Select Committee on Treasury Minutes of Evidence

Examination of Witnesses (Questions 100 - 119)



  100. Do you encourage government departments to test the market to make sure they are getting the best value for service?
  (Miss Johnson) Yes, and some of them do. Occasionally they decide not to use the Government Actuary's Department. We are relaxed about that and I am sure the Government Actuary's Department is too. It is good that there is competition and that things are looked at in that way.

  101. And you are quite sure that the costings are done in a transparent way? In other words, that overheads are properly accounted for?
  (Miss Johnson) I am, yes.

Mr Plaskitt

  102. The Government Actuary can — and, indeed, does - report to Parliament on matters to do with social security and pensions but not in terms of the life insurance industry, which seems closely linked to those. Is that satisfactory, do you think?
  (Miss Johnson) Obviously the way in which the Government Actuary's role is set up is defined in a variety of statutory responsibilities which he has and which the Department exercises, and those are set out in legislation. There is obviously no problem about the Government Actuary's Department being called to account in other ways by the House: obviously appearance in front of the Treasury Select Committee is a good example of ways in which their work can be further investigated, as you currently are doing.

  103. There may be a legislative reason why it does not report on life insurance to Parliament, but is that logical? Should we not be coming back to the legislation and considering a change?
  (Miss Johnson) We have not contemplated that and it has not seemed obviously desirable to us in some way. I am not aware of anyone particularly suggesting it, either.

  104. It is just that, as you know, we are investigating the Equitable Life matter and the Government Actuary could not tell us anything about the advice he had given to the DTI, to the Treasury or the FSA, because his relationship with the regulator is a commercial one. Is that a desirable arrangement, do you think?
  (Miss Johnson) It is a matter of fact that his relationship is a contractual one and, under those contractual arrangements, he is bound to maintain the confidentiality of the information that he supplies to clients. That has always been the case.

  105. But have not we potentially got a whistleblower here who has had his pea removed? Could we have avoided Equitable Life if the Actuary had been able to speak out on these matters and not be restrained by commercial considerations?
  (Miss Johnson) I am not privy to the actuarial advice that has been supplied on those occasions any more than the Committee is so I cannot comment on that, but I think it is unlikely that your speculation is so.

Mr Kidney

  106. When you say you have not been privy, who does the Government Actuary give his advice to, if not to the Treasury?
  (Miss Johnson) The advice has obviously been supplied to the FSA as the regulator. Where the advice was supplied to the Treasury then clearly we had advice. We are also able to seek advice ourselves from the Government Actuary's Department.

  107. So did he blow a whistle during the time the Treasury got his advice?
  (Miss Johnson) No.

Mr Plaskitt

  108. At the end of October 2000 the FSA announced its intention to transfer actuarial advice from the Government Actuary's Department to an in-house actuary. Are you at all concerned about the ending of the traditional separation between regulator and actuary which that implies?
  (Miss Johnson) It is a matter for the FSA who they get their future actuarial advice from. They have felt that it would be the best arrangement - and the Government Actuary's Department clearly did not disagree with that — that the staff should be transferred from the Government Actuary's Department and they are being transferred shortly to the FSA. They have been doing work for the FSA in recent times in any event and, as you know, a cohort of staff are going across to the FSA and the future actuarial advice arrangements for the FSA are a matter for them. As the regulator I am sure you would not be happy in other ways if we were telling them what we thought their advice arrangements should be.

  109. Treasury does not have a view on this arrangement?
  (Miss Johnson) No.

Mr Cousins

  110. Minister, this morning we have received from the Government Actuary's Department their service level agreement with the Treasury. I cannot truthfully say that in the time available to me I have done anything more than just whizz through it and, of course, I am not sure whether you will have it in front of you yourself.
  (Miss Johnson) I am not sure I have but do not let that stop you asking me a question, at least.

