Last week (1 March 2011) the ECJ ruled that, from the end of next year on, insurance companies are not allowed to charge men and women different rates for products. The decision could have far-reaching implications for the cost of defined contribution pension schemes in the UK. Pension Funds Insider talks with some experts to see what lies ahead

With the new ruling, male defined contribution (DC) pension holders will probably see their annuity costs rise, while the cost for women might fall. Men currently only pay less because they are assumed to live shorter lives, keeping the costs equal to the provider. So is it unfair that companies do not want to discriminate between two streams of income?

Experts say the ruling of the European Court of Justice (ECJ) could backfire and instead of a fairer market could create a rise in costs for both men and women.

Deborah Cooper, head of the regulatory research group at Mercer, believes there is a lot of evidence that suggests gender is correlated with risk factors relevant to insurance. The obvious example she mentions is mortality, where women on average live longer than men. Cooper says: "It is correct to say that some of this difference may be due to social or lifestyle factors, but insisting that it is ignored entirely could give rise to unintended consequences."

Zoe Lynch, partner at Sacker & Partners, says that the ruling doesn't mean insurers will completely stop using sex-based statistical evidence. "It just means that they will need to combine this with more sophisticated methods of judging longevity - including analysing lifestyles, medical and genetic history and postcodes," she says. "The effect of this is that for all annuities purchased after December next year, we should expect that insurers will be asking a lot more questions in order to accurately price the contract."

It is likely to be these stricter underwriting tests that will make insurance more expensive for everyone.

Officially the ruling does not directly apply to pension schemes because the judgment only referred to the directive covering goods and services. However, according to Lynch, pension schemes will not stay unaffected for now.

"Where the activities of an occupational pension scheme interact with the insurance industry, the same rules will apply. This means that annuities purchased by members directly will have to be based on unisex factors," she says.

Annuities purchased by trustees will also have to be based on unisex factors, points out Lynch. These annuities may either be for an individual or could be bulk annuities, including de-risking products such as buy-in and buy-out contracts.

Pension schemes should also start thinking about covering themselves for the future. Although trustees are now left in the dark, the judgment of the ECJ could mean that the industry will soon see the end of all specific calculations, as the European Union might decide they as well are against their anti-discrimination policies.

"It would seem sensible for trustees to consider whether they should adopt gender neutral factors for commutation and other calculations, pre-empting any subsequent judgments that might apply to them," says Cooper.

Annuity provider Living Time, which recently agreed a major distribution deal with MetLife, already started equalising their rates last month, ahead of the decision of the ECJ. However instead of aiming for the lower level, the provider has opted for the opposite.

Dominic Grinstead, managing director at MetLife Europe Limited UK believes that equalising rates helps end the existing confusion, and allows financial advisers time to review options.

"The decision to equalise rates at the higher level delivers certainty and underlines the benefits of fixed-term annuities as a key product innovation," he says.

azeevalkink@wilmington.co.uk