21st December 2012
Today may or may not prove to be the apocalypse predicted by the Mayans. Probably of greater significance, 21st December 2012 will more be remembered as the day insurance companies were stopped from underwriting their products on the basis of a person’s sex.
It is an issue that can certainly prove divisive, depending on whether you are going to be a winner or a loser. PricewaterhouseCoopers believes a male with a £100,000 pension pot will be £10,000 worse off as a result. Women may be a bit better off, but overall, more money will be kept by insurers.
The new rules, which follow a decision in the European Court of Human Rights, have been cast with the best intentions. But it looks like there will be more losers than winners.
It all comes down to risk. It may be sexist to divide the population on basis of gender, but it is a statistical fact that young men are riskier drivers than young women. And older men are more at risk of slipping off this mortal coil than women of the same age.
These differences have been reflected in insurance products since time immemorial. And annuities have been no exception. The average 65-year-old male buying an annuity is expected to live to 86 years and a month. The average woman on the other hand can expect a retirement more than two and a half years longer. So historically, when retirees have cashed in their pots to buy an annuity, men have been given around 8 per cent more, to reflect the fact they will be receiving the income for fewer years.
But the Test-Achats case, a case brought to the European Court by a Belgian consumers’ organisation, found it discriminatory to underwrite insurance products on the basis of a person’s gender.
Morally and intellectually the Court’s decision is right. Refusing access to a particular insurance rate on grounds of gender is by its very nature discriminatory.
Transpose the argument to ethnicity and the Court’s reasoning becomes even clearer. Few people would expect insurers to give different annuity rates to people based on their ethnic origin, even though there is clear statistical evidence that people from different ethnic groups have different life expectancies.
Ironically, this stance on ethnicity actually penalises people from ethnic minorities, many of whom have shorter life expectancies than white British people, meaning they would get higher annuities if such an approach were allowed but will not do so now.
On the other hand, insurers are allowed, and do, underwrite annuities on the basis of postcode. People in certain postcodes in London can expect to live 14 years longer than those in Glasgow, and insurance companies reflect this in the rates they offer.
Women will see some improvements in today’s new gender neutral annuity rates, although experts say their gains will be minimal, and in some cases non-existent.
Legal & General says the new rules mean its male rates are down 3 per cent while its female rates are up 3 per cent. Aviva says its female rates are up between 2 and 4 per cent while its male rates have fallen by between 1 and 2 per cent. Aegon and Prudential say they have uprated female rates to male rates.
But Philippe Guijaro, life insurance partner at PricewaterhouseCoopers believes these figures, which paint a relatively benign picture of the results of the changes, do not reflect the reality. Annuity providers have known about today’s historic rule change for a couple of years now. He argues that insurers have been massaging rates downwards to conceal the full extent of the price changes this gender neutral pricing will bring.
Guijaro reckons male annuities are now around 8 per cent more expensive as a result of the change. Given the fact that around 80 per cent of annuities are sold to men, women’s annuities would need to be about 32 per cent cheaper for the whole exercise to have worked out cost neutral across both sexes. Yet women’s deals have improved by less than a tenth of that figure.
Part of the problem is insurers now have to spend money insuring themselves against ‘getting too many women’ on their books.
So the new rules are a mixed blessing. But whether you are a winner or a loser, the debate over gender underwriting highlights the importance of underwriting generally. And for anyone buying an annuity that means shopping around to get the very best rate possible.
In most cases the worst thing you can do is stick with your pension provider when you come to buy your annuity at retirement. Shopping around for the best deal can give you up to 15 per cent more income for life if you are healthy. And if you have a medical condition that might affect your longevity you can often get up to 20 per cent more by going to an insurer that offers enhanced annuities for those in poor health. Combined, that could give you a third more income for the rest of your life, simply by shopping around for a better deal when you retire.
Even conditions such as high blood pressure and cholesterol will give you an enhanced rate. Smokers too can get up to 14 per cent more, on account of their reduced life expectancy.
Today’s ban may have stopped men from benefitting from gender when buying an annuity. But it should serve as a reminder for us all to ensure we make the most of any other underwriting factors we can benefit from by shopping around for an annuity.