Examination of Witnesses (Questions 120
- 140)
THURSDAY 1 MARCH 2001
MISS MELANIE
JOHNSON, DR
PAUL MILLS,
MR PETER
SCHOFIELD AND
MR MICHAEL
SWAN
120. Could you inform the Committee about that?
(Miss Johnson) I will write to the Committee further
on that point[1].
121. Do you think in the light of the discussion
that we have just had—and I accept, of course, that there
are issues of confidentiality involved—that there should
be some kind of reporting relationship between the Government
Actuary's Department and Parliament itself over the issues which
the service level agreement covers—not specifically identifying
individual companies but at least in broad terms?
(Miss Johnson) Well, if you are talking about in general,
obviously it is perfectly possible for, as I understand it, the
Committee to take evidence from the Government Actuary in general
about advice, as it were, in these sorts of areas. My understanding
of it legally is that the Government Actuary's Department would
be unable ever to divulge individual advice to the Committee or,
indeed, to any other party.
122. But the situation is that the Committee
has already established that the government actuaries regard themselves
as having a client relationship with the Treasury and they will
not answer questions on any of the issues covered in the service
level agreement which, as I hope I have indicated to you, seem
to me to be extremely decisive and far-reaching?
(Miss Johnson) Well, I have explained the situation,
I hope as clearly as I can.
123. Do you think some consideration should
be given to the statutory position of the Government Actuary's
Department and, indeed, the statutory position of appointed actuaries
within insurance companies? Is the government giving any attention
to that?
(Miss Johnson) No, not at the present time.
124. Are you really saying that, after the Equitable
Life saga, the government really does not have under consideration
a review of the role of appointed actuaries within insurance companies
and how they report to a wider public?
(Miss Johnson) It is obvious that there will be points
that will need to be considered whenever the FSA report becomes
available. It seems to me that that is the time at which evidence
will be presented to us all about the circumstances around the
Equitable Life situation which will inform what sort of main issues
might need to be addressed and how they might need to be addressed,
and we are awaiting that report.
125. Do you not accept, Minister, that it is
rather odd that the reports that appointed actuaries and insurance
companies make are all public documents available to Parliament,
available to policyholders, should they be able to get hold of
them and understand them if they did, but the analysis of what
they mean that is done by the Government Actuary's Department
is not publicly available? Do you not accept that there is a contradiction
there?
(Miss Johnson) You are saying that the information
effectively is available but the judgments of the actuaries, possibly
on the basis of it, are not available to you.
126. The information is being made available
in appointed actuaries' returns in a form which is extremely opaque
and difficult to understand. Do you not think there is a role
for somebody to take these appointed actuary's reports and, in
the public interest, either advise the government or independently
provide some analysis of what these reports contain and what they
mean?
(Miss Johnson) I think, given the reason that this
is of such interest is primarily at the moment due to the situation
surrounding Equitable Life, it makes sense, the FSA having undertaken
to produce a report on the circumstances which have led to the
present situation with Equitable Life, for us to wait to see what
the recommendations of that report are and what issues arise as
a result of the analysis that no doubt the FSA internal audit
and other folk who are doing this are undertaking, and what is
being identified there and respond to that report. It is premature
for us to decide at this stage which particular issues might need
to be addressed because clearly that report will point the way
ahead.
127. Minister, surely you accept, however, that
at the moment there is a great deal of debate about the nature
of with-profits products generally—the terminal bonus system,
lapse rates, and so on—and all the key information on those
issues has been analysed throughout by the Government Actuary's
Department and it is spelt out extremely clearly in the service
level agreement that information on all of those matters has been
going to the DTI when it was the insurance regulator, to the Treasury
when it was the insurance regulator and now to the FSA. Do you
not accept that there is now a public interest in opening this
up and getting a better quality of information to inform those
debates which are now going on?
