My previous offering (here) did not cover one aspect of the debate about the effect of the decision of the European Court of (so-called) Justice in case number C236/09. As I said then, the court decided that the premiums charged and benefits paid under insurance policies must not discriminate between men and women. In other words, men should never pay more or less than women simply because they are male and women should never receive more or less than men simply because they are female. I offered some views on the premium issue but said nothing about benefits.
The good Mr Pogo raised a matter in the comments (here). He observed that annuity rates are generally more generous for men than for women and wondered whether the court's ruling would require this to change. The answer, I think, is that it depends whether an annuity is an insurance policy.
As I understand matters personal pensions work as follows. An individual pays contributions to a third party in order to build a fund from which a pension will be payable if he lives long enough. He could just save the money himself, but by paying it to an approved pension fund holder he is allowed to claim tax relief for his contributions. The pension fund holder collects the payments, invests them as well as it can, take a chunky commission at every stage and accounts to the contributor every year with a statement explaining just how little is being held in the fund. Each pension policy has a defined end-date. Provided the contributor has reached the age of 55 he or she may receive something back (it used to be 50 but is now 55). If he or she is younger than 55 at the relevant date, the fund is closed and the accumulated lump-sum is invested until he or she hits the magic age. At that time the policy matures.
I don't pretend to know many ins-and-outs of insurance law, but believe it is correct that these pension arrangements are a form of insurance. All insurance involves two factors: (i) you pay premiums and (ii) you are entitled to receive a payment if the thing you have insured against occurs (be it a burglary, a disease or, as in the case of pensions, reaching a certain age despite modern science decreeing that to be impossible because you smoke and drink). Entitlement to receive anything under a pension plan is dependent on a contingency and for that reason I believe it correct to say that pension plans are a form of insurance.
Insurance can entitle you to a fixed sum (you might pay premiums that entitle you to £5,000 if you break a leg bone - no matter which bone or how seriously it is fractured, you get the same sum) or to recompense for loss (as with home contents insurance), or to protection against claims others take against you (as in the case of professional indemnity insurance), or it might entitle you to a variable sum depending on how well the insurance company has invested its receipts. This latter course is how pension policies work. The heirs of those who die before the maturity date of the policy might or might not be entitled to claim a lump sum by way of refund and they might or might not make a claim, in any event some money will be left in the fund by those who cannot or do not get a refund. Some investments will be good, others will be bad. The fund will be what it is at the date a policy matures and the policyholder will be entitled to a lump sum calculated according to the state of the fund at that date.
When the policy matures, the policyholder is entitled to a lump sum but, if he claimed tax relief on his contributions, he is not entitled to receive it as a single lump sum. I believe a certain percentage can be taken in cash but the rest has to be used to buy an annuity. Many think this requirement iniquitous, but that is not the point of today's missive. The point is that the insurance policy comes to an end when the lump sum is calculated and paid. It goes without saying that all insurers large enough to administer pension funds also offer annuities, but their customers cannot be required to buy one of their annuities. The customer is entitled to a lump sum but must take that lump sum in the form of AN annuity, not any particular annuity. The purchase of the annuity is a separate transaction from the allocation of a particular lump sum to a particular policyholder on the date the pension policy matures.
At that date the policyholder has the benefit of a sum of money. Provided that sum of money is not calculated differently according to whether the policyholder is male or female it will not, I think, fall foul of the ECJ's ruling.
When it comes to buying an annuity men tend to get better terms that women because we don't live as long. Whether being the recipient of nagging shortens life or delivering nagging lengthens life really doesn't matter, it might even be a combination of the two, but the fact is that blokes generally don't live as long as gals. Annuities reflect this reality by giving men slightly better returns. It seems to me that that will not fall foul of the ECJ's decision unless annuities are insurance contracts. I cannot see that they are.
An annuity is a contract under which you pay a company a lump sum in return for being entitled to an income (paid weekly, monthly, quarterly or annually) for life. An annuity is no different from the cash-for-equity deals that are available to homeowners of a certain age. You make your house over and in return are entitled to a defined sum each year for as long as you live, it might even be index-linked, and you are also entitled to remain in the house. There is nothing about this that seems to me to equate it to insurance any more than purchasing an annuity is insurance. It could, I suppose, be argued that the lump sum is a premium and the receipts are benefits that depends on the contingency of longevity but that involves a contingency that causes payments to cease rather than one that caues payments to commence - and an essential feature of insurance, as I understand it, is that the entitlement to receive a benefit rests on a contingency other than payment of the premiums.
