Postcode pensions set to reect how long we really live; Life

The size of the pension employees receive in future may depend not just on how much they have saved during their working life, but where they live, their occupation and even social status.

While politicians, and consumer lobby groups are campaigning for greater equality over annuity rates, insurance companies are poised to set pension payments to more accurately reflect the life expectancy of the policyholder.

Britain's biggest insurer, Norwich Union said on Friday that it expected to introduce "postcode annuities" by 2006. This will revolutionise the pensions world by basing retirement income on the street where you live.

Most people in Scotland will buy an annuity at some stage in their lives, following the closure to new members of many salary-linked pension schemes. This is the contract which effectively converts a pensions savings pot to a regular income until you die.

Historically, as with life assurance, annuities were a great leveller in that everyone received the same income for the same investment, with one major anomaly. Women have been badly discriminated against, and can receive anything up to a fifth less than a man, because statistically they live longer.

Scotland is littered with elderly women, living alone in dire straits and gender-based annuities exacerbate an already unjust situation whereby women are the most disadvantaged when it comes to pensions.

Help The Aged's Mervyn Kohler explains: "Most didn't have much of a career or earn any pension. Even when they did, family responsibilities prevented them climbing up the ladder. They mainly relied on their husband's pension, and that can be sharply cut back or even disappear completely when he dies."

Governments both at home and in Brussels are concerned at the way women are discriminated against when they come to buy annuities with the trivial sums they have managed to save.

The EU is considering a directive outlawing gender-based annuities, and Labour highlighted the plight of poverty-stricken elderly women in its recent pensions green paper.

Yet insurance companies are moving in the opposite direction, claiming that they are merely following consumer demand.

Scottish Equitable's pensions manager Rachel Vahey explains: "People want the most money they can get, so rather than a one-size- fits-all annuity we are seeing the development of contracts which more closely price in the risk."

Companies are already offering a higher income to people with poor health, through what are called impaired-lives contracts.

This concept is being developed further through "enhanced" annuities, which can also boost retirement income by anything up to 40% for people with health conditions which are not immediately life- threatening.

So far only Britannic and GE Life offer an enhanced option based on health, although MGM pays higher sums to people from various occupations. A shipyard worker, for example, who spent 40 years in heavy or dangerous work might be paid more than white collar staff.

However, next year Norwich Union, which is a market leader, will launch enhanced annuity contracts, making them very much the norm.

A Norwich Union spokesman said: "Whereas only one in 20 people taking out an annuity might qualify for an impaired contract, as many as one in five may be able to boost their income through an enhanced contract."

But this will be just one step in the direction of more accurate risk-pricing by the company. A year ago, it announced a study of death certificates to see whether basing annuity rates on post codes, in the same way as motor and household insurance would be viable. That study has been abandoned, because it proved too unwieldy and complex.

However marketing manager Ian Beggs said on Friday that the company believed the data it would accumulate from its experience of underwriting "enhanced" contracts would allow it to launch postcode annuities by the year 2006 or 2007 at the latest.

Beggs said: "The evidence is clear that people die younger in certain parts of the country. Why shouldn't they benefit from a higher income in the years they have left?"

Copyright 2003 SMG Sunday Newspapers Ltd.
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