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Annuities cost more for women: it's time for unisex rates

The Retirement Income Covenant is now in place and all super fund trustees of APRA-regulated funds have published their retirement income strategies. A required part of these strategies is how the trustee will address a range of risks faced by retirees, including longevity risks. That is, what happens if a person lives longer than expected?

Yet, most of the published Retirement Income Strategies have not tackled this issue. Specifically, while the vast majority of super funds offer an account-based pension, less than 20% of the funds provide access to a lifetime pension or annuity. This will need to change as super balances grow and life expectancies continue to increase. In pension systems around the world, the most common product to provide longevity protection is a lifetime annuity, that is, an insurance product that will keep paying you income, no matter how long you live.

Annuities cost more for women

One of the features of the Australian annuity market is that the income provided for a particular price will depend on your age. This is understandable – after all, the older you are, the lower your life expectancy. However, there is another determining factor that is used: your sex.

The reason is simple. Women, on average, have longer life expectancies than men.

The disparity in retirement wealth between genders is a complex issue, and much of it is driven by the gap that exists in the superannuation balances of men and women. While we know a gender super gap exists, it is an indirect result of super’s intrinsic link to employment and income patterns. On its own, super doesn’t discriminate. The SG rate is the same regardless of gender.

Similarly, the Age Pension does not consider gender in the equation. Although the pension is subject to means tests, the rules are the same for everyone, even though more women receive the pension for several reasons, including their longer life expectancy.

And, defined benefit superannuation pensions, currently paid to many public sector retirees, are based on an individual’s period of service and salary, not their gender. This is also normal practice in defined benefit schemes around the world.

How much more do women pay?

Annuities are the only part of our retirement income system where the benefit is determined by an individual’s sex. For example, based on currently published annuity rates from Australia’s major provider of annuities, a male aged 65 who purchases a CPI-indexed annuity with $100,000 would receive an initial monthly payment of $419 or $5,026 pa. This figure is 6.4% higher than for a 65-year-old female. At age 80, the difference increases to 9.2%.

In other words, women are paying between 6.4% and 9.2% more.

So the question needs to be asked: notwithstanding the differences in life expectancies, is it feasible to have unisex annuity rates?

In short, the answer is yes. The European Union, which boasts some of the best retirement income systems in the world, has required the same annuity rates for men and women since December 2012.

Ranked sixth out of 43 retirement income systems in the Mercer CFA Institute Global Pension Index, Australia’s retirement income system is well regarded around the world with the means-tested Age Pension and compulsory superannuation for all employees. As our retirement system matures and the focus moves from accumulation to retirement income, we must develop attractive longevity products for everyone. That goes for annuities: everyone should be treated the same.

Let's make it fairer

It’s time that the Australian government demonstrated to the public that sex must not be a factor in one’s retirement income. If paying superannuation on paid parental leave is a stretch too far for the forthcoming Budget, requiring unisex rates for annuities is a small but significant step towards a fairer retirement, regardless of an individual’s sex.

 

Dr David Knox is a Senior Partner at Mercer. See www.mercer.com.au. This article is general information and not investment advice, and does not consider the circumstances of any person.

 

21 Comments
Steve
August 07, 2022

Its been said but I think needs repeating. The total payment is amount paid x years of payment. To note the amount paid is lower for women but to miss they on average get paid for longer is woke cherry picking of facts. Its like saying "gee the youngsters are paying a fortune for housing" when you totally ignore the interest component of the total repayment over the life of a mortgage. I would hope in firstlinks we have an audience who are above such simplistic and overtly emotional arguments, that morning telly's territory.....

John De Ravin
August 07, 2022

If annuitisation were compulsory and for gender equity (or any other) reasons, government believed it had a social mandate to require unisex rating, so that males subsidised female annuity rates, that could work. We have enforced cross-subsidies in health insurance, for example.

