Select Committee on Treasury Minutes of Evidence


Examination of Witnesses (Questions 60 - 79)

THURSDAY 8 FEBRUARY 2001

MR CHRIS DAYKIN CB, MR ANDREW YOUNG AND MR ANDREW BEER

  60. The Peter Wright report. Would you be aware of it?
  (Mr Daykin) Yes.

  61. And that would have an implication for the reserving policy?
  (Mr Daykin) Peter Wright's report was specifically in relation to the problems relating to accumulating with-profits policies, which was the sort of modern version sometimes known as "unitised with-profits", for which the regulatory and professional requirements had not been very fully spelt out, so the object of that working party was to establish some recommendations from the profession for dealing with that particular type of product.

  62. And that would carry implications for the reserving policy?
  (Mr Daykin) Yes. The Government Actuary's Department has always worked very closely with such professional working parties—in fact, almost always, we have a representative on any such working party in order to make sure our views are fed into the process although we do not have the final say. Obviously the profession will decide what to do, nor is it necessarily the case that the Government Actuary's Department will always accept what the profession has decided as being sufficiently prudent. We could still give advice to the regulator that, although the profession has put out some paper, we still feel from a regulatory point of view it would be appropriate to insist on higher levels of reserves.

  63. Have you ever offered such advice?
  (Mr Daykin) Frequently.

  64. But you are not able to tell the Committee on what occasions?
  (Mr Daykin) No.

  65. Summarising all of this part of it, therefore, we have this very elaborate if somewhat intricate and obscure process of public reporting; we have appointed actuaries to whom you talk because your annual report is quite clear that you talk to them—and I would imagine there are not very many people who could make sense of what they might say other than people such as yourselves—but you do not regard yourself or your department as being in any way the guardian of the public interest over these issues or having any kind of independent voice to express concern?
  (Mr Daykin) I would like to regard ourselves in that way but nobody has ever given me that statutory responsibility, and our department has been involved in this process only through having been asked by the regulators who do have that statutory responsibility to provide them with technical advice and that is what we do. It could have happened another way—legislation could have been passed years ago to give the Government Actuary's Department a different role but that is not the case. The Government Actuary was only given a statutory role in relation to social security and pensions issues and, in relation to insurance supervision, we act simply on the basis of being requested to give advice by the regulator.

Judy Mallaber

  66. In your annual report, you make a brief reference to your work on minimum funding requirement. What role did you play in the design of the MFR?
  (Mr Daykin) We were not directly involved in the design because the Department of Social Security asked the actuarial profession to come up with a recommendation as to how the MFR should be structured. Having done that, however, we were, of course, advising the Department of Social Security throughout that period on how they should receive the information they were getting from the actuarial profession and what they should do with it, so we certainly played a role but were not specifically requested to design the MFR system.

  67. Did they take your advice on that?
  (Mr Daykin) Again, it is not really possible to say whether they did or did not on any particular issue. The important point to reflect on in this case is that many of the issues are not actuarial but political in nature and there was a great deal of discussion at the time about whether we were talking about a solvency requirement. In fact, the original Bill referred to a solvency requirement and then it was changed to a funding requirement, and the nuances between the different levels at which that might be set and the way in which it would work were as much as political as professional issues, as to how strong a requirement should be set and how the balance should be reached between protection of members' interests and the costs to employers of providing pensions.

  68. On what particular aspects are you able to provide advice and views? Was it purely highly technical advice you were giving?
  (Mr Daykin) We attempt, when we give advice, to draw attention to the broader issues. Our principal role is to analyse the technical aspects of the problem but because we have people experienced in the pensions area—many have worked for their whole career in pensions—we do have a source of advice which is often beneficial to a customer or a client like the Department of Social Security where they have only a limited number of people who have practical knowledge of the pensions industry.

  69. Why are you involved in the current review?
  (Mr Daykin) We are involved as advisers to the DSS on any issue which they care to put to us. The process has been somewhat devolved because they asked the actuarial profession to review the operation of the system; they reported back last autumn, and then there was a further round of consultation which the DSS put out. In parallel with which there has also been this discussion of the Treasury seeking advice from Paul Myners, and all of that has to be brought together now by the Department of Social Security and the Treasury and I would expect us to be closely involved in advising on how they should respond at this stage, but the decisions will inevitably be political.

  70. This is what seems rather puzzling in trying to get to the bottom of exactly what the role of government actuaries are. Why would it be the profession, the Faculty and Institute of Actuaries that take the lead on creating and then reforming the MFR, rather than yourselves? I would assume that would be the sort of role you would be performing on our behalf?
  (Mr Daykin) It could well have been, and certainly that would have been a route which the DSS could have followed. They could have simply asked us to design a system and advise them on it, so maybe it is really a question for the DSS as to why they did it that way. If I can surmise, I suppose it would be because they felt they would get a better acceptance by the industry if they involved the profession and the industry in the process rather than doing it behind closed doors.

