Select Committee on Treasury Minutes of Evidence


Memorandum from the Government Actuary

1.  ESTABLISHMENT AND ROLE OF GOVERNMENT ACTUARY'S DEPARTMENT (GAD)

  1.1  The Government Actuary's Department was created in 1919 as a Chancellor's department to provide actuarial advice to Ministers and departments. The original focus of GAD was on the financing of social security, but this rapidly expanded into all areas of pensions and social security. Starting from the late 1960s GAD became heavily involved in advising on financial aspects of the supervision of insurance companies.

  1.2  In 1989 a review of the role of GAD and its financial viability was carried out. This led to GAD adopting a full repayment régime, charging all clients for actuarial services, with the exception of the work on population projections and life tables, and the four-yearly occupational pension schemes survey. GAD continues to receive a net Vote of about 8 per cent of the gross voted expenditure.

  1.3  By October 2000, GAD had grown to a staff of 111 (see Annex 1), with gross voted expenditure in 2000-01 of £8.0 million and net voted running costs of £433,000 (plus capital of £219,000). In 1999-2000 GAD provided actuarial services to around 800 clients.

  1.4  The key statutory responsibilities of the Government Actuary are as follows:

(a)  The National Insurance Fund

  Reports to parliament are made in connection with:

    —  the annual uprating of benefits paid from the Fund; and

    —  the annual review of contributions paid to the Fund.

  In addition, a longer-term report to Parliament (the quinquennial review) is undertaken at least every five years. A review of the terms for contracting out of the State Earnings Related Pension Scheme (SERPS) is also undertaken at least every five years.

  Reports to Parliament are made when new social security legislation involving any significant long-term consequences is introduced into Parliament. From time to time further statutory reports to Parliament may be called for, for example, the November 2000 report to Parliament in accordance with section 36 of the Child Support, Pensions and Social Security Act 2000 on the likely effects of increasing the basic state pension in line with earnings.

  In relation to pension-sharing on divorce, the preparation of actuarial tables to facilitate the sharing of SERPS entitlements.

  The preparation of actuarial tables in relation to the premiums to be paid to the state scheme in certain circumstances by private pension schemes ceasing to contract out of SERPS.

(b)  Public sector pension schemes

  A wide range of statutory responsibilities are placed upon the Government Actuary in relation to actuarial calculations for members of public sector pension schemes, such as the determination of transfer values.

(c)  Matters connected with private pension arrangements

  Preparation of actuarial tables to permit calculation of the limits on amounts which may be taken from private pension income drawdown ("income withdrawal") arrangements.

2.  PURPOSE OF GAD

  2.1  Stated at its most general, the aim of the Government Actuary's Department (GAD) is:

    To provide mainly public sector clients with independent, professional, actuarial advice of the highest quality at reasonable cost.

  2.2  GAD exists because government, and the public sector more generally, needs actuarial advice. An in-house source of such advice meets the need for:

    —  an objective source of advice, free of conflicting commercial interests;

    —  confidentiality on sensitive political and commercial issues;

    —  consistency and comprehensiveness of advice, eg across the public service pension schemes;

    —  experience with handling political and policy issues; and

    —  value for money in terms of fees.

  2.3  Objectives were set for the department under the 1998 Public Service Agreement, which formed part of the three-year deal, starting 1999-2000:

    1.  to provide actuarial advice to government departments and other GAD clients in respect of employer-sponsored pension arrangements and other employee benefits;

    2.  to provide demographic analysis to support decision-making across all government departments and social security projections and other actuarial advice to support decision-making in social security, pensions policy and the regulation of complementary pension schemes; and

    3.  to provide financial and actuarial advice to support the regulation and supervision of financial institutions, in particular life and general insurance companies and friendly societies.

