Written evidence submitted by the Government
Actuary's Department (GAD)
Thank you for your letter of 12 November 2009
asking us a set of questions on which you would like answers in
order to prepare your annual report.
I am delighted to respond to your questions.
As background, understanding the answers to a lot of what you
are asking will, I believe, be helped by an understanding of the
overall strategy and business plans of the Department and how
things have changed since I started. So I shall start by setting
the scene in this regard.
COMMENTS ON
GAD'S STRATEGY/BUSINESS
PLANS ETC
When I took on the role of Government Actuary
on 1 May 2008, I instigated a strategic review which forced us
to address the questions:
Without addressing these questions it is impossible
to know what risks to control (of which more later) or how to
motivate the department to a common objective.
For GAD we decided that failure would be a sale
of the Department caused by our own action/errors (as opposed
to a Government inspired sale which would be subject to other
considerations).
Success, in the absence of a single metric such
as profits as one gets in private sector, was set as a balanced
scorecard of various metrics (see the key objectives described
in the summary business plan attached; the objectives include
delivery of the plan, improving sustainability and brand, complete
HR initiatives etc).
In addition, I have set myself three personal
success measures:
— to ensure GAD is a success;
— to be truly the Government Actuary
(ie providing all types of actuarial support to Government and
not just pensions support as has generally been the case for some
years); and
— to improve the "brand"
of GAD, and actuaries generally, in Government.
In order to deliver on this, we had a structured
set of initial objectives as follows:
— determine a descriptor of GAD; which
we have set as "Government Actuary's Department—the
actuarial consultancy—in the public sector—for the
public sector";
— determine, through client and employee
surveys and an interactive SWOT analysis, the values to which
we need to aspire (not just what we think we are);
— a total overhaul of the HR approach
(new job descriptions, career maps, competencies, appraisal system,
pay and reward etc);
— quality management information on
a monthly basis;
— establishment of half-yearly employee
attitude surveys (we have now finished three) and annual client
surveys (the second is now just finished);
— segmenting our business into three
strands and setting goals for each (ie to be principal provider
of services on policy work, to be best in class for our regular
work for public service pension schemes and to provide a valued
service to other work suppliers). The key is that clients judge
us on a scale of 1-10 and we achieve our goals if we secure target
marks on client perception;
— to shift to a client-centric organisation
which means (a) that clients decide whether they receive a quality
service rather than as previously, we form our own view on quality
and (b) we need to significantly change our culture with regard
to client service, sales and marketing;
— restructure the management of the
Department into functions with clear allocated responsibilities;
— to overhaul our training programme
in line with the new culture, the new competencies etc; and
— determine the big risks which can
lead to "failure" (seven in all). Interestingly of the
70 items on the GAD risk register when I started only three of
the big risks were present—a proportion which we understand
is not untypical. The big risks are getting sued, loss of any
of our key clients, valuation software, personal data loss and
three client specific risks.
In summary, these objectives recognise that
the two big things that matter for GAD are our people and our
clients.
As you have noticed we got off to a very successful
start in 2008-09. After two years' previous decline, income was
up 19%, staff numbers up some 30% at 30 June 2009, morale up significantly
and indeed all the metrics turned very positive.
As well as the summary business plan which is
attached to this letter, I also attach our "user-friendly"
annual report for 2008-09 which lists all of the things we do,
our values etc which I believe will fill in many gaps. It also
summarises on page two our achievements for last year and plans
for this year.
A key part of our plan is investment in developing
two new areas for us:
— investment and risk consulting (this
started in February this year); and
— opening a second office, in Scotland,
to serve Scottish Government and Local Authorities (early next
year).
To finish this introduction, I will share with
you my own approach to my own bonus which, sensibly, is different
to that elsewhere in civil service given that GAD receives income
broadly comparable to our expenditure so we can easily look at
private sector analogies. The principles are:
— there should be no reward for failure;
— there should be the potential for
a sizeable reduction if the risk of failure is higher at the end
of the bonus period than the beginning (this I see as critical
since it has more effect on behaviour than the previous principle);
— the maximum bonus should be set in
advance with a realistic chance of achievement;
— if I am to advise others on risk
and reward mechanisms (as I do), I should put my money where my
mouth is and try out mechanisms on myself first to see what works;
and
— there should be a real range of possible
outcomes from zero to 100% rather than the more common narrow
range which in practice could well be in the 66%-80% band.
