Select Committee on Treasury Appendices to the Minutes of Evidence


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.


  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.


  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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