Government pension change sorts out gender inequality in a favourable, but illogical way

Out-Law Analysis | 17 Aug 2012 | 10:05 am | 1 min. read

OPINION: The Government's recently-announced approach to drawdown limits has sorted out some gender inequality but it is not logical and could have unpredictable market consequences.

It fails to take account of the fact that the relevant gender equality requirement only applies to certain sorts of pension scheme. This may have unpredictable knock-on effects for savers faced with decisions on retirement between competing pension products.

Following the ECJ ruling that insurance companies cannot base the price of annuities on the gender of a person, the Government adopted a new policy (1-page / 23KB PDF) on drawdown that fixes the problem. However, it applies to all pension schemes offering drawdown, even though the ECJ ruling does not generally apply to occupational pension schemes.

There are two ways for people to get money from their pensions. One is drawdown (also known as income withdrawal). This enables a member of a defined contribution scheme to draw an annual income directly from their pension savings. The level of that income is not guaranteed since the amount savings will continue to depend on how they are invested.

The other is an annuity, which is a policy issued by an insurance company that converts all or part of your pension fund into a guaranteed level of pension income payable to you for life.

In the Test-Achats case the ECJ ruled that insurance companies will not be able to base the price of annuities on gender on new contracts concluded from 21 December 2012. The ban is likely to mean that annuity costs will go up for men and fall for women.

The ban applies to personal pension schemes, but it does not generally apply to annuities bought by trustees of occupational pension schemes. The Government has indicated that it does not intend to extend the ban to occupational pension schemes, so those schemes may be able to give men a better deal on annuities.

What the Government has now done is increase the amount of drawdown income that women can take from schemes so that it matches that of men. This gives women an advantage they didn't have before. But the Government did not need to grant women that advantage in relation to annuities bought by trustees of occupational pension schemes.

The logical thing to do would have been to set two different drawdown limits depending on whether the ban on gender-based pricing applies. But instead the Government has avoided the issue: drawdown for men is not worsened; drawdown for women is improved. Who is going to complain?

This is a welcome response to the ban on pricing annuity contracts according to gender. But it also has an impact on the competitive market between drawdown and annuities, which could have consequences that are quite unpredictable.

Simon Laight is a pensions expert at Pinsent Masons, the law firm behind Out-Law.com