A proforma to the approach I adopt is attached.
Note that this approach is only applicable to me at present. It
may get extended to the Executive on the Board but it is not appropriate
beyond that level. Note also that the proforma approach is designed
to avoid "shutting the stable door after the horse is bolted"
as is the intention of bonus deferral elsewhere. Quite which of
the two approaches turns out best is too early to say but the
approach I am adopting is not tried and tested elsewhere but is
a novel and worthwhile alternative to understand as the years
go by.
Turning now to the questions:
Q1. How has GAD's business changed in response
to the economic crisis
A1. To date very little. Our income for 2009-10
should again be some 20% higher than last year. 80% of our work
is UK public sector which has been and will be secure until 1
April 2010. Beyond that we expect:
— extra work for any new government,
whoever is in power, at the start of an administration;
— growing our two "investment
areas"; and
— some risks to some overseas insurance
contract renewals (although we are investing much time in protecting
our position and have very good relationships).
On balance we expect the second and third to
be more significant than the first but this is by no means certain.
So we are now into a theme of consolidation for 2010/11 and have
contingencies prepared.
Q2. To what extent is the new Investment and
Risk team a response to the changing economic environment over
the last year?
A2. In principle the answer is none but there
was an indirect influence.
When I started, the Department had very limited
expertise on investment or risk. Elsewhere, in the private sector,
investment is now mainstream actuarial work. Risk is upcoming.
I looked round Government and quickly came to the view that there
is a big need for quality mathematical and actuarial support in
both these areas so we launched the initiative of setting up this
team with a view to "marketing" our services. There
is no doubt that the credit crunch supported us in the analysis
but it wasn't a direct driver.
To date, the core team has grown from one person
to four in under a year. As well as investment risk, we are also
chairing a cross-Government group on project risk, we are aiming
to link with NAO/Internal Audit to establish a joint audit/actuarial
approach to managing and controlling risk and, are working with
APA, UKFI and Treasury.
Q3. How much of the (Investment and Risk)
team's work has been on the modeling of the Asset Protection Scheme
for HM Treasury?
A3. The short answer is not much. The work of
designing the APS was already under way when the team was formed.
That said, GAD were able to review the proposed terms of the APS
and comment on some risk-related aspects of the design. We also
reviewed an illustrative cashflow model that was used to help
with the scheme design, commented on its suitability for analysing
risk on an ongoing basis and proposed an alternative approach
to the modeling which would enable more of the potential risks
to be captured. In addition, members of our insurance team worked
with the investment and risk team given that the infrastructure
of the APS bears some resemblance to an insurance company. Now
that the APA has appointed its new head and new head of risk,
we are actively liaising with them regarding monitoring and evaluating
risks going forwards where we believe a combination of actuaries
with the APA's credit experts can deliver better than either expertise
in isolation.
Q4. What skills and expertise does the (Investment
and Risk) team possess to be able successfully to advise on investment
risk management strategies and approaches to hedging risk?
A4. Members of the team have extensive experience
of working with pension funds, insurance companies, asset managers
and investment banks in designing and implementing risk management
and hedging strategies. Specific expertise includes:
— financial and demographic risk assessment;
— stochastic asset liability modeling;
— investment strategy implementation
and asset allocation optimisation;
— critique of any investment strategy
and hedging;
— risk mitigation strategies eg interest
and inflation swaps, longevity hedging, insurance to effect a
risk transfer etc; and
— strong communication skills.
It is also worth recording that we are actively
exploring with other parts of Government (including NAO, Internal
Audit, Treasury, Cabinet Office and departmental risk Managers)
ways in which we can bring our skills on quantifying/managing
risk from a mathematical/financial perspective into a coordinated
framework with other relevant risk skills for the better control
of risk across Government. This proper professional mathematical
modeling expertise has been conspicuous by its absence to date.
Q5. (In relation to Solvency II) what additional
work will GAD be required to undertake?
A5. The work that our insurance team will do
on Solvency II needs to be considered under three headings:
(i) who is our client base;
(ii) the ongoing work for existing clients; and
(iii) other work (training and development, new
project for new and existing clients).
It should also be remembered that Solvency II
does not come into force until 2012.