  2.4  The rationale for GAD's existence implies that priority must be given to providing actuarial services to Ministers, to government departments and to financial regulators in the UK. However, GAD has a much broader client base than this and provides services, in the UK and internationally, to clients in the wider public sector. The business reasons for developing a broad portfolio of clients are that:

    —  it provides greater diversification and hence decreases financial dependence on a relatively small number of clients;

    —  it broadens and deepens the department's knowledge base, so that it can provide an improved service to core clients;

    —  it helps to spread overhead costs and to improve value for money to core clients; and

    —  it provides opportunities for personal development of staff.

  2.5  The department's aim is to be seen as a provider of good value high quality actuarial services to governments and public sector bodies around the world.

3.  NATURE OF GAD'S WORK

  3.1  GAD's work involves providing advice to a wide range of clients, mostly in the public sector. This advice is mainly in the areas of pensions, social security and related matters. On pensions, GAD provides an actuarial consultancy service to a wide range of public sector pension schemes, including the calculation of funding levels and contribution rates, the preparation of factors for administrators to use in calculations, and advice on the transfer of groups of employees between organisations. GAD also provides advice on the regulation of pension schemes to DSS, Inland Revenue and other government departments and actuarial advice to Opra in the day-to-day supervision of pension schemes. On social security, GAD work has included advice on the development of Second State Pensions and stakeholder pensions and technical support in connection with the National Insurance Fund.

4.  RELATIONSHIP WITH GOVERNMENT DEPARTMENTS

  4.1  GAD has always had a close working relationship with the Department of Social Security and its various predecessors. This arises both because of the Government Actuary's statutory responsibilities to report to Parliament on the finances of the National Insurance Fund, and because GAD is a centre of knowledge and experience on many aspects of social security, occupational pension schemes, personal pensions, insurance and annuities.

  4.2  The Government Actuary is required to prepare a report, for the Secretary of State for Social Security and Paymaster General to lay in Parliament, in respect of any proposal to amend the rates of benefit payable from the National Insurance Fund or to change the National Insurance Contribution rates or structure. The Government Actuary is required to report every five years on the long-term financial prospects for the National Insurance Fund and, also on a five-yearly schedule, on the terms for contracting out of the State Earnings-Related Pension Scheme (and, in the future, the State Second Pension). It is also custom and practice for a memorandum from the Government Actuary, on the financial consequences for the National Insurance Fund, to accompany the laying of any Bill which will significantly affect the finances of the Fund.

  4.3  In addition to these formal responsibilities, GAD is widely consulted by DSS in regard to many aspects of social security and pensions policy, including the assessment of the financial consequences of possible changes to the social security scheme. GAD assists with the answering of Parliamentary Questions and other enquiries which concern financial aspects of National Insurance benefits or contributions.

  4.4  GAD provide consultancy support to DSS on occupational and personal pensions. This includes funding or solvency requirements for funded complementary schemes, pension aspects of divorce and assessment of the financial consequences for schemes of new regulatory requirements.

  4.5  GAD provides actuarial and related consultancy advice to the Occupational Pensions Regulatory Authority (Opra), including currently seconding two qualified actuaries to Opra.

  4.6  In regard to public sector pensions, GAD advises the Treasury on general policy matters, and individual departments and agencies on specific scheme matters or issues relating to particular groups of staff. GAD provides actuarial advice to the Cabinet Office on the Principal Civil Service Pension Scheme. Where civil servants are transferred in connection with the contracting out of services or privatisation, GAD normally advises the relevant department or agency; ensures that the pension arrangements proposed for after the transfer meet the criterion of broad comparability and negotiates a bulk transfer value from the PCSPS to the receiving scheme which provides protection for the past service rights of transferring staff at least cost to the public purse.

  4.7  GAD also provides advice to the sponsoring departments and administrative agencies for most of the other main public service pension schemes; the Armed Forces Pension Scheme; the NHS Superannuation Scheme; the Teachers Pension Scheme and pension schemes for the police and fire services.