  71. You would regard it as being done behind closed doors if you were involved?
  (Mr Daykin) Others might. If we simply advised the DSS and they then pronounced what they were going to do, that might be felt to be a less transparent process.

  72. Would you not think it would be appropriate as a role for the Government Actuary's Department to be able to provide that kind of advice and also to do it in public in the way I think a number of us would like there to be access, openness and accountability in relation to the public sector? Would there be a particular problem in you providing that advice, drawing up proposals and making that public? Would that create difficulty in terms of your relationship with government departments?
  (Mr Daykin) I do not think so if that was the way it was structured. That, for example, is the way it is structured in relation to the contracting-out terms where there is a specific legislative requirement for the Government Actuary to report on the recommended contracting-out terms and, therefore, it is a transparent process where we produce our recommendations but they are published because they are a report that the Secretary of State must lay before Parliament. In order to increase the transparency of that process, we go through a consultation process prior to that. We issue a consultation document to the industry to get people's views before we finally give our advice to the Secretary of State and he publishes it. That is another model which, to my way of thinking, is a very good and transparent model but different projects have been done differently and, in the case of the minimum funding requirement it was decided that the appropriate way to go was to seek the advice of the actuarial profession.

  73. But are you giving your views then on what the actuarial profession is coming out with to the Secretary of State?
  (Mr Daykin) Yes.

Mr Beard

  74. Does the government always seek your advice on policy matters that require an actuarial contribution?
  (Mr Daykin) I do not think that I could say "Yes" absolutely to that. There are two reasons why that is not the case. Firstly, there may well be some areas where the government is not asking our advice because they have not realised they need it or there is some constraint, budgetary or otherwise, which leads them not to seek it. Secondly, there is a general edict out from the Treasury, from ten years or more ago now, to invite and encourage government departments to market-test actuarial services and, therefore, it would be perfectly expected that some government departments might seek actuarial services from other sources. Indeed, we are aware of the few occasions on which that has taken place—not many.

  75. When you do advise, is your advice always fully taken into account by the decision-maker?
  (Mr Daykin) I think that would be too much to expect. For any professional giving advice the recipient of the advice, the client, is always at liberty to do whatever they will with it. Our record is good in that respect and my feeling is that, generally, people are keen to have our advice and want to take it but it certainly would not be blanket, one hundred per cent, always operating on the basis of what we advise.

  76. Do you have a right to make representations to a minister in such circumstances where it is not taken?
  (Mr Daykin) We have our own minister. The Economic Secretary to the Treasury acts on behalf of the Chancellor as our minister and, if I was concerned about some situation where I thought another government department was not taking sufficient notice of our advice, then I could always make representations to her. I think at the end of the day, however, it is open to client departments to make their own decisions in the light of the advice they receive from us.

  77. What action, for instance, would you take in circumstances where your calculations, for instance, in re-establishing a link between earnings and pensions rather than inflation and pensions, differed from the departmental calculation?
  (Mr Daykin) I am not sure that it would arise in quite that form because the Department of Social Security do not carry out their own long term projections in parallel with what we do because they rely on us to provide that advice, since we have a statutory responsibility to report to Parliament on it. I think the issues where one might I suppose find a department sceptical about our advice is if they felt they did not really accept our assumptions for some reason, but in order to avoid that becoming an issue we usually have a continuous dialogue with the client to make sure they understand why we feel it is appropriate to make certain assumptions, and we will usually present a range of assumptions or the effect of different assumptions anyway. There might also be presentational issues in the way in which the department wants the results to be presented or when compared to what we might think. Subject, however, to the fact that I do have certain statutory responsibilities which I must certainly fulfil in reporting to Parliament and in those cases I must act wholly in the public interest in a way which I feel is completely professional. All the work we do for the Department of Social Security is client relationship work where we do what they seek from us and we provide them with advice.

  78. So if you were talking about assumptions in one of these assessments in the way you have been describing, and you came to a point where you could not agree with the assumptions, whose assumptions obtain?
  (Mr Daykin) If it is in the case of a report which is going to Parliament under my signature, then I have the final decision. It is my personal professional responsibility to sign the report, so I would need to be satisfied that I was comfortable with the assumptions that were being made.

Mr Cousins

  79. You said in answer to my colleague, Nigel Beard, that you could make representations to your own minister if you felt that your advice had not been properly regarded. Have you ever done so?
  (Mr Daykin) No.


 
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