Taking each in turn:
(i) Our insurance client base is primarily regulatory
support work for non-UK regulators. In other words, we have the
equivalent role for certain overseas regulators that actuaries
at the FSA have for the FSA in respect of the UK but, naturally,
the work we do is commensurate with the state of development of
the relevant local market. We also perform a small (but growing)
amount of consultancy work for Governmental Departments in the
UK.
(ii) In relation to ongoing regulatory support
work, much of this arises from September, through March. There
is no increase for October 2009-May 2010 on account of Solvency
II regulation. The first year when this is expected to arise is
2010-11 when we are likely to offer an internal model review service
(but whether clients defer until 2012 is unknown). We are planning
that in 2010-11, our workload will be some 50% higher on existing
EU clients. However, this estimate represents a very wide range
between 10% and 100% and only in six months' time will this become
clearer. Further, it should be realised that EU work represents
just some 25% of our insurance team's business.
(iii) We are already seeing new work arise in
terms of training sessions for regulators and for certain UK Government
Departments. We also expect our expertise will create real opportunities
to win new overseas clients. We recently secured a new client
with the Bahamas regulators.
Q6. What is GAD's strategy for coping with
this increased (Solvency II) workload
A6. At present, we are keeping a watching brief
and indulging in very low cost marketing exercises. This is because
there is so much uncertainty of whether there will be much extra
work and when it will arise, coupled with the constraints imposed
under Parliament's spending rules. As a Government Department,
we are constrained to not go below budget of a £588,000 net
cost for 2009-10 (based on £13.5 million income) nor to make
any profit. This makes it almost impossible to staff up in advance
for work that will not arise for at least a year and potentially
never. Further, the potential growth relates to non-UK work which
is outside our core strategy. (The rationale for having a public
sector GAD is to support UK central government; if we become a
profit-centre for non-core work we would likely suffer in our
ability to deliver to this core strategy). Against this background
(and the earlier mentioned risks with some of our overseas contracts)
"our wait and prepare" strategy is:
— monitor and report quarterly on Solvency
II activity/developments;
— build relations with the actuaries
in FSA for purposes of sharing knowledge, joint training etc with
a view to determining if there are any future possibilities of
secondments either way to create a more flexible pool of labour
to respond quickly to demand;
— attend the key international insurance
regulator conference each year; and
— develop a 2010-11 Solvency II strategy
in May 2010.
Q7. Does the estimation of numbers of staff
needed next year include those required to complete the increasing
Solvency II work?
A7. Our estimation of 130 average staff for 2009-10
does not include any specific Solvency II extra staff but it does
effectively make an allowance. We just applied an overall increase
to 2008-09. Already the estimate looks like it might be too low
independent of Solvency II. Regardless, any increased workload,
if it comes, will not be big relative to the Department as a whole.
We do not know if much will arise in 2010-11 and we have to manage
relative to some very tight financial "caps and collars"!
Q8. How many man hours do you envisage being
spent on this area in 2009-10 and 2010-11?
A8. For 2009-10, the client-training fee based
work (some to UK departments, some overseas) will comprise some
50-150 man-hours. For internal awareness and training, we do not
specifically itemise or budget our pure Solvency II elements but
we started internal training in the summer of 2009 and envisage
some 100-150 total man hours for our 15 insurance team members
on awareness and training in 2009-10. We will not come to a view
on 2010-11 until May 2010 (see A6 above) for all the reasons given.
Things are too uncertain at present.
Q9. To what do you attribute GAD's success?
A9.
— Absolute clarity on meaning of success/failure
and the big risks to failure.
— Clear recognition that our strategy
focuses on our people and our clients.
— Leadership and Drive. I will do everything
I ask others to do and not afraid of taking personal risks.
— Combining private sector focus and
techniques with the strong ethics and service culture of public
sector.
— It would be wrong to totally ignore
the recession! Although not a major contribution, the recession
has, when combined with all the positive messages and our changed
reputation, helped us recruit and retain quality staff. But I
would not wish you to overplay this aspect.
Q10. To what extent is the increased income
the result of increased charges for your services rather than
increased business?
