved on, particularly in a social sense.
The desire of the EU to delete sexual discrimination in underwriting is an example of the dynamic nature of our business. As with all social change, the interesting part is working out what will be the impact over the long term and spotting the unseen implications of the change.
The most significant impact of this change is on the unisex pricing of annuities. I wonder if there are two hidden impacts of the proposal?
The first relates to final-salary pensions, where a woman receives the same pension formula as a man, despite the fact that she will live longer and will therefore receive a higher total value, which means that her pension will cost her employer more than a man of the same age and length of service. Does this mean that to be treated equally, a woman will receive a pension based on 70ths and a man 60ths or that female contribution rates will rise? Neither of these situations can be intended but could be an unintended consequence of this legislation.
The second potential impact that I can see relates to pure annuities. If unisex pricing is made compulsory, it will mean that the actuary will have to make an assumption as to how many males and how many females will join the fund in future.
Now, we all know that actuaries are conservative souls – even more so now after the events of the last few years – so they will err on the side of caution by assuming that more longer-living females will join the fund. The result will be a twofold pressure on rates – the first from applying unisex principles and the second from the assumption as to the spread between males and females. The result will be a reduction in annuity rates that are already regarded as poor value by the consumer.
The difficult part about making a prediction is that very often there are other forces at work – in this case pension simplification, which will increase the level at which commutation can be taken and allow unsecured income to continue beyond age 75.
The increase in commutation is interesting as it means that those with smaller funds will no longer buy an annuity. Actuaries will tell you that those with smaller funds die sooner and are therefore more profitable.
So, dear reader, if you have stayed with me this far you will see that the humble annuity is about to suffer a triple whammy – unisex pricing, conservative assumptions of the numbers of males and females in order to arrive at a unisex price and removal of the more profitable small funds. The Inland Revenue is also about to allow income drawdown to continue beyond age 75, albeit on conservative terms. The result of all of this could be a significant reduction in annuity sales.
Could it be that the Government will by stealth have given the Conservatives what they seek – an end to the annuity?
Bob Bullivant is managing director of Sofa