But it does not seem appropriate in the current context of private sector annuity provision, in a system where life annuities are chosen for the time being by only a very small minority of retirees, to force private sector insurers to adopt unisex rating. A likely consequence would be that only those for whom the offered rates would be perceived as attractive would take out the annuities. Annuity providers that wanted to remain solvent would be forced to recognise this in their pricing so their “unisex” rates would be close to their former female rates. So females wouldn’t gain (much) but males would lose a lot. Would that be progress?

David Knox
August 06, 2022

Thank you for all your comments. A couple of years ago I would have responded in a similar way.

However, mortality rates (and hence life expectancy) is influenced by many factors and sex is a relatively minor one. Socio economic class reflected by factors such as lifestyle, education, income, access to health services etc. is much more important and we do not factor these into annuity prices.

Australia's retirement income system is endorsed by the government and financially supported by the tax payer through both the age pension and super tax concessions. Apart from annuity pricing, there is no difference on the grounds of sex or gender in the system.

Lifetime annuities may not be that popular at the moment but if we are going to seriously consider the development of products that provide longevity protection for retirees, we need to think about removing any differentiation on the grounds of sex. Some longevity products are already doing just that.

Albert
August 07, 2022

So why pick sex to factor this in ?

David Toohey
August 04, 2022

I generally follow reasoning that market forces should determine the price and availability of a good or service. If there exist popular social reasons (mandated by way of an election) or market failure then the government should legislate accordingly - but must do so carefully to avoid unsustainable consequences. In my opinion there is no such mandate or need for legislation to enforce unisex annuities. The points argued by David Knox don't attempt to address market failure, but instead appeal to the notion of what is "fair", which is not an election issue (yet), and it is valid to generate debate in an article like this. The Age Pension is not a valid comparison, it is unisex because it is a universal government handout. A private contract (such as insurance) allows for companies to offer insurance at the price of their choosing, and for people to buy the insurance or not. Legislation to set unisex annuities prices would result in females obtaining an expected profit at the expense of males whose contracts become very poor value. This will lead to the distribution being heavily skewed to females. Companies would either withdraw from the market or adjust their unisex prices, making it even more expensive for males, and pretty soon the life annuities market will be almost entirely women and will remain small, which would undo more than half the good work that is being done now to fix the longevity risk problem. Unless the government acts further to reinvent the whole system from the ground up to ensure that suppliers of annuities are not disadvantaged by providing universal coverage with no discrimination, then, no, this private market should allow price and underwriting discrimination. I note that the private health insurance system is set up like this, where taxation effects shepherd youngsters (with good incomes) into the insurance system to pay for the expensive oldies. But I see no impetus for such a socialised longevity scheme because we have such a scheme already, the Age Pension.

Rob
August 04, 2022

Has zero to do with Gender - can be Male vs Male, Female vs Female, Female vs Male. I have run annuity books and to equalize premiums so you can make a "gender neutral claim" is just marketing, woke, nonsense. Risk varies dramatically and often has zero to do with age and often has much more to do with genetics and lifestyle. My wife and I both have multi generations into their 90's, as a "client" I would happily buy an annuity [if rates get off the floor!] but as a "provider", the last people I would want to sell an annuity to are people like us where there is a high prospect of losing money!!

Jeff
August 04, 2022

Putting the issue of unisex annuities aside, this article highlights the interesting challenge of navigating the arbitrary boundaries about what explanatory factors are morally acceptable from the perspective of underwriting risks. The actuaries can identify a whole host of characteristics that correlate with risk but are limited to sex, age, and smoking status.

Also, right or wrong, it's hard to see unisex annuities having any impact on Australian retirement outcomes. Lifetime annuities account for only 2% of assets transferring to retirement according to Challenger. It's not like male annuities are flying off the shelf so it seems like there are bigger hurdles to clear first.

Ramani
August 04, 2022

To remove the gender discrimination as suggested, the actuarial profession can and should estimate the required funding with a suitable degree of statistical confidence, taking account of the differential life expectancy. A suitable levy payable by senior male actuaries (regardless of sex if any) would be the karmic course to follow??.

Joey
August 04, 2022

I once read that people with SMSFs live longer because they (in general) have more income and can pay for better health services, better lifestyles, access to better food, etc. So should SMSF trustees pay more for annuities?

