Examination of Witnesses (Questions 100
- 119)
THURSDAY 1 MARCH 2001
MISS MELANIE
JOHNSON, DR
PAUL MILLS,
MR PETER
SCHOFIELD AND
MR MICHAEL
SWAN
100. Do you encourage government departments
to test the market to make sure they are getting the best value
for service?
(Miss Johnson) Yes, and some of them do. Occasionally
they decide not to use the Government Actuary's Department. We
are relaxed about that and I am sure the Government Actuary's
Department is too. It is good that there is competition and that
things are looked at in that way.
101. And you are quite sure that the costings
are done in a transparent way? In other words, that overheads
are properly accounted for?
(Miss Johnson) I am, yes.
Mr Plaskitt
102. The Government Actuary can — and,
indeed, does - report to Parliament on matters to do with social
security and pensions but not in terms of the life insurance industry,
which seems closely linked to those. Is that satisfactory, do
you think?
(Miss Johnson) Obviously the way in which the Government
Actuary's role is set up is defined in a variety of statutory
responsibilities which he has and which the Department exercises,
and those are set out in legislation. There is obviously no problem
about the Government Actuary's Department being called to account
in other ways by the House: obviously appearance in front of the
Treasury Select Committee is a good example of ways in which their
work can be further investigated, as you currently are doing.
103. There may be a legislative reason why it
does not report on life insurance to Parliament, but is that logical?
Should we not be coming back to the legislation and considering
a change?
(Miss Johnson) We have not contemplated that and it
has not seemed obviously desirable to us in some way. I am not
aware of anyone particularly suggesting it, either.
104. It is just that, as you know, we are investigating
the Equitable Life matter and the Government Actuary could not
tell us anything about the advice he had given to the DTI, to
the Treasury or the FSA, because his relationship with the regulator
is a commercial one. Is that a desirable arrangement, do you think?
(Miss Johnson) It is a matter of fact that his relationship
is a contractual one and, under those contractual arrangements,
he is bound to maintain the confidentiality of the information
that he supplies to clients. That has always been the case.
105. But have not we potentially got a whistleblower
here who has had his pea removed? Could we have avoided Equitable
Life if the Actuary had been able to speak out on these matters
and not be restrained by commercial considerations?
(Miss Johnson) I am not privy to the actuarial advice
that has been supplied on those occasions any more than the Committee
is so I cannot comment on that, but I think it is unlikely that
your speculation is so.
Mr Kidney
106. When you say you have not been privy, who
does the Government Actuary give his advice to, if not to the
Treasury?
(Miss Johnson) The advice has obviously been supplied
to the FSA as the regulator. Where the advice was supplied to
the Treasury then clearly we had advice. We are also able to seek
advice ourselves from the Government Actuary's Department.
107. So did he blow a whistle during the time
the Treasury got his advice?
(Miss Johnson) No.
Mr Plaskitt
108. At the end of October 2000 the FSA announced
its intention to transfer actuarial advice from the Government
Actuary's Department to an in-house actuary. Are you at all concerned
about the ending of the traditional separation between regulator
and actuary which that implies?
(Miss Johnson) It is a matter for the FSA who they
get their future actuarial advice from. They have felt that it
would be the best arrangement - and the Government Actuary's Department
clearly did not disagree with that — that the staff should
be transferred from the Government Actuary's Department and they
are being transferred shortly to the FSA. They have been doing
work for the FSA in recent times in any event and, as you know,
a cohort of staff are going across to the FSA and the future actuarial
advice arrangements for the FSA are a matter for them. As the
regulator I am sure you would not be happy in other ways if we
were telling them what we thought their advice arrangements should
be.
109. Treasury does not have a view on this arrangement?
(Miss Johnson) No.
Mr Cousins
110. Minister, this morning we have received
from the Government Actuary's Department their service level agreement
with the Treasury. I cannot truthfully say that in the time available
to me I have done anything more than just whizz through it and,
of course, I am not sure whether you will have it in front of
you yourself.
(Miss Johnson) I am not sure I have but do not let
that stop you asking me a question, at least.
111. It is clear from the service level agreement
that the Government Actuary's Department is the key source of
information about the liabilities of insurers and the ability
of insurers to fulfil policyholders' reasonable expectations.
That is crystal clear in the service level agreement. The agreement
also points out that, unless there are special circumstances,
the Government Actuary's Department will be with the DTI and then
the Treasury regulators, now the FSA regulators, on all their
visits to companies and the Government Actuary will be used as
their key source for advice in the scrutiny of the annual returns
of the appointed actuaries. The service level agreement goes on
to say that the key indicators the government actuaries will use
in their advice to ministers will be, amongst other things, trends
in free asset ratios, worrying exposures and impacts on bonus
strategy. Those are clearly identified as specific points on which
the Government Actuary's Department will act as the key source
of advice. It goes on to say in point A 17 that, if the Government
Actuary's Department considers that the insurance directorate
might need to exercise Her Majesty's Treasury's powers of intervention,
it will make appropriate recommendations. In the light of that,
could you reconsider the answer you gave to Mr Kidney in which
you said that ministers had not been informed about the Equitable
Life situation, because the service level agreement makes it crystal
clear that the Government Actuary's Department was the central
crucial source of advice to government on all the issues which
have figured in the evolution of the Equitable Life saga. Would
you disagree with that?
