March 1 came and, as widely predicted the ECJ backed up the Advocate General’s view and banned gender discrimination in annuity rates. What was less widely expected was the 21 month window offered, with discrimination only outlawed from 21 December 2012. This window should give providers plenty of time to consider how to handle the change.
I think that it is likely that we will see a more sophisticated approach to underwriting annuities. Simple differentiation based on gender alone has always been a very crude way of estimating life expectation. My late grandmother and Queen Elizabeth the Queen Mother were both born in 1900. Both were females, but whereas the Queen Mother died in 2002, my grandmother died in 1972 a full 30 years earlier. This example highlights very strongly that gender alone does not determine life expectation.
Annuity providers were not just sitting there waiting for the announcement. One cut its rate guarantees so that no quote was guaranteed past 28 February. Another announced that it was equalising its male and female rates ahead of the ruling; something it is very easy to do when your rates are not competitive. Others had planned to close for new business for an indeterminate period until they knew what the market was doing.
Before the announcement the doom-mongers were saying that male annuity rates would be equalised down to match female annuity rates. There were ‘buy now while stocks last’ signals coming from some providers looking to cash in on the uncertainty. Now we have some clarity and it is clear that clients who were not planning to buy an annuity this year do not need to take any action. Rates could still move up with interest rates, before the impact of equalisation is felt.
We will continue to monitor the annuity market carefully and would recommend advisers in this area of advice to do likewise. If it is clear that rates are moving ahead of the December 2012 deadline, we will take appropriate action. Otherwise we expect it to be business as usual for some months to come. Before this announcement, we always recommended the use of the Open Market Option, and this will be particularly important now, in case some uncompetitive annuity providers decide to reduce their rates now to benefit from policyholder inertia.
There seems to be a general expectation that rates will be equalised down, with men getting annuity rates similar to those currently offered to women, but I do not believe that this will be the case. The annuity industry has been given 21 months to consider how to underwrite people buying annuities more effectively, and hopefully this will result in a better outcome for all of them.
David Trenner is technical director at Intelligent Pensions