Mortality projections and unisex pricing of annuities in the UK
| Published date | 15 May 2007 |
| DOI | https://doi.org/10.1108/13581980710744057 |
| Pages | 166-179 |
| Date | 15 May 2007 |
| Author | Robert Hudson |
| Subject Matter | Accounting & finance |
Mortality projections and unisex
pricing of annuities in the UK
Robert Hudson
Leeds University Business School, University of Leeds, Leeds, UK
Abstract
Purpose – In the UK, there is a strong government commitment to the compulsory use of annuities to
manage the “decumulation” of assets in defined contribution pension schemes. Almost all annuity
rates are determined by reference to the gender of the individual involved. This has the implication
that females receive a lower pension for a given size of pension fund. It is arguable that this situation
represents a clear case of sex discrimination and moral, legal- and policy-based arguments can be
made for and against this view. The purpose of this paper is to review these arguments in the light of
emerging evidence about longevity.
Design/methodology/approach – The paper outlines the nature of the UK annuit ymarket and the
associated methods of annuity pricing, details the difficulties of predicting longevity and discusses
the economic implications of a move to unisex annuity rates.
Findings – A number of recent trends are weakening the financial and statistical arguments against
introducing unisex annuity rates. The life expectancy of males and females is converging, the use of
annuity pricing factors other than gender is increasingly common and it has become clear that there is
great uncertainty in mortality projections.
Practical implications – Statistical and financial arguments that gender should be a primary factor
for costing annuities should be accorded less weight than in the past.
Originality/value – The paper offers an evaluation of the merits of unisex annuity rates in the light
of recent evidence about longevity.
Keywords Pensions, Lifeexpectancy, Gender, United Kingdom
Paper type Research paper
1. Introduction
In the UK, the requirement that individuals use annuities to manage the
“decumulation” of assets built up in defined contribution pension schemes has long
been a cornerstone of pension legislation. Current indications are that the government
is strongly committed to retaining this approach. The recent document on the annuities
market from HM Treasury (2006, p. 32) sets out the advantages of annuities and
concludes that “annuities meet consumers’ needs in retirement.”
Given the strong likelihood that individuals with assets in defined contribution
pension schemes will continue to be compelled to purchase annuities this paper
examines the implications of this for sex equality. To date, in the UK, almost all
annuity rates have been determined by reference to the sex of the individual involved.
Females generally receive less attractive annuity rates and hence a lower pension for a
given size of pensions fund. It is certainly arguable that this situation represents a clear
case of sex discrimination and that unisex annuity rates should be used in order to
treat the sexes fairly.
There are, however, strong counter arguments to the assertion that unisex annuity
rates are necessary to remove discrimination. Annuity rates are calculated taking into
account the expected longevity experience of the annuitant. Historically, women have
The current issue and full text archive of this journal is available at
www.emeraldinsight.com/1358-1988.htm
JFRC
15,2
166
Journal of Financial Regulation and
Compliance
Vol. 15 No. 2, 2007
pp. 166-179
qEmerald Group Publishing Limited
1358-1988
DOI 10.1108/13581980710744057
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