  4.8  GAD provides a service to all government departments by preparing and promulgating the official national population projections every two years. These are widely used for forward planning purposes and also form the basis for a number of derivative projections: labour force projections, household projections, regional and district projections (local authority and NHS).

  4.9  GAD assists National Savings to maintain the integrity of the ERNIE Premium Bond draw, by testing the results of the draw each month to ensure that there is no evidence of bias or non-randomness.

  4.10  GAD's primary role is the provision of advice to support the development of policy. GAD does not have any policy-making responsibilities of its own.

5.  RELATIONSHIP WITH FINANCIAL SERVICES AUTHORITY

  5.1  GAD provided actuarial advice for many years to the Insurance Division of the Department of Trade and Industry on actuarial questions relating to the supervision of insurance companies. GAD continued to fulfil this role when responsibility for insurance supervision passed to HM Treasury in January 1998 and when it passed to the Financial Services Authority in January 1999.

  5.2  At the end of October 2000, FSA gave formal notice to GAD of the termination of these arrangements and of their intention to transfer the actuarial advice function in-house. On the expiry of the six month notice period, at the end of April 2001, those staff at GAD who are engaged on work for the FSA will be transferred to the FSA, together with the actuarial advisory function. Staff will be given individual offers of appointment as permanent employees of the FSA. The transfer is being treated under the provisions of the Cabinet Office "Statement of Practice on Staff Transfers in the Public Sector" (January 2000). This, inter alia, means that the principles of TUPE apply and past service pension rights will be protected under the associated Treasury Guidance "A Fair Deal for Staff Pensions" (June 1999).

6.  FUTURE WORK PROFILE

  6.1  Following the transfer of the staff concerned to the FSA, GAD can clearly be expected to have a reduced level of staffing in 2001-02 compared to the current year, and have correspondingly lower salary outgoings and fee income. The need to reduce accommodation costs to remain financially viable if such a transfer were to happen had already been identified and GAD moved to a different building in 1999-2000, saving around £400,000 on overhead expenditure.

  6.2  GAD has reviewed its future work programme to ensure that the anticipated future financial position remains reasonably stable. It is impossible for the most part to project in advance which particular clients will seek advice from GAD and how the income in future will be generated by particular clients. However, it is expected that GAD will be able to keep within its financial targets, taking account of the saving in accommodation costs and the expected demand for GAD services.

  6.3  There has never been any shortage of work to occupy as many professional staff as we can recruit, even with active, and virtually continuous, recruitment competitions. More fee income could be generated from existing clients. Without finding any new ones, if GAD were successful in recruiting more actuarial resources to meet all demands. There are also considerable opportunities for new sources of work, including increasing the amount of work done for overseas clients on those topics on which GAD has particular expertise, for example on social security and public sector pensions financing and reform.

7.  WORKFORCE AND PERSONNEL ISSUES

  7.1  GAD is a small and specialised department, with a high proportion of staff who have, or who are studying for, a professional actuarial qualification. Annex 1 summarises the development of GAD's overall staffing structure from 1 April 1979 to 1 April 2000. As can be seen, in recent years the numbers of actuarial staff have grown steadily. The penultimate column shows the staff in post at 31 October 2000, excluding three secondees to FSA and two to Opra. There will be a reduction when possibly up to 20 staff, including the three secondees, transfer to the FSA at the end of April 2001. The net effect, allowing for recent recruitment, will be to reduce the departmental complement to roughly the same as at the end of 1999, as shown in the last column of Annex 1.

  7.2  GAD competes with private sector employers for scarce actuarial resources. Since 1989, when GAD moved onto a full repayment financing basis, actuarial salary levels have had regard to the need to be competitive in the recruitment and retention of qualified and trainee actuaries. GAD was one of the first government departments to introduce a fully performance-related pay system. Pay increases continue to be fully dependent on performance. However, given public sector constraints, it is inevitable that salary levels are increasingly out of line with the private sector, especially for more senior staff.