Martin
August 04, 2022

I can only assume this was supposed to be published on 1 April, but is a tad late

Argus Tuft
August 04, 2022

When I studied financial mathematics there was a simple risk relationship in expressed in longevity tables based on the gender of the class recipients. The longer the statistically predicted life time the lower the periodic payment required to extinguish the present value of the basis of the annuity.

As I understand it if the annuity is payable up to the time of death then it is not rocket science to work out that the equivalent annuity payment should be lower because of the longer prospective term all other factors being equal.

Perhaps you could also concentrate on the explicit bias in the pension system whereby women live longer receive longer pensions funded disproportionately by male taxpayers.

Ryan
August 04, 2022

To make this issue to go away the government just has to invest in getting male life expectancy up to the same level as female. Problem solved.

Toby Potter
August 04, 2022

or female life expectancy down to men's in which case they would receive the same annuity payment.
"Simples" as they say in the ads

Pete
August 04, 2022

Is anybody else tired of hearing about women's issues? From my point of view, I wished I could look forward to a few extra years to my life.

Ian
August 04, 2022

Isn't the flip side that men pay more for life insurance? Is that unfair too?

Cam
August 04, 2022

Gender pushing gone mad. The current system means if you have the same $ amount and same life expectancy then you get the same annuity. The article concludes that a longer life expectancy for women is a problem we need to overcome. Women live longer than men, people in capital cities live longer than those in regional and remote locations, Aboriginals live less than others. Having an 'equal' system means Aboriginal men in remote locations are subsidising white women in cities.
The system in the article would result in mainly women taking out annuities, so wouldn't solve anything anyway.
Maybe allocating money in a budget to equalising life expectancy is more equitable - and would achieve the outcome proposed at the same time.

Andrew Boal
August 04, 2022

Yes, the "selection" point you make is very real. If men don't see value in an annuity, many may be discouraged to buy one?

Aussie HIFIRE
August 04, 2022

As noted by the author, the reason annuity rates are lower for women is that they are likely to live longer than men, and therefore the annuity provider will on average have to pay out for more years to a woman than a man assuming they both start with the same amount at the same age. So long as the total amount paid out on average is the same on an inflation adjusted basis, this seems equitable.

A move away from this system requires that one group subsidise the other for what should be purely a business arrangement. Would the author be keen for unisex rates for expenses like car insurance where young men currently pay higher rates than young women?

Rob
August 04, 2022

Nonsense! As you clearly state, women, on average, live longer than men and the insurer, in this case a Life Co, calculates, their risk and their future liability accordingly, investing in Assets that match that Liability. Your proposal is that men should be "paying more" and women "paying less" in the pursuit of unisex nirvana. Or perhaps you want everyone to pay more so the gender flag can be shelved...? I would in fact suggest exactly the opposite - that individual mortality risk should be just that, individual. Every day we see new tools and new tests to more accurately predict risk whether it is health or floods. In General Insurance, lower risk should always be lower cost. For annuities a "lower risk of dying" - male or female, it is the reverse and should be a higher cost as the liability continues for longer. When you attempt to overlay some unisex idealism over insurance basics of risk assessment and matching liabilities with assets, seems to me there will be a lot of unemployed Actuaries!

Neil
August 04, 2022

I think the inference you leave is a sound one.

In an age when technology is getting better, why assume that any male has the same life expectancy as any other male (same applies for female vs another female). How far away from life expectancy tables taking into account more sophisticated criteria such as
- residential postcode (eg. kms away from a hospital, which themselves would be ranked according to their quality),
- socio-economic status (as an indicator of capacity to seek preventive health measures)
- pre-existing medical / lifestyle conditions, etc?

John
August 04, 2022

What you put may well be the case and may initially provide a supporting argument. The fact is though that what the article postulates would be that even after taking all of what you suggest into consideration, that at the final decision making point between two exactly the same backgrounds and ages, excepting one being male and the other female, that a female with a longer life expectancy should receive additional benefits for the same financial input. A clear gender bias.

 

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