The European Court of Justice (ECJ) Test-Achats case is expected to have substantial ramifications for UK pension schemes, including a possible further depression of annuity rates, according to Aries Pension & Insurance Systems.

The ECJ Test-Achats case concerns whether it is lawful for insurance companies to calculate the price of annuities with reference to different life expectancies for men and women. Presently, as women are expected on average to live longer than men they receive less retirement income per year than for a comparable male with the same pension pot.

However, the Advocate-General has concluded that the exemption in an EU Directive allowing sex differentiated actuarial factors for pricing insurance policies is unlawful and should be removed, and Aries says if the judgement expected on 1 March 2011 follows this opinion as expected, annuity income for men will decline as will the income generated from joint annuities.

Aries director Ian Neale said the imminent judgement ‘spells bad news’ for annuity rates in the UK, which have already been declining steadily for the past 10 years.

“For anybody with a money purchase pension even halfway near to seeing their required retirement income in the far distance, this ruling could put it completely out of sight,” he said.

Neale added the introduction of the new three-pillar, risk based solvency regime for insurance undertakings, Solvency II from December 31 will further depress annuity rates.

“If extended to defined benefit pension schemes, as the EU is threatening, it would be hugely damaging as liabilities would have to be valued using gilt rates; much higher contributions would be required. There is simply no more room in the DB coffin for yet another nail and people will start wondering whether there’s any point in saving into a pension at all. What we as an industry needs is some glimmer of hope that will persuade people that pensions remain the best way of saving for retirement,” He concluded.

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