How the gender directive has affected annuities
The EU's Gender Directive came into being in December, forcing insurers to ignore gender when pricing up products. Guest blogger Tom McPhail of Hargreaves Lansdown looks at what it has meant for annuity pricing nearly a month on.
Changes to the rules governing the sale of insurance products at the end of last year mean that since 21st December, it has been illegal to use different prices for men and women when selling annuities.
Given that annuities are essentially a bet between you and an insurance company as to how long you will live (and therefore how long they will have to pay you an income), this is quite a big deal.
Why gender neutral rates are a big deal
It is a well-established phenomenon that on average, women live longer than men. Because of this, up until 21st December it was always the case that women got lower annuity income payments than men. Comparing a man and a woman in their mid-50s (the earliest age you can draw a pension is 55), the difference in rates was pretty modest, a matter of only 2% or 3%.
What's happened post G-Day?
So what happened? Some insurance companies ‘equalised’ their rates by largely improving their female rates to match the terms they were already offering to men.
Others moved to more of a half-way position between the two. It is notable that in the run-up to the deadline on 21st December there was an unusually high number of annuity rate reductions (meaning lower payouts). This suggests that perhaps the insurance companies were building a little extra margin into their terms, perhaps just because the market was all going to get a bit uncertain.
Since 21st December we have had one insurance company slightly improve their rates and three companies have cut their rates. In addition we have also had the annual round of price adjustments to reflect our ever-improving life expectancy (which also has the effect of reducing payouts).
So far it is too early to see any pattern emerging. After a flurry of activity just before the legislation kicked in, as male investors rushed to buy their annuity before the rates were cut, business volumes have been relatively low.
What we have seen in the past week is an improvement in gilt yields. In the fullness of time we may see this feed through into better annuity rates, but at the moment it is premature to expect any significant improvements. We’ll keep an eye on the market and let you know when we see any clear pattern emerging.
Tom McPhail is Head of Pensions Research at Hargreaves Lansdown