Written by Anna Rogers an Nick Roessler
Anna Rogers and Nick Roessler give an Anglo-German perspective on the ECJ ruling in the Test-Achats case and asses its potential impact on occupational pension schemes
The European Court of Justice decided a significant case recently, brought by a consumer rights organisation Test-Achats. From 21 December 2012 insurers will no longer be able to take gender into account in setting insurance premiums for individuals. This may mean women will pay more for car insurance and possibly less for annuities. But what does it mean for occupational (employer-sponsored) pension schemes? This is an issue that arises in those EU Member States with developed private sector pension systems like the UK and Germany.
- Actuarial factors can remain unequal for now
UK law allows occupational pension schemes to use sex-specific actuarial factors in a number of situations, particularly transfers, commutation and early retirement. This is backed up by the 1993 ECJ ruling in Neath v Hugh Steeper, where the differences reflect differences in the actuarial cost of the benefits.
- However pension schemes cannot afford to be complacent
The Test-Achats decision stresses that, in the Court's view, the EU Treaty requires "the progressive elimination of inequality between the sexes". Challenge may follow in the occupational pensions context and the UK Government may review the permissive legislation. It seems reasonable to assume that any change would be required from a future date. There is a deadline of 15 August 2013 for review of the Equal Treatment Directive in the pensions context and that would seem a likely date.
- Annuity purchase for DC pots will change
From 21 December 2012, men and women who use a money purchase "pot" (or cash balance pot) to buy a pension from an insurer at retirement will have to be offered it on the same terms. It may be that the gender difference, especially on a joint life pension, is likely to be smaller than the differences that already exist in market pricing for members willing to shop around.
- Enhanced transfer value exercises will have to recognise unisex annuity purchase
The ECJ ruling has a direct implication for enhanced transfer value (ETV) exercises, where members are offered financial advice on what retirement benefits they can expect if they transferred into a personal pension scheme. Members must be advised that they may be able to draw a better pension before or after December 2012, or earlier if insurers anticipate the change.
- Trustees insuring benefits will be unaffected
Occupational schemes themselves often insure some of the benefits they provide. The group premiums that a pension scheme (or an employer) pays to insure, say, a lump sum death benefit are not directly affected, as long as the benefit is equal. For the same reason, the ECJ ruling need not affect the cost of a "buy-in" bulk purchase annuity, which is effectively an investment contract. The same applies to longevity swaps and other investment products, where taking account of the gender make-up of the relevant population will continue to be possible.
- The consequences vary according to type of scheme
There are a multitude of different scheme structures under German law but broadly there are two main categories: direct promise schemes, under which the employer is the direct debtor of the pension benefits, and indirect promise schemes, under which the primary debtor of the pension benefits is third party - very often an insurance company.
- DB schemes are already equal
The need for unisex tariffs in pension systems has been heavily debated among experts in Germany since many years. In the absence of binding jurisprudence, the prevailing view in literature is that different treatment of men and women is not allowed in Defined Benefits plans as such unequal treatment would be in breach of the EU Treaty.
- "DC" schemes take different forms
While German law does still not allow pure defined contribution arrangements, Germany has seen a trend towards so-called "contribution oriented promises", meaning promises under which specified contributions are paid, but at the same time foreseeable benefits are guaranteed. Under most of these structures promises can be either sponsored by employers, employees or jointly by both parties to the employment relationships (e.g. by a top-up commitment under which the employer undertakes to top up employee-contributions).
- Member-financed "DC" is already equal
For schemes financed solely by employee contributions, unisex tariffs became mandatory in 2006 in order to secure certain tax benefits. Therefore, in practice unequal treatment of men and women is virtually only found in schemes that are employer-sponsored and contribution oriented.
- Indirect Employer-financed "DC" may have to change
To the extent that those schemes are indirect promise schemes, the funding vehicle that they use is an insurance company in the vast majority of cases. In these schemes the close interaction between insurance law and employment law rules is likely to trigger the mandatory use of unisex-tariffs as a direct result of Test-Achats for all promises given after as of 21 December 2010.
- Direct Employer-financed "DC" can continue unequal for now
In employer-sponsored, internally financed contribution-oriented schemes the Equal Treatment Directive suggests that unequal treatment of men and women in these schemes on actuarially justifiable grounds is and will remain allowed. As long as these principles are good law, a German court will have to construe the respective section of the Anti-Discrimination Act ("Allgemeines Gleichbehandlungsgesetz") to give effect to these rules.
- Likely challenge
However, if tested, it will be difficult to logically justify for the ECJ that an exception to the equal treatment doctrine should continue for occupational pension schemes, while in Test-Achats, such exception has expressly been declared prohibited for insurance contracts in an effort to protect "fundamental principles of the European Union". Therefore, one can rightfully say that Test-Achats opened the door for unisex tariffs for all pension schemes structured in Germany.
Some commentators have said the Test-Achats ruling flies in the face of biological fact, but few people would be comfortable with an insurance premium that varied according to race, even if statistical evidence supported it. We expect that now the principle has changed in the insurance context it is only a matter of time before it changes in the occupational context too.
Written by Anna Rogers and Nick Roessler, Partners in Mayer Brown's Employment & Benefits team in London and Frankfurt