  7.3  GAD seeks to maintain and increase its actuarial resources through the recruitment of good quality actuarial trainees, most of them straight from university. Substantial support is provided to enable them to pass the examinations of the Faculty and Institute of Actuaries, the professional bodies for actuaries in the UK. This includes study time, mentoring, paid subscriptions, exam fees and tuition fees and a strongly supportive environment.

  7.4  In the light of rapidly growing demands for GAD's services, and with a view to strengthening GAD's professional skills with those who have private sector experience, there is a virtually continuous programme of trying to recruit qualified, or nearly qualified actuaries. Because of the severe shortages of actuaries in the UK market, this is inevitably a slow process and it is difficult to make much more progress than replacing those who leave to work in the private sector. Although it is never possible to recruit as many actuaries as would be desirable, slow growth in numbers of qualified actuaries has nevertheless been achieved.

  7.5  GAD achieved recognition as an Investor in People (IiP) in January 2000 and continues to work to maintain that accreditation. GAD is committed to equal opportunities for all and is actively working to increase diversity in its workforce.

  7.6  The Institution of Professionals, Managers and Scientists (IPMS) offers union representation for any GAD staff who wish to belong. GAD has an active policy of consulting the Staff Side on all matters which affect staff.

  7.7  All GAD staff are located on a single floor (the 11th floor) of the New King's Beam House, a building managed by Customs and Excise. Staff operate in an open plan environment.

  7.8  GAD does not have any members of the Senior Civil Service (SCS) as such, although Chief Actuaries, Directing Actuaries and the Government Actuary are departmental grades of similar seniority. Regard is had to the terms and conditions of the SCS where these are relevant.

8.  DEPARTMENTAL AIMS AND OBJECTIVES

  8.1  In November 1998 the Economic Secretary to the Treasury (EST) approved the Public Service Agreement (PSA) for GAD under the Comprehensive Spending Review. This confirmed the aims and objectives of the department and defined the net resources available to the department over the next three financial years, starting at £636,000 in 1999-2000 (£423,000 current expenditure and £213,000 capital expenditure) and rising by about 2.5 per cent each year with £652,000 in 2000-01 (£433,000 current expenditure and £219,000 capital expenditure). It is anticipated that GAD's gross annual expenditure in 2000-01 will be of the order of £7.7 million and income is targeted to bring in at least £7.3 million.

  8.2  The PSA requires GAD to achieve challenging standards of performance in key areas of its business. In particular GAD is required to agree with its main clients each year detailed work programmes, requirements for the provision of actuarial advice, key targets for quality and performance, and evaluation requirements, as part of the Service Level Agreements. Client satisfaction with the service is to be evaluated by means of annual client surveys.

  8.3  In addition, the PSA laid down targets which are concerned with improving efficiency and are intended by Treasury to provide some measures as to whether GAD is providing better and more cost-effective services. These include the requirement to have achieved a reduction in overhead recovery rates (the loading applied to salary-based rates in determining fees), the introduction of a competence-based appraisal system and full implementation of the Management of Business Process computer system (time-recording, invoicing, accounting, etc), much of which is already fully operational. GAD was also required under the PSA to work towards the achievement if IiP accreditation by the beginning of 2000, which was successfully achieved. Monitoring of the performance of the department as a whole is by means of an Aggregate Efficiency Index, which combines several indicators into one measure. GAD also reports annually on real increases in charge-out rates (net of GDP deflation) and chargeable hours as a proportion of conditioned hours.

  8.4  The Department's level of achievement against the various PSA performance measures and targets has been monitored and reported to Treasury on a quarterly basis. This PSA monitoring will cease at the end of this Financial Year 2000-01 when GAD's 1998 PSA is replaced by the new Service Delivery Agreement (SDA).

  8.5  In July 2000, following the Government's Spending Review (SR) 2000, the Chief Secretary to the Treasury approved GAD spending plans for the following three years starting in 2001-02, on a Resource basis. The Departmental Expenditure Limit (DEL) for 2001-02 is £685,000 (£461,000 resource (administration) expenditure and £224,000 capital expenditure), rising by about 3 per cent each year thereafter.

