ECJ judgment – who wins and who loses?

On March 1 the Court of Justice of the European Union (ECJ) handed down its much anticipated judgment in Association Belge des Consommateurs Test-Achats ASBL and others case (Case C-236/09).

The court chose to follow the opinion of advocate general Juliane Kokott and ruled gender-based pricing in insurance contracts is unlawful.

The ECJ has allowed a transitional period so that gender based pricing will be invalid from December 21, 2012.

Although the judgment did not mention occupational pension schemes explicitly, it is likely to have a significant impact on the pensions industry. Annuity rates for men are now expected to drop to fall in line with those for women.

The ruling cannot be challenged or appealed as the ECJ is effectively the last stop for law making.

Who loses out?

Leaving aside the annuity implications (see Pensions Management’s analysis for more on that), defined benefit (DB) schemes could face unintended consequences.

Gary Tansley, consultant at HamishWilson, said: “It seems likely that the use of gender-dependent factors in DB schemes for such things as commutation of pension into cash, early or late retirement and transfer values will be deemed unlawful. Of these, it is commutation factors that will be affected the most, with men gaining at the expense of women if an attempt is made to achieve cost-neutrality compared with current gender-based factors.

“The biggest problem, though, may be for those schemes that allow members to surrender part of their pension when they reach retirement in favour of a larger pension for their spouse (or an additional pension for a dependant) payable following their death.”

Danny Wilding, partner at Barnett Waddingham, agreed that all DB transfer options need to be looked at before December 2012.

“At present DB schemes generally calculate sex-specific amounts for those wishing to transfer their benefits to a new employer’s scheme or a personal pension policy. Most receiving schemes will be defined contribution and the individual will ultimately use the proceeds of the transfer to buy an annuity at rates that are currently sex-specific and so the eventual benefits should be broadly similar for men and women,” he said.

“However, when annuity rates become sex-equalised there is likely to be pressure on pension schemes to provide sex-equalised transfer amounts, otherwise there would be an advantage for transferring women compared to men. It therefore seems sensible for trustees to assume that transfer bases are likely to have to become sex-equalised from December 21, 2012 in order to avoid possible future claims of sex discrimination.

“This would include enhanced transfer exercises that have been popular with many sponsors of late. In fact, for transferees with retirement dates of 2013 or later there is a case for a more immediate change to the calculation basis.”

Who wins?

Buyout providers could also receive a windfall as schemes seek to settle their pension liabilities before the gender ruling becomes a potential hurdle. There were differing opinions about how the ECJ judgment would affect the buyout market; LCP’s partner Charlie Finch said the initial view of some of the key insurance companies is the ruling will not affect pension buyouts, buy-ins and longevity swaps.

He added: “This will be good news for trustees who have plans in place to use the insurance market to derisk. If the ruling was to affect pension buyouts it could cause significant disruption to trustees’ derisking plans and potentially additional costs for sponsoring employers who are already feeling the heavy burden of providing final salary pensions.”

But lawyers at Norton Rose appeared to disagree, arguing that the evidence wasn’t as clear cut. Lesley Browning, partner, warned trustees considering a buyout exercise to seek advice in relation to any policy purchase in the transitional period between now and December 21, 2012.

“It is likely insurance will become more expensive in general, due to stricter underwriting tests, meaning that now, more than ever, it will be essential for trustees to shop around for a suitable product.”