European law can be a strange thing. There is the often quoted example of the required size and shape of bananas, or the Brussels dictat that a Cornish pasty must be in the traditional ‘D’ shape to be truly considered Cornish. But the case recently brought by a Belgian consumer group, protesting the fact that women drivers pay lower car insurance premiums than men, may be one decision that has more serious ramifications – particularly for divorcing couples in the UK.
The Belgian case was brought to the European Court of Justice (ECJ) by consumer group Test-Achats. They argued that an exemption for insurance companies from the general European prohibition against gender discrimination was unlawful. The suggestion that young female drivers are in the lowest risk category, young male drivers are in the highest risk and that their insurance premiums should therefore differ seems to make perfect sense. Nevertheless, the court determined that using gender to differentiate between male and female insurance policies was in violation of human rights.
The ruling, which comes into force from December 2012, will mean that women have to pay higher premiums of up to 30 per cent more, and that insurance costs for men could fall by 10 per cent.
The impact on pensions
The impact of this will also be felt by those buying a pension annuity – a financial product that is supplied by insurance companies. In the UK many of us have what are called ‘money-purchase’ pensions, where we put money into a pension every month and the fund grows until the day we reach retirement. At this point we use that fund to buy an annuity, which supplies us with an income for the rest of our lives. At the moment, the cost of buying an annuity that provides £15,000 each year during retirement is higher for a woman than a man. This is because statistically speaking women live longer than men and therefore need a larger sum of money to buy the same annual income over the period of their retirement.
It is expected that unlike car insurance, the cost of buying an annuity will reduce for women and increase for men. And at the present time around 80 per cent of annuities are purchased by men. This reflects the fact that more men than women have traditionally had private pensions, a situation that will inevitably change as a greater number of working women make their own provisions for retirement.
In divorce cases we often see arguments on behalf of the wife that suggest she will need more than half the value of the pension scheme that she and her husband have accumulated during their marriage, to provide her with the same level of income during a longer retirement. Anyone not already very close to pension age has the right under the Pension Schemes Act 1993 to take a Cash Equivalent Transfer Value (CETV) to another registered pension scheme. The husband will often argue against this on the basis that it seems transparently unfair for his wife to receive more money. And to add to the confusion, the approach of the district judge to how a pension should be divided is unclear.
What does the law tell us?
The decision in the case of Martin-Dye v Martin-Dye  EWCA 681 confirmed that it would be wrong to try to offset realisable assets against a pension, and also provided useful guidance on the distinction between the two. The court ruled that a pension is not equivalent to other forms of asset and should instead be the subject of a pension sharing order.
But ask twenty different judges whether they would split a pension based on its CETV, or by reference to an actuarial calculation which equalises the future pension income, and you will fail to get one consistent response.
There are uncertainties about actuarial calculations because, despite the thoroughness of the exercise, they are still based upon estimates, statistics and assumptions. Nevertheless, there are also compelling arguments for why a husband and wife, if the circumstances of their case justify it (a long marriage with both of them near retirement age for example), should have a fair and reasonable expectation that they will receive an equal income in retirement. That this could mean a larger financial award for the wife is often difficult to swallow during the emotions of divorce.
The ‘unisex pensioner’
Discrimination based on gender is nothing new for family lawyers. Mrs White successfully took her case to the House of Lords in 2000 where it was determined that women should no longer be discriminated against or stereotyped because of their gender in divorce cases. That husbands and wives make different, but equally valuable roles and contributions to a marriage is now a well-established concept.
The European Court of Justice ruling means that the cost of purchasing an annuity will be the same whether you are male or female. So for simple money purchase pensions, and in cases where both parties are invested in similar funds and are of equal age, the arguments about equality of income may become a little easier to resolve when the ruling comes into effect in December 2012. But where the parties are of different ages or the pensions are invested in substantially different funds (for example when comparing a Self-Invested Personal Pension (SIPP) invested in commercial property with a simple personal pension invested in a managed fund) advice from a pension expert should still be sought.
The ruling may also have an impact on pension sharing orders that involve private sector final salary schemes, especially if the spouse receiving the benefit of the pension sharing order has to take an external transfer into a private pension scheme, because annuity costs will again become relevant.
Paul Windle, Pensions Actuary at Actuaries for Lawyers, believes the ruling could open up a can of worms:
“If the European Court ruling regarding the requirement for unisex premiums and benefits in the insurance services sector is interpreted to also apply to the calculation of Cash Equivalent Transfer Values (CETVs) in defined benefit pension schemes, this would have huge consequences for the UK Pensions Industry costing tens of millions of pounds. The impact on divorce settlements could be to push up CETVs for males as the life expectancy of a unisex pensioner would be higher than the life expectancy of a male pensioner, though this will be balanced to a degree by the fact that the cost of providing contingent spouses benefits to a unisex spouse will be cheaper than providing contingent benefits to a female spouse.
“Given that divorce solicitors and their clients have been subject to months of delays in waiting for public sector pension schemes to revise their CETVs in late 2010, to allow for the move to Consumer Price Index (CPI) linking from April 2011, it would be unfortunate if further delays are now introduced to reflect the impact of moving to unisex life expectancy assumptions for pension scheme members”.
A change to the Duxbury Tables
There will be other possible consequences for family lawyers. When working out capitalisation of maintenance, we use the Duxbury Tables to calculate the amount of capital required to provide a specific income over a person’s lifetime, on the basis that the fund will be exhausted at the end of their life. It is a difficult sum to work out as people’s life expectancies are different and rates of return on investment are uncertain, but the tables at least provide a point of reference and rough guide.
However, they do again differentiate between men and women. There use will therefore need to be reconsidered because any approach that discriminates, inadvertently or otherwise, by gender would be unlawful following the European Court of Justice’s ruling.
While all these changes will take some time to be fully understood and take effect, it is clear that they will have a profound impact on the financial arrangements of nearly every divorce in the future.
Julian Hawkhead became Managing Partner of the Harrogate office of Stowe Family Law in December 2009. Although Julian has a broad spectrum of expertise in Family Law, he is a Resolution accredited specialist in both Emergency Procedures in Financial & Property Cases and Complex Financial & Property Matters. He is known in particular for specialising in cases involving complex financial arrangements for high net worth clients, often with a corporate or trust element.