APPENDIX 6
Memorandum from the Faculty and Institute
of Actuaries
1. Members of the actuarial profession provide
commercial, financial and technical advice underpinning the operation
of insurance companies, pension funds and other financial institutions.
The actuarial profession welcomes the opportunity to assist the
Treasury Sub-Committee with its current inquiry into the Government
Actuary's Department (GAD).
2. The profession has always worked closely
with the GAD, since its creation early in the 20th century, and
has valued the continuity of expertise that the Department has
demonstrated even as it has adapted to changes in Governmental
and social structures over the years.
3. A further significant change is now imminent,
with the transfer of certain of GAD's responsibilities to the
Financial Services Authority (FSA). This submission offers comments
under two headings:
— the handling of GAD's role of actuarial
adviser on insurance supervision, and the implications of transferring
this role to the FSA
— the handling of the GAD's other responsibilities
in the recent past, and after this transfer.
ROLE OF
ACTUARIAL ADVISER
ON INSURANCE
SUPERVISION
4. In the profession's view, it has been
important that there has been within Government a respected senior
actuary with whom Appointed Actuaries, who hold key responsibilities
in relation to the financial condition of life assurance companies,
can discuss matters. This role has been performed by the Government
Actuary who has exercised influence through personal and professional
liaison. It is not clear where that role will lie in future, once
the insurance division of GAD has been absorbed into the FSA with
no "functional head" equivalent to the Government Actuary
able to exercise moral suasion on Appointed Actuaries.
5. Looking ahead in relation to the supervision
of general insurance (GI) business, it is possible that the FSA
will move towards a so-called risk-based approach to understanding
company security. The profession would suggest that the analysis
and understanding of this on behalf of FSA should best be done
by actuaries. Issues of consistency arise, for example, in relation
to the actuarial requirements proposed for Lloyd's under FSA consultation
paper 66. There must be a danger that different elements of British
GI entities will start to have a variety of different types of
GI supervision. This would be the opposite of what the unified
FSA is trying to achieve.
GAD'S OTHER
RESPONSIBILITIES
Experience in relation to Contracted-Out Schemes,
and the Pension Schemes Office
6. In August 2000, as on earlier occasions,
GAD consulted on rebates and reduced rates of National Insurance
Contributions for members of contracted-out schemes. We found
this consultation most helpful, and we would like to commend to
the Treasury the principle of non-statutory consultation.
7. It is akin to consultation on draft clauses
in Finance Bills. Given the complexity of actuarial funding work,
the normal time that might be available to consider draft regulations
would be inadequate to enable suitable modelling work and response
on proposals. The informal three months or so of discussion and
request for feedback has been very welcome.
8. We have however found much more difficulty
in entering satisfactory dialogue with the GAD in its role as
adviser to the Pension Schemes Office (PSO) of the Inland Revenue.
One of our concerns over the last five years has been a major
change to the decades-old actuarial practice of funding for routine
early retirements in pension schemes. A change in PSO requirements
was announced without warning in 1995 and the PSO referred us
to GAD for discussion on their reasons. Many meetings were followed
by a serious delay in responding to correspondence and we have
failed to reach agreement. This experience has been shared with
the Association of Consulting Actuaries.
9. We have recently concluded that the advice
GAD has given the PSO has been the fundamental obstacle, rather
than the policy intent of the Revenue. We are disappointed that
the Revenue's extensive discretionary powers to set their funding
rules were used in this way and that the GAD's advice was prayed
in aid of such a major change without any facility for proper
representation. The outcome appears to have been contrary to DSS'
intentions to improve the security of pension scheme members.
Expectations for the future
10. The transfer of certain of GAD's current
responsibilities to the FSA should not lead to the absorption
of its remaining functions into other Government Departments.
The profession sees powerful reasons why such a dispersal should
not take place, and why those functions should continue to be
held in a separate unit (ie GAD):
— it provides an independence from
any departmental "vested interests"
— it provides for a degree of consistency
of approach
— there is value in keeping a pool
of expertise that can be called upon for various purposes together
(eg as GAD was able to pick up the work on AIDS).
11. Furthermore, any greater dispersal of
current functions would run the risk that the post of Government
Actuary itself might disappear. The profession would argue strongly
that the post, with its substantial responsibilities, should be
maintained:
— as a senior government adviser, with
expertise to make recommendations in the following important areas:
— State, company and personal pensions
— pension schemes for State employees
— long-term saving, and tax treatment
— long-term social welfare and
health costs
— and as an "ambassador",
both for the UK system of regulation and for the profession generally;
and as an impartial adviser to Governments in other countries
on the areas set out above. This is a role which recent Government
Actuaries have fulfilled, and which has undoubtedly garnered an
enormous amount of goodwill towards the UK around the world.
12. The current Government Actuary has a
well-deserved reputation for objectivity and a willingness to
express his views on matters of Government policy which would
be unlikely to be seen without the independence that a separate
GAD provides.
19 January 2001
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