(Miss Johnson) I am sure there is a public interest
in better information and we do support better information for
consumers and have done a lot to address that. I will not go through
any of what we are doing because it is, in a sense, tangential
to the point you are making but what is appropriate in these circumstances
is to see what is being identified as recommendations or issues
arising out of the FSA report and to tackle those, because they
should be the most important issues which we need to address out
of the circumstances surrounding Equitable Life. Clearly, just
on the with-profits point, the FSA and Sir Howard himself said,
I believe when he was here, that they would be looking further
at with-profits. He has certainly since made a speech in Wales
on this subject indicating that the FSA will be looking further
at with-profits policies.
Chairman
128. Arising out of that, given that the role
of the Actuary's Department has changed with respect to insurance
companies, do you think there really is a continuing role for
the Actuary's Department in its present form?
(Miss Johnson) Yes, because they provide us with cost-effective
and independent advice. There are a number of key statutory roles
that they carry out and they are a major supplier of actuarial
advice across government. It does not make very much sense to
fragment that across government: it makes sense to hold it in
a central, specialised resource given the nature of their work.
It would cost government a lot more to have that work done by
the private sector on an ad hoc arrangement than via the Government
Actuary's Department.
129. You mentioned in answer to an earlier question
I asked about contracting out that this was not only allowed but
it happened. Can you give us an example of where a government
department has contracted out actuarial services?
(Miss Johnson) I know in one or two cases, for example,
the Inland Revenue have used non Government Actuary's Department
actuarial advice for some work they have been doing on one or
two occasions. Obviously I am not aware across government—and
I do not think you are really expecting me to be—where this
is happening more widely but I know of that because it interrelates
with work that is being done for me.
130. Would any of your officials be able to
help on that?
(Miss Johnson) I very much doubt it.
131. Finally, what about overseas work? Are
they allowed to make profits on that?
(Miss Johnson) Well, they are allowed to fully recoup
all their costs associated with it. As you are aware, they do
a small but significant proportion of overseas and outside work.
I think that helps them to offer opportunities of an actuarial
kind in terms of professional development which otherwise might
not be available and strengthens the organisation in terms of
its experience. Generally speaking, we are very comfortable with
the work they do on all of that.
132. What is the reason for not allowing them
to make a profit?
(Miss Johnson) Basically because it is public sector
and it is the rules under which the public sector operate. There
could be questions about the competition law and in Europe presumably
on state aid as well, conceivably, if there was an organisation
that was basically public sector but which was going out on another
basis and making a profit.
133. That does seem a little bit odd in view
of the discussion we are going to have in a few moments' time
about the Royal Mint, which does seem to be in a similar situation?
(Miss Johnson) Those are the rules that have operated
for the Government Actuary's Department, certainly and Michael
Swan, who is responsible for the Government Actuary's Department
on the Treasury side, is saying that the difference is that there
is a trading fund for the Mint and it is via the trading fund
arrangements that the Mint is on a different footing.
134. On the question of recruitment, apparently
the Government Actuary's Department is having problems recruiting
staff at the moment. Is that correct?
(Miss Johnson) I think the evidence I have seen which
has been sent to you indicates a declining problem on recruitment
and retention, in fact.
135. Is there a way round this problem, that
you can see?
(Miss Johnson) It is always the case that, where people
are trained and there is a high degree of training and there are
high rates of pay to be had outside the organisation, there will
be a certain attrition rate from within the organisation to outside,
because people as they become trained and it is a lengthy period
of training to become an actuary, become very valuable commodities
and can be made offers that the public sector cannot compete with.
Having said that, the analysis that has been sent to you shows
a growing convergence between the public and private sector in
the Government Actuary's Department in this regard in terms of
turnover of staffing. I believe that we do not have a significant
issue of any kind to address on this: we always keep this in mind
and I am sure the Government Actuary's Department are keeping
in mind in the way they are recruiting and retaining people, but
there is not a significant issue on this at the present time.
