ECJ ruling will affect Annuity rates

Financial News

The European Court of Justice (ECJ) has this morning ruled that gender cannot be taken into account by insurance companies when setting premiums.

Not only will this affect things such as car insurance premiums, which are expected to rise for women and fall for men, it will also affect the Annuity rates offered to both men and women.

Why does it affect Annuity rates?

An Annuity is a method of turning a lump sum of money, generally from a Pension fund, into an income. Historically insurance companies who provide Annuities have used various factors, including age, gender and state of health to determine the Annuity rate that an individual would get.

As men have shorter life expectancies than women, male Annuity rates are generally higher than for a woman of the same age.

The ECJ ruling will mean that insurers will no longer be able to use gender as a means of setting Annuity rates.

What affect will this have on Annuity rates?

If you have already bought an Annuity nothing will change, only Annuities bought in the future will be affected.

The ECJ have given insurers until the 21st December 2012 to comply with the ruling.

Although the ruling was only confirmed this morning Annuity providers have been working behind the scenes on their response for some time.

Some providers will no doubt simply decrease the Annuity rates offered to men, experts believe that this could mean a reduction of between 3 – 8%. It is possible that we will see Annuity rates for women rise; although this would mean a reduction in the profit margin of the insurer.

The more likely scenario is a compromise where insurers reduce the Annuity rates offered to men and increase those for women allowing both male and female rates to meet somewhere in the middle.

In the highly competitive Annuity market it will be interesting to see which Annuity providers make the first move and when, December 2012 is a long way off.

What now?

The ECJ ruling was expected by many, however the deadline of 21st December 2012 for compliance will be viewed positively as it was feared an immediate change would be necessary.

The longer than expected deadline will mean Annuity providers have time to take a breath, step back, and consider their response.

Despite recent Annuity rate rises many experts believe that there is long term downward pressure on Annuity rates, only time will tell whether the ECJ ruling is one such pressure, at least for men.