The second pensions’ time bomb
Some unintended consequences are looming in the pensions and annuities market. As we have known for some time, the use of risk assessment based on gender for insurance policies will be illegal from 21 December 2012. But the EU Commission has now said that ‘Some insurance products, such as annuities, contribute to retirement income. The directive however only covers insurance and pensions which are private, voluntary and separate from the employment relationship, employment and occupation being explicitly excluded from its scope.’ This has been justified on the legal nicety that the ruling only applies to insurance contracts and therefore has no effect on occupational pensions. The result will be yet another difference between how people are treated in the private insurance market and in occupational pension schemes. How sustainable is this for the future given the onward march of anti-discrimination law?
In another part of the forest we have the changing annuities market based on disability risk assessment. In a way this is compatible with the ruling that criticised risk assessment based on gender as “lazy underwriting” when a more accurate means of assessment is available. Years ago this would have been an intellectual argument. Back in the 90s if you had really poor health and you purchased an annuity you would get the same return as if you were very healthy. From the individual’s perspective this seemed clearly unfair. But what of the healthy people? Should they get a lower payout because say they don’t smoke or drink to excess and are regular gym visitors etc. In practice, for a long time after the market changed to accept health underwriting, it made no difference as the healthy pool was not re-assessed.
In this decade though the position has changed and will change further. We now have individual sophisticated underwriting for enhanced annuities comprising about 20% of the market. Going forward, some have suggested that this could rise to 40%. And it may not just be health as a factor. Postcodes, occupations and, potentially if the moratorium were to be reviewed, predictive genetic tests. For genetics the current debate would be turned on its head as unfavorable tests would result in bigger payouts.
The inevitable result of this trend will be to affect the mortality rates of the residual (healthier) portion of the pool. Also critical to pricing will be what pool any insurer actually holds and these will vary over time. Ultimately this will create a market very different from what we have known in the past.
So what does this mean for social policy. First there will be a “gender gap” between what the public will see simply as “pensions” – discrimination will be ok for some but not others based on an “arcane rule”. Second not only will you have no idea what your pension will be based on contributions and market performance but even if you knew that you would still have no idea because of health underwriting. And the effect is contrary to the Government’s intentions on rewarding individual engagement in improving public health. Sooner or later the Government needs to sit down and think about all this in the round.
To discuss this, contact Richard.Walsh@SAMIConsulting.co.uk.
This article first appeared in Cover Magazine in May 2012.