APPENDIX 1
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.
2. HM Treasury states that its aim is: "to
raise the rate of sustainable growth, and achieve rising prosperity,
through creating economic and employment opportunities for all".
Among the subordinate objectives which HM Treasury has adopted
are: "promoting a fair and efficient tax and benefit system
with incentives to work, save and invest", and "securing
an efficient market in financial services and banking with fair
and effective supervision".
3. Given its close and long-standing involvement
in key aspects of financial services provision in this country,
the actuarial profession has a natural interest in the effectiveness
with which HM Treasury handles these responsibilities.
4. The actuarial profession welcomes the
opportunity to assist the Treasury Committee with its current
Inquiry into HM Treasury. In particular we comment on the flow
of information into and out of the department, and on its relationship
with other bodies, notably the Financial Services Authority and
the Department of Social Security.
Openness
5. In its statement of aim and objectives,
HM Treasury has given a commitment to: "maintain a professional,
well motivated and outward-looking organisation committed to open
and accountable conduct of policy both here and abroad".
6. The actuarial profession welcomes this
commitment. While final responsibility for decisions taken in
the areas of policy handled by HM Treasury rests with Ministers
and officials, it is essential for the decision-making process
to be informed by the views of external parties with relevant
knowledge and insight. The actuarial profession has particular
expertise in and experience of financial services issues, and
our strong commitment to the public interest means that we are
ready to assist in understanding of such issues and policy development.
7. The profession has sought dialogue with
HM Treasury on a number of issues. In some cases, there have been
positive and useful exchanges both at meetings and in correspondence.
In other cases, the profession has found that the department's
commitment to openness has not been sustained in practice, giving
the impression that Treasury Ministers are more reluctant to meet
us than their counterparts in other Ministries. Examples of recent
issues where better dialogue would have been preferable include:
— the withdrawal of ACT Tax Credits
on dividends. The lack of consultation over this measure meant
that the repercussions on the Minimum Funding Requirement (MFR)
for pension schemes caused significant concern, and there was
some delay before the formulation of the MFR could be suitably
modified.
— the introduction of ISAs and stakeholder
pensions. HM Treasury has promoted these proposals without placing
sufficient weight on the expert advice from the profession and
elsewhere which pointed out the significant limitations that are
inherent in them.
— occupational pension schemes. HM
Treasury has appeared unwilling to recognise the continuing merits
of defined benefit schemes in securing appropriate provision for
people in retirement.
— with-profits products. HM Treasury
has seemed reluctant to recognise consumer preferences for such
products.
Relationships with other bodies
8. Until 1999, the regulation of the insurance
industry rested with the DTI; it then resided briefly with HM
Treasury itself; but now has been transferred to the Financial
Services Authority (FSA).
9. The actuarial profession has close contacts
with members of the Insurance Directorate of the FSA. The transfer
of personnel with the organisational transfer of the Directorate
from DTI via HM Treasury to the FSA has ensured a welcome continuity
of understanding of the issues involved. However, the longer term
will see a change in personnel, and it will be the underlying
structure and the institutional relationships which will determine
the future handling of regulation in this area.
10. The profession has two major concerns
about possible developments:
— first, the Financial Services and
Markets Bill proposes very extensive powers for the FSA (in some
cases going beyond the powers currently available to the regulatory
authorities) which may be deployed by a body that is not accountable
to Parliament in the same way as a Government Department. It is
not clear how far HM Treasury, as the accountable department,
will be able to exercise the necessary checks on the FSA's activity.
— second, the transfer of regulatory
responsibilities from DTI to the FSA runs the risk of weakening
the quality of debate within Whitehall since, unlike the DTI,
the FSA does not have a ministerial head who sits at the Cabinet
table alongside other Ministerial colleagues.
11. The profession is aware that the FSA
is considering the possibility of integrating into its organisation
the actuarial advice function, which is currently part of the
Government Actuary's Department (GAD). The profession considers
it very important that the Government's handling of insurance
regulation and related policy development should be informed by
expert actuarial knowledge. It believes that the separate existence
of GAD has hitherto ensured that this has been the case. It recognises
that the organisational changes which are entailed in the establishment
of the FSA may make it appropriate to replace the existing arrangements
by in-house provision of actuarial advice. The profession's main
concern is that the quality, availability and independence of
such advice are maintained; any organisational changes should
enhance rather than impair the provision of the advice.
12. A second area of concern is with the
relationship between HM Treasury and DSS in the field of pensions
policy. As will be evident from press comment over the last two
years or more, there is general concern in the pensions field
that pensions policy is being driven by fiscal policies of HM
Treasury as much as by the social policies of the DSS.
13. This conflict can be seen as between
the approach of the Pension Schemes Office of the Inland Revenue,
which is to limit the extent of advance funding of occupational
pensions, and the approach of DSS, which is to encourage occupational
provision. Another example would be the reluctance of HM Treasury
to countenance concurrent membership of occupational defined benefit
schemes and stakeholder pension schemes, on grounds of limiting
potential abuse of tax reliefs, when a more significant issue
is to avoid repetition of the mistakes made over mis-selling of
personal pensions to members of occupational pension schemes in
1988.
Recommendation
14. The actuarial profession has experienced
a greater willingness on the part of HM Treasury officials to
listen to concerns in the very recent past. We are ready to provide
expert and informed advice on policy issues, but it is necessary
for channels of communication to be open.
15. Given that HM Treasury is moving away
from being primarily involved in tax and economic affairs (with
the need before a Budget to have a period of purdah) and into
wider fields of social policy, eg social security, employment,
occupational pensions and institutional investment, the profession
considers that the department will need generally to develop a
more consultative style, including evidence of willingness to
listen to alternative views, in order to reflect this changing
role.
May 2000
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