Examination of Witnesses (Questions 80
THURSDAY 8 FEBRUARY 2001
DAYKIN CB, MR
80. I ought to declare an interest as a policyholder
in the National Insurance Fund, but I think probably everyone
in this room is in that position. Coming to the document you published
in November 2000 which showed what was then quite a strong political
issuethe uprating of pensions in line with earnings rather
than priceswhat your projections show on page 12 is that,
if pensions have been uprated in line with earnings, and that
was continued through to 2005-06 steadily, year on year, at the
end of that period of time there would be a balance of over £23
billion in the National Insurance Fund, and that balance would
be, by 2005-06, 40 per cent of the relevant benefits expenditure,
and the excess balance over your minimum recommended level would
be £13.6 billion. This is fairly striking advice on what
was a very significant political issue, both then and now. Did
the Department of Social Security have any dialogue with you about
(Mr Daykin) The contents of that report were under
discussion between us and the Department of Social Security for
some while before. In fact, the gist of the outcome which is projected
there would have been well known to the Department from a long
time ago from discussions we would have had with them. The specific
report you are referring to was, in fact, required of us by an
amendment of the Act which was passed in July, and was a specific
narrow point as to what would be the situation over the five years
which we have projected there, and it did not come as any surprise
to us or the Department that that was the case. Also in that report
I felt it was important to show what the longer term impact would
be because, in the longer term, there would be a shortfall in
the contributions over benefits if one continued on that basis,
and the question of whether contributions should be increased
in order to provide earnings upratings is an entirely political
question. All I can do is present what the figures would be on
either basis in order to inform that debate. The level of fund
you referred to is still very small compared to many other countries.
The United States have a huge
81. It is a bit better than Equitable Life!
(Mr Daykin) Well, no. I think Equitable Life policyholders
might not be too happy if there was only money there to pay out
benefits for four or five months. It is a very small fund in relation
to the liabilities which are there.
82. You meant to say "years", I am
sure, rather than "months"?
(Mr Daykin) No. At the end of that period it would
build up to about four or five months of benefit expenditure because
the standard, the 16 per cent which we referred to as the minimum
which we think is reasonable, is 16 per cent of a year's benefit
which is only about six weeks of benefit expenditure. It is only
a working balance and does not represent a fund for future liabilities.
83. Just to wrap this topic up, would it be
fair to say that it is your role, in the context in which Mr Cousins
has been asking questions, to persuade the government that the
actuarial approach to, for instance, the fund that we have just
been discussing is the appropriate approach, rather than, say,
some sort of flat contributory kind of approach?
(Mr Daykin) We can provide the government with advice
on the effect of different ways. In practice most social security
schemes around the world are on a pay-as-you-go system because
of the huge amounts of money which would need to be built up in
order to fund all the liabilities in advance. The principal actuarial
function in the UK, therefore, which is a very strong discipline
here, is that the Government Actuary presents these reports to
Parliament and they give not only short-term but also long-term
projections of the effect of the legislation which enables the
parliamentary discussion process and the ministerial decision-making
process to proceed on the basis of a full understanding of the
long-term effects. Hopefully this will avoid making mistakes in
ignorance, for example, of the effect which might flow in the
long term from a particular policy.
84. Throughout this discussion, there has been
reticence about being public. Would you describe your department
as in keeping with open government and transparency in today's
(Mr Daykin) My understanding of our role is that we
are there to be advisers to other government departments who have
policy responsibilities. We have not been given any policy responsibilities
which we should be open about, so we operate in a client relationship
with other government departments. It is their responsibility
to be fulfilling the requirements of open government in respect
to any of their policies. We have a client relationship with them
in the same way that a private firm would have if they were advising
them, and it is up to our clients rather than us to decide what
disclosures to give. If Parliament should decide to give the Government
Actuary some specific requirements to report publicly on particular
issues, that would be a completely different matter.
85. Sometimes you give advice to select committees
and sometimes to individual Members of Parliament. How do you
choose which ones you are going to take on as clients?
(Mr Daykin) In principle we are willing to act for
any client which does not put us in a situation of conflict with
core clients and where they have the ability to finance payment
for the advice which they are seeking.
86. Do you think Parliament makes appropriate
use of your department in gaining objective information?
(Mr Daykin) I believe they could make more use of
us in a number of respects.
87. Can I follow that up? Perhaps you could
outline what you think those might be?
(Mr Daykin) For example, if a select committee felt
that they wanted to explore the financial impact of an alternative
set of policies, then they could seek advice from us on the costings
of that, be it in the pensions area or social security.
88. Would we have to pay for it?
(Mr Daykin) As we are set up at the moment we do not
have the resources to do it for free but that could be considered.
If it was thought to be in the public interest that we had that
role then we should, in principle, have more of a core budget
which we could use for such purposes.
89. That is an interesting point. Have you ever
offered advice on the future projections of the unfunded pay-as-you-go
public sector pension schemes like teachers, police staff, fire
staff and so on?
(Mr Daykin) The teachers and the National Health Service
schemes operate with a notional fund for which we do a published
valuation. The other schemes which you refer to are all strictly
pay-as-you-go. We do advise the respective managers and departmental
sponsors of those schemes and we have done projections of the
long-term consequences of those schemes. We do not, at the moment,
have any statutory responsibility to report to Parliament on that
in the way we do on social security but, personally, I would see
no reason from our point of view why we would not welcome such
90. I think we can take the hint on that! Your
own profession has become one where salary levels have become
extremely high in the private sector. Are you having difficulties
in recruitment? Do you think there is going to be a problem about
maintaining the quality of the government actuarial service?
(Mr Daykin) Recruitment is a constant problem for
us for the reasons you indicate and also because the majority
of actuaries who enter the profession do not see themselves as
working in the public sector. They expect to be working in the
private sector. We do have a salary structure, therefore, which
is quite competitive by Civil Service standards. Because we are
a separate department, because we have this autonomy and we charge
fees for our services, we are able to set salaries which are,
at least, in touch with the market but, nevertheless, we have
a great deal of difficulty in recruiting as many qualified actuaries
as we would like. We barely manage to keep pace with the ones
we lose. We have steadily grown in terms of numbers over the years,
and we are certainly able to recruit trainees from university
but many leave for various reasons before they become senior actuaries.
We would love to be able to have more actuarieswe could
provide a better service to our clients; we could expand into
other areas if we were able to recruit more but the pressures
on the profession at large are enormous in this respect, and all
people trying to recruit actuaries have difficulty recruiting
at the present time. In our situation as a public department it
is inevitable that we will have those problems more than others.
91. Perhaps you could make available to the
Committee the turnover rate that you are experiencing, and highlight
these recruitment and retention problems?
(Mr Daykin) Yes.
92. Do you recruit actuaries from overseas?
(Mr Daykin) We have, sometimesmainly trainee
actuaries. We have a range of trainee actuaries from different
countries around the world at the moment which also helps us sometimes
when we need linguistic skills.
Chairman: Thank you very much. There are one
or two issues which we want to try and follow up with you through
officials which were pointed out by Mr Cousins but, subject to
that, thank you very much indeed.