Select Committee on Treasury Minutes of Evidence


Examination of Witnesses (Questions 80 - 92)

THURSDAY 8 FEBRUARY 2001

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

  80. I ought to declare an interest as a policyholder in the National Insurance Fund, but I think probably everyone in this room is in that position. Coming to the document you published in November 2000 which showed what was then quite a strong political issue—the uprating of pensions in line with earnings rather than prices—what your projections show on page 12 is that, if pensions have been uprated in line with earnings, and that was continued through to 2005-06 steadily, year on year, at the end of that period of time there would be a balance of over £23 billion in the National Insurance Fund, and that balance would be, by 2005-06, 40 per cent of the relevant benefits expenditure, and the excess balance over your minimum recommended level would be £13.6 billion. This is fairly striking advice on what was a very significant political issue, both then and now. Did the Department of Social Security have any dialogue with you about these issues?
  (Mr Daykin) The contents of that report were under discussion between us and the Department of Social Security for some while before. In fact, the gist of the outcome which is projected there would have been well known to the Department from a long time ago from discussions we would have had with them. The specific report you are referring to was, in fact, required of us by an amendment of the Act which was passed in July, and was a specific narrow point as to what would be the situation over the five years which we have projected there, and it did not come as any surprise to us or the Department that that was the case. Also in that report I felt it was important to show what the longer term impact would be because, in the longer term, there would be a shortfall in the contributions over benefits if one continued on that basis, and the question of whether contributions should be increased in order to provide earnings upratings is an entirely political question. All I can do is present what the figures would be on either basis in order to inform that debate. The level of fund you referred to is still very small compared to many other countries. The United States have a huge—

  81. It is a bit better than Equitable Life!
  (Mr Daykin) Well, no. I think Equitable Life policyholders might not be too happy if there was only money there to pay out benefits for four or five months. It is a very small fund in relation to the liabilities which are there.

  82. You meant to say "years", I am sure, rather than "months"?
  (Mr Daykin) No. At the end of that period it would build up to about four or five months of benefit expenditure because the standard, the 16 per cent which we referred to as the minimum which we think is reasonable, is 16 per cent of a year's benefit which is only about six weeks of benefit expenditure. It is only a working balance and does not represent a fund for future liabilities.

Chairman

  83. Just to wrap this topic up, would it be fair to say that it is your role, in the context in which Mr Cousins has been asking questions, to persuade the government that the actuarial approach to, for instance, the fund that we have just been discussing is the appropriate approach, rather than, say, some sort of flat contributory kind of approach?
  (Mr Daykin) We can provide the government with advice on the effect of different ways. In practice most social security schemes around the world are on a pay-as-you-go system because of the huge amounts of money which would need to be built up in order to fund all the liabilities in advance. The principal actuarial function in the UK, therefore, which is a very strong discipline here, is that the Government Actuary presents these reports to Parliament and they give not only short-term but also long-term projections of the effect of the legislation which enables the parliamentary discussion process and the ministerial decision-making process to proceed on the basis of a full understanding of the long-term effects. Hopefully this will avoid making mistakes in ignorance, for example, of the effect which might flow in the long term from a particular policy.

Mr Beard

  84. Throughout this discussion, there has been reticence about being public. Would you describe your department as in keeping with open government and transparency in today's terms?
  (Mr Daykin) My understanding of our role is that we are there to be advisers to other government departments who have policy responsibilities. We have not been given any policy responsibilities which we should be open about, so we operate in a client relationship with other government departments. It is their responsibility to be fulfilling the requirements of open government in respect to any of their policies. We have a client relationship with them in the same way that a private firm would have if they were advising them, and it is up to our clients rather than us to decide what disclosures to give. If Parliament should decide to give the Government Actuary some specific requirements to report publicly on particular issues, that would be a completely different matter.

  85. Sometimes you give advice to select committees and sometimes to individual Members of Parliament. How do you choose which ones you are going to take on as clients?
  (Mr Daykin) In principle we are willing to act for any client which does not put us in a situation of conflict with core clients and where they have the ability to finance payment for the advice which they are seeking.

  86. Do you think Parliament makes appropriate use of your department in gaining objective information?
  (Mr Daykin) I believe they could make more use of us in a number of respects.

Mr Cousins

  87. Can I follow that up? Perhaps you could outline what you think those might be?
  (Mr Daykin) For example, if a select committee felt that they wanted to explore the financial impact of an alternative set of policies, then they could seek advice from us on the costings of that, be it in the pensions area or social security.

Chairman

  88. Would we have to pay for it?
  (Mr Daykin) As we are set up at the moment we do not have the resources to do it for free but that could be considered. If it was thought to be in the public interest that we had that role then we should, in principle, have more of a core budget which we could use for such purposes.

Mr Cousins

  89. That is an interesting point. Have you ever offered advice on the future projections of the unfunded pay-as-you-go public sector pension schemes like teachers, police staff, fire staff and so on?
  (Mr Daykin) The teachers and the National Health Service schemes operate with a notional fund for which we do a published valuation. The other schemes which you refer to are all strictly pay-as-you-go. We do advise the respective managers and departmental sponsors of those schemes and we have done projections of the long-term consequences of those schemes. We do not, at the moment, have any statutory responsibility to report to Parliament on that in the way we do on social security but, personally, I would see no reason from our point of view why we would not welcome such a requirement.

  90. I think we can take the hint on that! Your own profession has become one where salary levels have become extremely high in the private sector. Are you having difficulties in recruitment? Do you think there is going to be a problem about maintaining the quality of the government actuarial service?
  (Mr Daykin) Recruitment is a constant problem for us for the reasons you indicate and also because the majority of actuaries who enter the profession do not see themselves as working in the public sector. They expect to be working in the private sector. We do have a salary structure, therefore, which is quite competitive by Civil Service standards. Because we are a separate department, because we have this autonomy and we charge fees for our services, we are able to set salaries which are, at least, in touch with the market but, nevertheless, we have a great deal of difficulty in recruiting as many qualified actuaries as we would like. We barely manage to keep pace with the ones we lose. We have steadily grown in terms of numbers over the years, and we are certainly able to recruit trainees from university but many leave for various reasons before they become senior actuaries. We would love to be able to have more actuaries—we could provide a better service to our clients; we could expand into other areas if we were able to recruit more but the pressures on the profession at large are enormous in this respect, and all people trying to recruit actuaries have difficulty recruiting at the present time. In our situation as a public department it is inevitable that we will have those problems more than others.

  91. Perhaps you could make available to the Committee the turnover rate that you are experiencing, and highlight these recruitment and retention problems?
  (Mr Daykin) Yes.

  92. Do you recruit actuaries from overseas?
  (Mr Daykin) We have, sometimes—mainly trainee actuaries. We have a range of trainee actuaries from different countries around the world at the moment which also helps us sometimes when we need linguistic skills.

  Chairman: Thank you very much. There are one or two issues which we want to try and follow up with you through officials which were pointed out by Mr Cousins but, subject to that, thank you very much indeed.


 
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