Observer – Osborne ignores pensioners at his peril
by Dr. Ros Altmann
(All material on this page is subject to copyright and must not be reproduced without the author’s permission.)
Once again we have a decision imposed on us by the EU which could cause significant damage to decent middle-class Britons.
The decision by the European Court to ban sex discrimination in financial transactions is not just political correctness gone mad – but a poorly thought out decision that risks plunging middle-class UK pensioners into poverty.
The European Court’s decision quite simply defies common sense. Insurers will no longer be able to use their well-established models to accurately assess the risk of those applying for cover when pricing their products – whether that be for particular groups of drivers who are more prone to accidents, or for groups of pensioners who have longer life expectancy.
This could hardly have come at a worse time, with UK pensioners’ income taking a battering from record low savings rates and ever spiralling inflation.
You have to wonder whether the EC has really thought this one through. Men on the whole do not live as long as women. This is a well recognised fact. With 8 out of every 10 UK annuities bought by men, insurers will no longer be able to take this crucial factor into consideration when pricing annuities. Quite simply, if an insurance company does not know whether the person buying an annuity is male or female, they will have to increase the risk margin ‘just in case’ there are selling to a woman. This means men will all face potentially worse annuity rates and they will receive lower pensions for the rest of their lives (and if they are married, this impacts their wives too). Women for their part are unlikely to see their rates improve by very much.
What makes this ruling even harder to stomach is that it will hit UK pensioners far harder than any other EU country, because our government is the only one in Europe that requires people to annuitise their pension funds. Oh the irony! The worst affected are likely to be those with tens of thousands of pounds of hard-earned pension savings, but who do not have enough money to afford more flexible pension options, nor so little that they are allowed to take their money as a cash sum. When combined with the fact that our state pension is already the lowest in Europe, you start to see what the EC clearly cannot – that this ruling will lead to a large number of our middle-class pensioners falling slowly but surely into poverty.
Looking at the UK’s devastated pensions landscape as a whole, one should not underestimate the impact of this ruling. Our annuity rates are already offering record-low pensions, and these will now fall further for most purchasers. With final salary schemes nearly all closed, and with future private sector pensions almost exclusively on a defined contribution basis, this ruling could damage millions of future pensioners.
Although the EC’s ruling will not kick-in until 2012, at the same time, another EU Directive (known as Solvency II) will add a second blow to annuity prices. UK insurers will be required to change their annuity reserving requirements and this is expected to increase annuity prices for everyone by over ten per cent. So there will be a double hit from Europe to UK pensions.
And let us not forget that in 2012 we will embark on a national system of automatically enrolling all workers into pension schemes. Under current rules, this will usually require annuitisation on retirement, so the EU ruling will not only reduce pensioners’ incomes – it is also potentially a blow to our future national income, because our pensioners will have less money to spend.
While I’m sure the EC has acted with the best of intentions, its meddling could hasten the breakdown of our system. We have just about the lowest state pension in Europe, so private pension income is crucial for UK pensioners to enjoy a decent retirement, but EU rules now jeopardise this for millions in future. If you needed an example of political correctness gone horribly wrong, you need look no further.