Brexit and pensions - the start?
As well as being a bit of a pensions geek I am also a bit of a legal geek. Before accidentally falling into financial services and pensions, the nearest to a career plan I had was possibly to become a lawyer!
I am not really sure why, but a few years ago, having done a few pension exams, I went back to law and did an LLM degree in European Law, and to finish it off did a dissertation entitled ‘The effect of EU Law on UK pension Law’. In the light of recent events, I thought it would be an interesting document to revisit!
Obviously we are still in the EU until we trigger Article 50 and go through the leaving process – so any potential changes must be viewed in this timescale.
Any change to pension law is not immediately obvious. There are a number of Directives that could well have to be brought into effect (e.g. IORPII, Mifid II) and I guess that there could still be decisions that emerge from the European Court of Justice (ECJ). Indeed, the UK Court is still making referrals to the European Court (e.g. 28 July 2016 Grenvill Holden Hampshire v PPF).
Much of the change that the EU has brought to the UK pension world has been in the form of measures to facilitate the four freedoms (freedom of movement of capital, people, goods and service provision), cases to harmonise tax systems, social legislation to prevent discrimination and to enhance employment law and workers’ rights (TUPE).
I am pretty sure that, as a country outside the EU, we would not immediately revoke such legislation, indeed this could be beyond our control depending on the Brexit deal details.
There is, however, one case that jumped out at me that I have never quite been totally comfortable with, and I wonder whether Brexit could give the chance of a rethink.
The decision of the ECJ in Association Belge des Consommateurs Test-Achats ASBL and others (Case C-236/09) (Test Achats) was the trigger for a significant change in insurance practice. In the case, the Court said that the practice of pricing contracts of insurance by reference to the gender of the individual insured is incompatible with EU law.
The Test-Achats case concerned rights protected under the Gender Directive (2004/113/EC) which outlawed discrimination between men and women in the supply of goods and services, including in the provision of insurance. Article 5(2) of the Directive allowed insurers to offer different premiums or benefits under insurance contracts, as long as the basis could be justified by accurate and up-to-date statistical data.
In something of a controversial decision, AG Kokott advised the European Court that the use of actuarial factors based on sex was incompatible with the fundamental principle of equal treatment, and proposed that Article 5(2) should be declared invalid.
In her opinion, there was a "sweeping assumption" that statistical differences are essentially due to a person’s sex when, in her opinion, many other factors play an important role. In her words: "life expectancy […] is strongly influenced by economic or social conditions as well as by the habits of each individual."
She went on to say: "Both women and men nowadays engage in demanding and sometimes extremely stressful professional activities, members of both sexes consume a not inconsiderable amount of stimulants and even the kind and extent of sporting activities practiced by people cannot from the outset be linked to one or other of the sexes."
Kokott concluded: "The use of a person's sex as a kind of substitute criterion for other distinguishing features is incompatible with the principle of equal treatment for men and women."
The big change in the pensions world was the effect of this decision on annuity rates. New annuity contracts after 21 December 2012 were no longer able to have rates calculated using different life expectancy figures for men and women and had signalled a move to unisex rates.
This was against the statistical evidence that showed that women do live longer than men (albeit the difference has fallen over the years – perhaps as a result of some of the factors mentioned by AG Kolkott).
Annuity rates did change, however I think it is difficult to perhaps quantify by how much. This is because it had been factored in over a number of years in conjunction with other changes to the market.
Annuities are an important part of the retirement planning tool box and over the last couple of months there have been a number of stories of falling interest rates and annuity providers pulling out of the market.
We do need some sort of innovation to offer a more attractive annuity – could a return to gender- based pricing offer any opportunities?
As we move though the Brexit process I am sure there will be more issues to report on in the pensions and retirement world.