A.10 The increase in fee income for the year
(allowing for the increase in work-in-progress which is shown
as a credit against expenditure in the accounts rather than income)
is about 21%. This comprises an increase in chargeable hours worked
of 15% and an increase in average fee per hour of 6%. So, roughly,
just under one-third is increased charges and two-thirds is increased
business. It is worth considering, conceptually, where the increased
business has come from which is:
— a catch-up of work (backlog), that
had slipped behind expected timescales in the previous year, arising
from the recruitment of extra staff;
— being given extra work from ongoing
clients by being more on top of our workload; and
Of these, the last only made a small contribution
in 2008-09 but 2009-10 year to date is already showing significant
wins in new clients; some against strong competition.
Q11. What are your projections for income
for 2009-10?
A11. Although difficult to predict we anticipate
income could be between £13.5 million and £14.5 million
which would represent another year of close to 20% growth depending
on the precise turn-out.
Q12. Why did you waive this year's bonus when
GAD has had "real and genuine success" (Annual Report
and Resource Account, p 22) over the last year under your stewardship?
A12. On a factual basis, I did not waive the
bonus in full. I took £15,000 and waived the potential excess
of up to £25,000. Although a final nominal figure was never
agreed, it was accepted that it would have been in excess of £20,000
without the waiver. So how did we arrive at this position? It
was a combination of two factors:
(i) I want to make GAD a success. This means
we need to build and preserve good relations with all parts of
Government in order to get work and more work from them. I was
advised that to push for more than £15,000 would create serious
difficulties to the Civil Service given their desire to achieve
more cost control over the pay bill.
(ii) I felt that a full waiver would be quite
wrong since it would create a message generally in the Department
that the Department had been a failure meaning that success would
be seen by all as being no better than failure—which would
create the perverse behaviour of rewarding failure! To explain,
the message to senior people of no bonus after a successful year
would have been "it doesn't matter whether you do poor work;
you're not going to lose out relative to doing good work, since
you end up with the same pay—so why do more than the minimum"—hence
the reward for failure consequence of a full bonus waiver.
So it was pretty straightforward. My big objective
of "GAD success" meant it would be stupid to push for
more than £15,000. Note that in line with my drive for transparency/disclosure,
we positively disclosed and accounted for my 2008-09 bonus in
the 2008-09 accounts notwithstanding the cash not being paid until
2009-10. If you would like more details of my 2009-10 bonus arrangement
over and above the proforma attached please let me know.
Q13. How is GAD going to measure performance
against these aims, and how will GAD report this to stakeholders?
A13. Against each of the three aims we take measurements:
— firstly on the client's perception of
"preferred provider", "best in class", "highly
valued";
— secondly on income growth for each category.
We have targets for the perception measures
(85% for preferred provider, 60% for best in class, by summer
2010. These are stretch targets given a base of 76%,and 36% respectively
in August 2008.
Our growth targets for each category are 20%,
7% and 10% per annum. The last two are being beaten. We are behind
on the first.
In early 2009 we did a full report to stakeholders
of the results (good and not good) of the summer 2008 exercise.
We will do the same again in early 2010 in respect of this year's
exercise. If you would like to see the report we issued earlier
this year, please let me know.
Q14. Will GAD be repeating the client survey
conducted in 2008-09 on an annual basis in order to gain stakeholders'
views on GAD's performance?
A14. Absolutely yes. We conducted an equivalent
survey in September/October 2009. The results are not fully analysed.
Initial indications suggest not much change over the year. So
we need to understand why this is the case and do better.
Q15. GAD's Annual Report records great success
in recruitment with staff numbers up accordingly. Does the fact
that "Consultancy" costs and "Agency and other
temporary staff" costs have increased dramatically suggest
that GAD has nevertheless been working this year without the full
time permanent staff it needs?
A15. There is a sizeable increase in Consultancy
and Agency costs as you rightly point out. The increase in agency
costs reflects our great success in recruitment and represents
the agency commissions for each new recruit we take on through
agency introductions.
The increase in commissions is caused by us
taking on a handful of staff to cope with our workload where:
(a) some did not actually wish to become permanent
members of GAD;
(b) given our rapid expansion, it suited us to
have some flexibility to easily reduce numbers if for example
the increased workload did prove to come just from catching up
on the backlog.
As of the present, we still have two such individuals
on a staffing level now of 134 so we believe we are managing this
well at present.
Q16. Has GAD recruited the right staff?