If this is correct, annuity returns are not caught by the ECJ ruling.
It's only a matter of time, of course.
The good Mr Pogo raised a matter in the comments (here). He observed that annuity rates are generally more generous for men than for women and wondered whether the court's ruling would require this to change. The answer, I think, is that it depends whether an annuity is an insurance policy.
As I understand matters personal pensions work as follows. An individual pays contributions to a third party in order to build a fund from which a pension will be payable if he lives long enough. He could just save the money himself, but by paying it to an approved pension fund holder he is allowed to claim tax relief for his contributions. The pension fund holder collects the payments, invests them as well as it can, take a chunky commission at every stage and accounts to the contributor every year with a statement explaining just how little is being held in the fund. Each pension policy has a defined end-date. Provided the contributor has reached the age of 55 he or she may receive something back (it used to be 50 but is now 55). If he or she is younger than 55 at the relevant date, the fund is closed and the accumulated lump-sum is invested until he or she hits the magic age. At that time the policy matures.
I don't pretend to know many ins-and-outs of insurance law, but believe it is correct that these pension arrangements are a form of insurance. All insurance involves two factors: (i) you pay premiums and (ii) you are entitled to receive a payment if the thing you have insured against occurs (be it a burglary, a disease or, as in the case of pensions, reaching a certain age despite modern science decreeing that to be impossible because you smoke and drink). Entitlement to receive anything under a pension plan is dependent on a contingency and for that reason I believe it correct to say that pension plans are a form of insurance.
Insurance can entitle you to a fixed sum (you might pay premiums that entitle you to £5,000 if you break a leg bone - no matter which bone or how seriously it is fractured, you get the same sum) or to recompense for loss (as with home contents insurance), or to protection against claims others take against you (as in the case of professional indemnity insurance), or it might entitle you to a variable sum depending on how well the insurance company has invested its receipts. This latter course is how pension policies work. The heirs of those who die before the maturity date of the policy might or might not be entitled to claim a lump sum by way of refund and they might or might not make a claim, in any event some money will be left in the fund by those who cannot or do not get a refund. Some investments will be good, others will be bad. The fund will be what it is at the date a policy matures and the policyholder will be entitled to a lump sum calculated according to the state of the fund at that date.
When the policy matures, the policyholder is entitled to a lump sum but, if he claimed tax relief on his contributions, he is not entitled to receive it as a single lump sum. I believe a certain percentage can be taken in cash but the rest has to be used to buy an annuity. Many think this requirement iniquitous, but that is not the point of today's missive. The point is that the insurance policy comes to an end when the lump sum is calculated and paid. It goes without saying that all insurers large enough to administer pension funds also offer annuities, but their customers cannot be required to buy one of their annuities. The customer is entitled to a lump sum but must take that lump sum in the form of AN annuity, not any particular annuity. The purchase of the annuity is a separate transaction from the allocation of a particular lump sum to a particular policyholder on the date the pension policy matures.
At that date the policyholder has the benefit of a sum of money. Provided that sum of money is not calculated differently according to whether the policyholder is male or female it will not, I think, fall foul of the ECJ's ruling.
When it comes to buying an annuity men tend to get better terms that women because we don't live as long. Whether being the recipient of nagging shortens life or delivering nagging lengthens life really doesn't matter, it might even be a combination of the two, but the fact is that blokes generally don't live as long as gals. Annuities reflect this reality by giving men slightly better returns. It seems to me that that will not fall foul of the ECJ's decision unless annuities are insurance contracts. I cannot see that they are.
An annuity is a contract under which you pay a company a lump sum in return for being entitled to an income (paid weekly, monthly, quarterly or annually) for life. An annuity is no different from the cash-for-equity deals that are available to homeowners of a certain age. You make your house over and in return are entitled to a defined sum each year for as long as you live, it might even be index-linked, and you are also entitled to remain in the house. There is nothing about this that seems to me to equate it to insurance any more than purchasing an annuity is insurance. It could, I suppose, be argued that the lump sum is a premium and the receipts are benefits that depends on the contingency of longevity but that involves a contingency that causes payments to cease rather than one that caues payments to commence - and an essential feature of insurance, as I understand it, is that the entitlement to receive a benefit rests on a contingency other than payment of the premiums.
If this is correct, annuity returns are not caught by the ECJ ruling.
It's only a matter of time, of course.
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1 comment:
Phew thank heavens for that I thought I was going to have to have a sex change upon retirement!
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