Examination of Witnesses (Questions 60
THURSDAY 8 FEBRUARY 2001
DAYKIN CB, MR
60. The Peter Wright report. Would you be aware
(Mr Daykin) Yes.
61. And that would have an implication for the
(Mr Daykin) Peter Wright's report was specifically
in relation to the problems relating to accumulating with-profits
policies, which was the sort of modern version sometimes known
as "unitised with-profits", for which the regulatory
and professional requirements had not been very fully spelt out,
so the object of that working party was to establish some recommendations
from the profession for dealing with that particular type of product.
62. And that would carry implications for the
(Mr Daykin) Yes. The Government Actuary's Department
has always worked very closely with such professional working
partiesin fact, almost always, we have a representative
on any such working party in order to make sure our views are
fed into the process although we do not have the final say. Obviously
the profession will decide what to do, nor is it necessarily the
case that the Government Actuary's Department will always accept
what the profession has decided as being sufficiently prudent.
We could still give advice to the regulator that, although the
profession has put out some paper, we still feel from a regulatory
point of view it would be appropriate to insist on higher levels
63. Have you ever offered such advice?
(Mr Daykin) Frequently.
64. But you are not able to tell the Committee
on what occasions?
(Mr Daykin) No.
65. Summarising all of this part of it, therefore,
we have this very elaborate if somewhat intricate and obscure
process of public reporting; we have appointed actuaries to whom
you talk because your annual report is quite clear that you talk
to themand I would imagine there are not very many people
who could make sense of what they might say other than people
such as yourselvesbut you do not regard yourself or your
department as being in any way the guardian of the public interest
over these issues or having any kind of independent voice to express
(Mr Daykin) I would like to regard ourselves in that
way but nobody has ever given me that statutory responsibility,
and our department has been involved in this process only through
having been asked by the regulators who do have that statutory
responsibility to provide them with technical advice and that
is what we do. It could have happened another waylegislation
could have been passed years ago to give the Government Actuary's
Department a different role but that is not the case. The Government
Actuary was only given a statutory role in relation to social
security and pensions issues and, in relation to insurance supervision,
we act simply on the basis of being requested to give advice by
66. In your annual report, you make a brief
reference to your work on minimum funding requirement. What role
did you play in the design of the MFR?
(Mr Daykin) We were not directly involved in the design
because the Department of Social Security asked the actuarial
profession to come up with a recommendation as to how the MFR
should be structured. Having done that, however, we were, of course,
advising the Department of Social Security throughout that period
on how they should receive the information they were getting from
the actuarial profession and what they should do with it, so we
certainly played a role but were not specifically requested to
design the MFR system.
67. Did they take your advice on that?
(Mr Daykin) Again, it is not really possible to say
whether they did or did not on any particular issue. The important
point to reflect on in this case is that many of the issues are
not actuarial but political in nature and there was a great deal
of discussion at the time about whether we were talking about
a solvency requirement. In fact, the original Bill referred to
a solvency requirement and then it was changed to a funding requirement,
and the nuances between the different levels at which that might
be set and the way in which it would work were as much as political
as professional issues, as to how strong a requirement should
be set and how the balance should be reached between protection
of members' interests and the costs to employers of providing
68. On what particular aspects are you able
to provide advice and views? Was it purely highly technical advice
you were giving?
(Mr Daykin) We attempt, when we give advice, to draw
attention to the broader issues. Our principal role is to analyse
the technical aspects of the problem but because we have people
experienced in the pensions areamany have worked for their
whole career in pensionswe do have a source of advice which
is often beneficial to a customer or a client like the Department
of Social Security where they have only a limited number of people
who have practical knowledge of the pensions industry.
69. Why are you involved in the current review?
(Mr Daykin) We are involved as advisers to the DSS
on any issue which they care to put to us. The process has been
somewhat devolved because they asked the actuarial profession
to review the operation of the system; they reported back last
autumn, and then there was a further round of consultation which
the DSS put out. In parallel with which there has also been this
discussion of the Treasury seeking advice from Paul Myners, and
all of that has to be brought together now by the Department of
Social Security and the Treasury and I would expect us to be closely
involved in advising on how they should respond at this stage,
but the decisions will inevitably be political.
70. This is what seems rather puzzling in trying
to get to the bottom of exactly what the role of government actuaries
are. Why would it be the profession, the Faculty and Institute
of Actuaries that take the lead on creating and then reforming
the MFR, rather than yourselves? I would assume that would be
the sort of role you would be performing on our behalf?
(Mr Daykin) It could well have been, and certainly
that would have been a route which the DSS could have followed.