  8.6  GAD, as a small department, was not required to submit a new PSA. Instead GAD has agreed a Service Delivery Agreement (SDA), which is copied at Annex 2. The SDA was developed from the PSA and carries through the more focused key targets and performance measures from the PSA. Targets in the SDA are set in respect of timely and accurate actuarial advice, improving levels of client satisfaction scores, and a refined Aggregate Efficiency Index. There are also commitments in relation to Civil Service Reform and, in line with the Civil Service as a whole, targets in relation to reducing sickness absence rates and ill-health retirements. The SDA is a public document. Achievement of targets will be monitored by and reported to Treasury on a regular basis, as for the PSA.

  8.7  As a quasi-commercial operation, GAD's chief objective is to provide a good quality of service to clients whilst generating sufficient fee income to cover all outgoings except for the net voted amount (and separately for net running costs). GAD carries out annual client satisfaction surveys and is working to improve the methodology and effectiveness of these. Consideration is being given to the development of a Business Manager role to assist in maintaining good relationships with clients.

  8.8  The internal audit function of GAD is contracted out to the External Business Team of the Department for Education and Employment. Internal audit is carried out in accordance with a risk-based methodology.

  8.9  GAD's accounts and financial statements are audited by the National Audit Office. GAD has successfully introduced Resource Accounting and expects to be monitored on the basis of Resource Accounts results from 2001-02 onwards.

  8.10  Although GAD's business needs had for many years required the monitoring of finances on an accruals basis as well as in cash terms, the introduction of the formal structure of Resource accounts has made significant demands on finance staff.

  8.11  GAD has met the various trigger points for the introduction of Resource Accounts and prepared fully audited Resource Accounts for 2000-01, following the unaudited "dry run" in 1999-2000.

  8.12  Cash accounting always sat uneasily with the operation of GAD's business activities and placed an unhealthy premium on end-year cash transactions, particularly on the part of many of our clients. For GAD itself there was also a critical, and largely uncontrollable, issue over getting just the right amount of cash income in during the year, when accruals were relatively stable.

  8.13  GAD welcomes the move to vote resources and monitor utilisation on a Resource Accounts basis. Cash management will remain a significant issue for GAD, with inflows and outflows of around £7 million a year having to be managed without realistic working capital.

  8.14  A summary of GAD's Appropriation Accounts for the last five years is given at Annex 3.

  8.15  GAD operates an annual business planning cycle, in which a five-year strategic plan is developed by the Management Board. A business plan for the next financial year is presented to all GAD staff in March, and forms the basis of for the setting of directorate targets, from which individual performance targets are cascaded down.

9.  INFORMATION TECHNOLOGY

  9.1  GAD has a highly developed PC based information technology network, with all staff on-line. The nature of GAD's work means that all professional staff and trainees have to be fully computer literate. This is true also of most of the non-actuarial support functions in the department.

  9.2  Subject to signing personal undertakings, all GAD staff have access to external e-mail and the internet. Communication from clients by e-mail is encouraged and some forms of advice may be given by e-mail. Up to now, however, there is no real substitute for formally signed reports and letters conveying actuarial advice.

  9.3  Much of the software for actuarial applications is developed in-house. However, GAD is currently in the process of purchasing a pension scheme valuation system, having decided that this will be the most practical and cost-effective method of upgrading the systems capability in this area.

  9.4  A dedicated Computer Services Section provides support for the network, for computer hardware and software, and for IT purchasing and contracting, while the web-site (www.gad.gov.uk) acts as the prime GAD avenue for Electronic Service Delivery (EDS), in line with the department's e-business strategy.

January 2001


 
previous page contents next page

House of Commons home page Parliament home page House of Lords home page search page enquiries index

© Parliamentary copyright 2001
Prepared 27 March 2001