A16. There is no doubt that with the changed
direction and the recession, GAD has been able to recruit some
real quality actuarial staff at all levels. In a year's time,
might we look back and say "we could have done better there"
or "we missed an opportunity on that issue" or "we
misjudged"? I expect so. But that's always the way of things
and at present I have no omissions or regrets.
Q17. Are GAD's pay levels sufficiently competitive
to attract the senior staff and specialists that you need?
A17. At present the answer is yes. But we need
to monitor very closely since, once there is real growth in the
economy, there is a significant risk of losses of good staff.
Positive adherence to our key values and exposure to plenty of
interesting work will be a great help.
Q18. How many staff will you be recruiting
in the next financial year?
A18. We expect our staff numbers at 31 March
2010 to be broadly as they are today (ie 134) plus two or three
new staff to set up our Glasgow office.
Q19. Is GAD still on course to move into a
new office in "early 2010"? Do you have a more precise
date for the move?
A19. No. GAD will be unable to more into a new
office as planned.
Although we had received OGC and Treasury approval
in April 2009, and had a firm commitment of new better, cheaper
premises and had a new tenant for the whole of Finlaison House,
we hit problems due to our sub-tenants. One of our sub-tenants
is the Baha Mousa Inquiry. They had originally expected to vacate
in April 2010 but this is now likely to be extended to late 2010.
So the new tenant for Finlaison House, quite reasonably, pulled
out needing full immediate occupancy. It will be difficult to
find new tenants in the current climate so we are focused on staying
in Finlaison House for the foreseeable future and delivering quality
service to our clients.
We are being more efficient in our use of space—Finlaison
House is 2,874 sq metres with GAD occupying 1,376 sq metres (a
reduction from 1,515 sq metres on 1 May 2008 when I took on the
role notwithstanding the higher staff numbers).
The committee should be aware that, as a result
of our failure to move, our finances are very vulnerable to sub-tenants
leaving. We could in the next year or two face a hit to our net
costs of over £1 million based on what may or may not happen.
We are in discussions with Treasury and OGC about managing this
potential exposure.
Q20. What benefits do VIP events bring to
GAD and its business?
A20. Ultimately, our aim is to have greater penetration
of Government so that Government makes best use of its in-house
actuarial services wherever this is appropriate. There are lots
of areas of Government where our expertise could be of real benefit
and currently is not, due to lack of knowledge and lack of sponsorship.
So our first aim is to spread the word amongst senior key participants
and influencers that we're back in business.
Our second aim is to act as a facilitator between
key government/public sector individuals and the external financial
world where there are often misunderstandings. If all parties
can better understand each other then policy implementation will
work better for all parties (in the non-party political sense)
for the good of the country. And if we can do this, then this
will also support our first objective.
To date we have held four breakfasts—two
in January on gilts issuance (with Treasury/DMO), one in June
on Longevity (with ONS and Cass Business School) and one in October
on the Walker review (with Sir David Walker speaking).
Q21. What was the cost of holding these events?
A21. The total cost of the four events to date
was £1,572.
Q22. What progress has been made on the valuation
of the miners' pension scheme?
A22. The September 2008 valuation for the Mineworkers
Pension Scheme has been completed and signed in September 2009.
Copies were circulated to the trustees, DECC, HM treasury shortly
afterwards. A copy is enclosed. The statement on risk requested
by the committee is included as Appendix B of the report. Members
of the scheme were briefed on the outcome by a newsletter issued
in late October. There is no formal publication of the report
other than as described above.
The valuation for the British Coal Staff Superannuation
Scheme has nearly concluded its consultation phase and we hope
to sign the report in the next month or two.
CONCLUDING REMARKS
My aim in the above has been to answer the questions
fully and honestly with the hope that you can see the tremendous
progress the whole Department has achieved and takes pride in,
along with the challenges we face. We are on a journey to even
greater things for the good of Government and the country. But
as stated there are many challenges ahead and potential minefields
to navigate. So if you would like any more information about the
past or the future, whether in writing or face to face, please
do not hesitate to get in touch and I would be delighted to assist
further.
Attachments:[3]
— Short form Annual Review.
— Proforma bonus approach.
Trevor Llanwarne
Government Actuary
5 January 2010
3 Not printed. Back
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