They could have simply asked us to design a system and advise
them on it, so maybe it is really a question for the DSS as to
why they did it that way. If I can surmise, I suppose it would
be because they felt they would get a better acceptance by the
industry if they involved the profession and the industry in the
process rather than doing it behind closed doors.
71. You would regard it as being done behind
closed doors if you were involved?
(Mr Daykin) Others might. If we simply advised the
DSS and they then pronounced what they were going to do, that
might be felt to be a less transparent process.
72. Would you not think it would be appropriate
as a role for the Government Actuary's Department to be able to
provide that kind of advice and also to do it in public in the
way I think a number of us would like there to be access, openness
and accountability in relation to the public sector? Would there
be a particular problem in you providing that advice, drawing
up proposals and making that public? Would that create difficulty
in terms of your relationship with government departments?
(Mr Daykin) I do not think so if that was the way
it was structured. That, for example, is the way it is structured
in relation to the contracting-out terms where there is a specific
legislative requirement for the Government Actuary to report on
the recommended contracting-out terms and, therefore, it is a
transparent process where we produce our recommendations but they
are published because they are a report that the Secretary of
State must lay before Parliament. In order to increase the transparency
of that process, we go through a consultation process prior to
that. We issue a consultation document to the industry to get
people's views before we finally give our advice to the Secretary
of State and he publishes it. That is another model which, to
my way of thinking, is a very good and transparent model but different
projects have been done differently and, in the case of the minimum
funding requirement it was decided that the appropriate way to
go was to seek the advice of the actuarial profession.
73. But are you giving your views then on what
the actuarial profession is coming out with to the Secretary of
(Mr Daykin) Yes.
74. Does the government always seek your advice
on policy matters that require an actuarial contribution?
(Mr Daykin) I do not think that I could say "Yes"
absolutely to that. There are two reasons why that is not the
case. Firstly, there may well be some areas where the government
is not asking our advice because they have not realised they need
it or there is some constraint, budgetary or otherwise, which
leads them not to seek it. Secondly, there is a general edict
out from the Treasury, from ten years or more ago now, to invite
and encourage government departments to market-test actuarial
services and, therefore, it would be perfectly expected that some
government departments might seek actuarial services from other
sources. Indeed, we are aware of the few occasions on which that
has taken placenot many.
75. When you do advise, is your advice always
fully taken into account by the decision-maker?
(Mr Daykin) I think that would be too much to expect.
For any professional giving advice the recipient of the advice,
the client, is always at liberty to do whatever they will with
it. Our record is good in that respect and my feeling is that,
generally, people are keen to have our advice and want to take
it but it certainly would not be blanket, one hundred per cent,
always operating on the basis of what we advise.
76. Do you have a right to make representations
to a minister in such circumstances where it is not taken?
(Mr Daykin) We have our own minister. The Economic
Secretary to the Treasury acts on behalf of the Chancellor as
our minister and, if I was concerned about some situation where
I thought another government department was not taking sufficient
notice of our advice, then I could always make representations
to her. I think at the end of the day, however, it is open to
client departments to make their own decisions in the light of
the advice they receive from us.
77. What action, for instance, would you take
in circumstances where your calculations, for instance, in re-establishing
a link between earnings and pensions rather than inflation and
pensions, differed from the departmental calculation?
(Mr Daykin) I am not sure that it would arise in quite
that form because the Department of Social Security do not carry
out their own long term projections in parallel with what we do
because they rely on us to provide that advice, since we have
a statutory responsibility to report to Parliament on it. I think
the issues where one might I suppose find a department sceptical
about our advice is if they felt they did not really accept our
assumptions for some reason, but in order to avoid that becoming
an issue we usually have a continuous dialogue with the client
to make sure they understand why we feel it is appropriate to
make certain assumptions, and we will usually present a range
of assumptions or the effect of different assumptions anyway.
There might also be presentational issues in the way in which
the department wants the results to be presented or when compared
to what we might think. Subject, however, to the fact that I do
have certain statutory responsibilities which I must certainly
fulfil in reporting to Parliament and in those cases I must act
wholly in the public interest in a way which I feel is completely
professional. All the work we do for the Department of Social
Security is client relationship work where we do what they seek
from us and we provide them with advice.
78. So if you were talking about assumptions
in one of these assessments in the way you have been describing,
and you came to a point where you could not agree with the assumptions,
whose assumptions obtain?
(Mr Daykin) If it is in the case of a report which
is going to Parliament under my signature, then I have the final
decision. It is my personal professional responsibility to sign
the report, so I would need to be satisfied that I was comfortable
with the assumptions that were being made.
79. You said in answer to my colleague, Nigel
Beard, that you could make representations to your own minister
if you felt that your advice had not been properly regarded. Have
you ever done so?
(Mr Daykin) No.