Is it the end of the road for sex-based actuarial factors?

Introduction

The highly anticipated ECJ decision in the Test-Achats case1 was published yesterday. The case challenged the validity of an exemption in a European Directive2 (the “Directive”) which permits insurers to use sex as a determining factor in their assessment of risk, where it is based on “relevant and accurate actuarial and statistical data”.

Key points

From 21 December 2012, insurers will no longer be able to use gender as a risk factor when assessing premiums and benefits under insurance policies.
The decision will impact upon the purchase of certain annuities by pension scheme trustees and members alike.
The wider impact on occupational pension schemes (which currently benefit from a separate legislative exemption allowing the use of sex-based actuarial factors) is, as yet, unclear.
However, the ECJ’s decision may well prompt the Government to consider the legality of using sex-based factors more generally.

Background

The Directive provides a framework for combating discrimination based on sex regarding the access to and supply of goods and services. Its preamble indicates it does not apply to men and women “in matters of employment and occupation”, as this is dealt with elsewhere in EU law.

The Directive generally prohibits the use of sex as a factor which would result in different premiums and benefits being used for men and women in insurance products. However, when implementing the Directive, Member States were able to take advantage of an exemption under article 5(2) permitting “proportionate differences” in individuals’ premiums and benefits, “where the use of sex is a determining factor in the assessment of risk based on relevant and accurate actuarial and statistical data”.

The Challenge

The Belgian Government took advantage of the article 5(2) exemption for life assurance contracts. Test-Achats (a non-profit making consumer organisation) brought an action for annulment on the basis that the law was incompatible with the principle of equal treatment for men and women. The case was referred to the ECJ.

ECJ decision

The ECJ noted that the Directive required Member States who chose to take advantage of the article 5(2) exemption, by allowing the use of sex-based factors in insurance contracts, to review their decision by 21 December 2012 (being five years after the date by which Member States were originally required to implement the Directive). But the Directive was silent as to how long the exemption itself would continue.

The ECJ considered that this lack of “temporal” limitation worked against the achievement of both the Directive’s and the EU’s objective of equal treatment between men and women. Consequently, the ECJ declared that, with effect from 21 December 2012, article 5(2) will no longer be valid.

What does it mean?

As the UK took advantage of the article 5(2) exemption, it is now up to the Government to give effect to the ECJ’s decision.

What seems certain is that, from 21 December 2012, insurers will need to use sex neutral factors for assessing premiums and benefits under new insurance contracts, including annuities. But the extent (if any) to which annuities already in existence before that date will be affected remains to be seen.

Impact on occupational pension schemes

The wider impact on pension schemes is less certain.

Currently, occupational pension schemes are allowed to use sex-based actuarial factors to determine, for example, funding requirements, transfer values and commutation.3 It is for the Government to decide whether this legislation should likewise be amended in light of the ECJ’s decision.

Although trustees need not take action immediately, they should monitor the fallout from the case. When considering actuarial factors, they will no doubt wish to bear in mind the direction in which Europe is moving when it comes to the use of sex-based factors.

1 Association belge des Consommateurs Test-Achats ASBL (Case C-236/09)
2 Directive 2004/113/EC which implements the principle of equal treatment between men and women in the access to and supply of goods and services
3 The Equality Act 2010 (Sex Equality Rule) (Exceptions) Regulations 2010