There was one a couple of years ago, as I think the figures show.
Judy Mallaber
136. I would like to return to this question
of client confidentiality and whether that can mean that we do
not have some of the information that might be of assistance in
looking at what is happening. Relating to the Minimum Funding
Requirement introduced by the Pensions Act in relation to the
Maxwell pension scandal, it was rather puzzling to us that it
was the Faculty and Institute of Actuaries that took the lead
in reforming the Minimum Funding Requirement rather than the Government
Actuary's Department giving advice to what would have been I think
the DSS. When we questioned the Government Actuary's Department
on that, he speculated that maybe they had not been asked to do
it because they would not have had the same acceptance from the
profession, in that they would have been seen to be giving advice
behind closed doors because of client confidentiality between
themselves and a Government department, as it would have been.
Is there any reason, however, why, on a matter of developing public
policy such as this, the Government Actuary's Department could
not give advice in public in order to enable there to be a debate
and then for the Government department to reach its decisions
with us knowing what the Government Actuary's Department were
doing? It appeared they had not been asked to do the work but
that it had been given to the professional organisation and that
might have been solely because of client confidentiality.
(Miss Johnson) It would not be for me to speculate
on the reasons why the DSS decided to go to the Faculty and Institute
of Actuaries, except for the obvious reason: clearly they are
the lead professional body in actuarial matters so it does not
seem prima facie an unreasonable decision on the part of the DSS
to decide that that is where they are going to get their advice
on this particular issue. Clearly, the Government Actuary's Department
were involved via the Faculty and Institute of Actuaries' involvement
in it and involved in other ways. They clearly played a role and
it is in their capacity as advisers to the DSS.
137. But, in principle, subject presumably to
having to change that constitutional arrangement relating to client
confidentiality, would there be any reason that would stop GAD
from being asked to give advice on the development of a policy
issue to a Government department and for that advice to be made
public? Is there any constitutional reason why it could not operate
in that way?
(Miss Johnson) I do not think there is any reason
why Government Actuary's Department could not have been asked
to do the DSS work; the DSS simply decided to ask the Institute
and Faculty of Actuaries and that was the choice they made. I
do not think that this issue is a significant issue in this kind
of context.
138. Would you have any difficulty in the Government
Actuary's Department's advice to you being made public? What would
be the areas where you felt it could be made public and the areas
where you felt it could not be?
(Miss Johnson) It is a question of giving their advice
in terms of analysis rather than policy. I think there is a difference
there which we need to bear in mind.
139. Are there any areas where their analysis
should be kept secret rather than being in the public domain?
(Miss Johnson) It depends on the contractual relationship.
If they have one, just as anybody else who is going out and getting
a service, there can be reasons why that client or person does
not want that advice or that analysis to be made public, and it
is up to the client then whether the advice is made public. Where
the client is government and it is an analysis, I do not think
in many cases that that would cause a problem if it had been sought
in a general way to inform policy. We do not normally go through
the process of revealing the details of policy formulation in
a public arena: probably select committees are the nearest place
in which such issues get discussed but, as you are aware, it is
perfectly normal in Government for the finished policy to be submitted
and it is only where there has been engagement through public
consultation or processes like that where Government decides to
release the information about the way in which that work has been
done and the results of the consultation, for example.
140. In this case, the Government Actuary's
Department would be giving you technical advice on the issue and
that would be why you were seeking their advice in that client
relationship. Can you give us any indication of the circumstances
in which you think it would be unhelpful for that technical analysis
to be made public? I would have thought it would usually have
helped inform our understanding of the decisions of the Government?
(Miss Johnson) I am sure many matters might inform
people's understanding of the decisions of Government but it is
typically the case that the underlying information and advice
that goes into the final policy decisions is not a matter of public
property: nor, indeed, is it envisaged to come under the Freedom
of Information legislation.
Chairman: Thank you very much.
1 See Appendix 8 Back
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