(Miss Johnson) Clearly the reading that the reference
you have made is an interesting one; however, I do not in any
way go back on what I said to Mr Kidney earlier. The point is
the advice is confidential on each specific case and so the Government
Actuary's Department has an individual relationship and the advice
on each specific case is confidential advice. I am not aware of
what arrangements are made between the Government Actuary's Department
and officials; as a minister I am not privy to any of that information.
112. I see. Clearly what is of great importance
in the evolution of the Equitable Life saga—and in a way
that is just an example of a wider body of problems—and
you will agree with me it is clear from the service level agreement,
is that the Government Actuary's Department had the dominant central
role in providing the specific advice to ministers on all of the
issues—bonuses, with-profits policies, free asset ratios,
lapse rates, it is all spelt out in detail—and that the
Government Actuary's Department is the key source of advice to
officials on all those sorts of issues?
(Miss Johnson) The point is we have to make a distinction
between generic advice and specific advice. On generic advice
it is certainly the case that the Government Actuary's Department
will supply advice both to officials and ministers of a generic
kind, but on specific, individual, cases that advice is confidential
between the Government Actuary's Department and whoever is their
client.
113. Can I say that it is clear from the service
level agreement that the advice that the Government Actuary's
Department gives is not just generic advice, point A7(a): "Government
Actuaries will report to Her Majesty's Treasury immediately if
the initial scrutiny of any company raises serious concern; (b)
the Government Actuary's Department will send to Her Majesty's
Treasury by the end of August a report covering all initial scrutinies
which will consist of a priority rating for each company, an indication
of solvency cover for each company...", et cetera. This is
not generic advice: this is advice very specific to companies
and their performance?
(Miss Johnson) But that advice is being supplied to
the regulator. I believe that the FSA told the Committee, Sir
Michael, about their 1998 concerns over Equitable's reserving
on guaranteed annuity options and they clearly took the Government
Actuary's Department's advice into account in pursuing these.
That is a matter on which the FSA has, rightly, given you evidence
and it is not for me to gainsay that or interfere in that in any
way.
114. I do not want to pursue this point unduly
this morning but it is a matter of record that the FSA regard
their duties as beginning on 1 January 1999 -
(Miss Johnson) Quite rightly.
115. Exactly so—and everything before
that is, so to speak, on that ground. Can you advise the Committee,
therefore, as to where Parliament goes if it wishes to examine
what advice was given to the Treasury and what the Treasury did
with that advice prior to 1 January 1999?
(Miss Johnson) The FSA, as you are aware, is producing
a report and the report is going to set out the background and
the events leading up to the point at which responsibility for
prudential insurance regulation moved to the FSA. I cannot pre-judge
what will be in that report but the FSA has the brief to look
into the background and the events leading up to the time at which
it obviously assumed, as you rightly say, on 1 January 1999 responsibility
for prudential regulation.
116. The main Committee had in front of it Mr
Roberts, who is now the insurance regulator at the FSA and had
previously been the insurance regulator at the Treasury and before
that had been the insurance regulator at the DTI. When I sought
to ask him questions about matters before 1 January 1999, Sir
Howard Davies intervened and said that that was covered by advice
to ministers and I could not ask him questions about that. That
leads me to the conclusion, therefore, that it is to ministers
we should come if we wish to pursue those issues about how the
Government Actuary's advice was treated at the Treasury and what
the quality of that advice was. Given Sir Howard Davies' ruling—which
I accepted—it does seem to me that logically I can only
come to ministers to pursue those points?
(Miss Johnson) I think there are two separate issues
here, possibly—one is advice to ministers on which obviously
Sir Howard was commenting at that particular point—as you
tell me—and there is clearly the question of the advice
more generally, as it were. Much of the advice is clearly not
going in all cases to ministers, but I cannot see any reason why
the FSA, in doing its job and I expect it to do a thorough and
complete job in preparing its report, as I am sure you do, cannot
cover these matters in terms of the background to the report.
117. I understand that but, Minister, you do
see the dilemma that Parliamentary scrutiny is now faced with—and
I do not want to labour this point this morning but it does seem
right at least to draw this to your attention—where Parliament
is being told that it cannot ask the FSA questions about the advice
that was given to the Treasury and to ministers prior to 1 January
1999 and, therefore, it is to ministers that Parliament must come
to seek some explanation of the quality of the Government Actuary's
advice to the Treasury before 1 January 1999 and, of course, what
was done with that advice?
(Miss Johnson) Well, as I have said, the report is
down to cover the background to the events prior to 1 January
1999 and, clearly, issues can be brought into consideration in
that background.
118. I am grateful for that reply but can I
just leave you with this thought: that perhaps this is something
you might care to discuss with Sir Howard so that Parliament can
be assured that, should it wish to, these matters about what happened
between the Government Actuary's Department, the Treasury and
actions that were taken before 1 January 1999 can be properly
scrutinised because, as of now, I think there is a gap which seems
to block effective Parliamentary scrutiny. I am sure that is not
being done wilfully but it is there nonetheless, and I think we
need some clarification about how that gap is to be closed.
(Miss Johnson) I understand the point you are making
but I think it is also important to recognise that there are elements
of information which you may be interested in which are down to
the confidential individual relationship between the Government
Actuary's Department and any of its clients which—in the
case of Equitable—are a matter for Equitable as a client
to decide whether they make them available.
119. Is the Government Actuary's Department
involved in the FSA inquiry into Equitable Life directly?
(Miss Johnson) I am not aware of them being involved.
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