Test Achats UK Consultation: Sackers’ Response
On 1 March 2011, in the Test-Achats case, the CJEU ruled that, with effect from 21 December 2012, an exemption in the “Gender 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”, will no longer be valid. HMT’s consultation on the UK response to the 1 March CJEU’s ruling that insurance benefits and premiums after 21 December 2012 should be gender neutral, seeks views on the Government’s legal interpretation of the judgment and the accompanying draft regulations that will amend the Equality Act 2010.
HMT’s consultation proposes a narrow interpretation of the Test-Achats decision in the UK, in that it should only apply to new contracts for insurance and related financial services entered into on or after 21 December 2012. We agree with this approach.
In this response:
Due to legislative requirements in the UK, the majority of DC pension members will ultimately purchase an annuity. This situation is unlikely to change as a result of the Test-Achats ruling or the current consultation. In practice, we expect annuity purchase to become more common, as the occupational pensions market continues to shift from DB to DC.
The consultation acknowledges that any impact as a result of adverse selection is likely to fall on the consumer. Any rise in annuity premiums resulting from adverse selection may lead to lower pensions and, ultimately, more individuals needing to rely on the state for financial support during their retirement.
Contrary to the current efforts of the Government and the pensions industry to encourage use of the OMO, individuals may be discouraged from doing so if the application of fewer variables in annuity pricing leads to more standardised pricing between insurers, with less incentive for competition in the market.
There is a risk that more people with small pots will find themselves unable to purchase an annuity on the open market. If the effect of this is that employers find themselves called upon more frequently to provide annuities via a workplace pension scheme, this could result in the greater use of contract-based schemes rather than trust-based arrangements, ultimately leading to loss of control and flexibility for employers and their workforces.
For occupational DB pension schemes, the ban on the use of gender as a risk factor in the pricing of individual insurance policies may, in our view, lead to an increase in the cost of buying out members’ benefits with insurance policies. As a result, employers looking to de-risk by means of a buy-out or buy-in, or those seeking to wind-up, may find themselves unable to do so, while others may be discouraged by the higher costs. Employers may also be adversely affected in circumstances where contributions by reference to buy-out costs are compulsory (for example, on winding-up or where debts under section 75 of the Pensions Act 1995 need to be met).
We consider the Government’s proposed plan to repeal only paragraph 22 of Schedule 3 of the Equality Act to be in line with both the Test-Achats decision and the European Commission’s guidelines.
Our reading of the Test-Achats judgment is that it only applies to contracts for insurance or related financial services which are subject to the Gender Directive and not the Equal Treatment Directive. This view is supported by the Commission’s guidelines, which draw a clear distinction between the equality provisions applicable to insurance and related contracts and those which govern sex equality in pension schemes (linked to employment and occupation) which are subject to the Equal Treatment Directive.
In the UK, under the Equality Act 2010 (and the Equality Act 2010 (Sex Equality Rule) (Exceptions) Regulations 2010) occupational pension schemes are permitted to use sex-based actuarial factors to determine, for example, funding requirements, transfer values and commutation.
Draft regulation 3 makes reference to “a contact concluded before 21st December 2012” (our emphasis). We understand that the intention is to refer to insurance contracts which have been entered into before this date, rather than contracts which have come to an end by that time. However, the phraseology is ambiguous and we suggest that draft regulation 3 is amended to make the intention clear.