  111. It is clear from the service level agreement that the Government Actuary's Department is the key source of information about the liabilities of insurers and the ability of insurers to fulfil policyholders' reasonable expectations. That is crystal clear in the service level agreement. The agreement also points out that, unless there are special circumstances, the Government Actuary's Department will be with the DTI and then the Treasury regulators, now the FSA regulators, on all their visits to companies and the Government Actuary will be used as their key source for advice in the scrutiny of the annual returns of the appointed actuaries. The service level agreement goes on to say that the key indicators the government actuaries will use in their advice to ministers will be, amongst other things, trends in free asset ratios, worrying exposures and impacts on bonus strategy. Those are clearly identified as specific points on which the Government Actuary's Department will act as the key source of advice. It goes on to say in point A 17 that, if the Government Actuary's Department considers that the insurance directorate might need to exercise Her Majesty's Treasury's powers of intervention, it will make appropriate recommendations. In the light of that, could you reconsider the answer you gave to Mr Kidney in which you said that ministers had not been informed about the Equitable Life situation, because the service level agreement makes it crystal clear that the Government Actuary's Department was the central crucial source of advice to government on all the issues which have figured in the evolution of the Equitable Life saga. Would you disagree with that?
  (Miss Johnson) Clearly the reading that the reference you have made is an interesting one; however, I do not in any way go back on what I said to Mr Kidney earlier. The point is the advice is confidential on each specific case and so the Government Actuary's Department has an individual relationship and the advice on each specific case is confidential advice. I am not aware of what arrangements are made between the Government Actuary's Department and officials; as a minister I am not privy to any of that information.

  112. I see. Clearly what is of great importance in the evolution of the Equitable Life saga—and in a way that is just an example of a wider body of problems—and you will agree with me it is clear from the service level agreement, is that the Government Actuary's Department had the dominant central role in providing the specific advice to ministers on all of the issues—bonuses, with-profits policies, free asset ratios, lapse rates, it is all spelt out in detail—and that the Government Actuary's Department is the key source of advice to officials on all those sorts of issues?
  (Miss Johnson) The point is we have to make a distinction between generic advice and specific advice. On generic advice it is certainly the case that the Government Actuary's Department will supply advice both to officials and ministers of a generic kind, but on specific, individual, cases that advice is confidential between the Government Actuary's Department and whoever is their client.

  113. Can I say that it is clear from the service level agreement that the advice that the Government Actuary's Department gives is not just generic advice, point A7(a): "Government Actuaries will report to Her Majesty's Treasury immediately if the initial scrutiny of any company raises serious concern; (b) the Government Actuary's Department will send to Her Majesty's Treasury by the end of August a report covering all initial scrutinies which will consist of a priority rating for each company, an indication of solvency cover for each company...", et cetera. This is not generic advice: this is advice very specific to companies and their performance?
  (Miss Johnson) But that advice is being supplied to the regulator. I believe that the FSA told the Committee, Sir Michael, about their 1998 concerns over Equitable's reserving on guaranteed annuity options and they clearly took the Government Actuary's Department's advice into account in pursuing these. That is a matter on which the FSA has, rightly, given you evidence and it is not for me to gainsay that or interfere in that in any way.

  114. I do not want to pursue this point unduly this morning but it is a matter of record that the FSA regard their duties as beginning on 1 January 1999 -
  (Miss Johnson) Quite rightly.

  115. Exactly so—and everything before that is, so to speak, on that ground. Can you advise the Committee, therefore, as to where Parliament goes if it wishes to examine what advice was given to the Treasury and what the Treasury did with that advice prior to 1 January 1999?
  (Miss Johnson) The FSA, as you are aware, is producing a report and the report is going to set out the background and the events leading up to the point at which responsibility for prudential insurance regulation moved to the FSA. I cannot pre-judge what will be in that report but the FSA has the brief to look into the background and the events leading up to the time at which it obviously assumed, as you rightly say, on 1 January 1999 responsibility for prudential regulation.

  116. The main Committee had in front of it Mr Roberts, who is now the insurance regulator at the FSA and had previously been the insurance regulator at the Treasury and before that had been the insurance regulator at the DTI. When I sought to ask him questions about matters before 1 January 1999, Sir Howard Davies intervened and said that that was covered by advice to ministers and I could not ask him questions about that. That leads me to the conclusion, therefore, that it is to ministers we should come if we wish to pursue those issues about how the Government Actuary's advice was treated at the Treasury and what the quality of that advice was. Given Sir Howard Davies' ruling—which I accepted—it does seem to me that logically I can only come to ministers to pursue those points?
  (Miss Johnson) I think there are two separate issues here, possibly—one is advice to ministers on which obviously Sir Howard was commenting at that particular point—as you tell me—and there is clearly the question of the advice more generally, as it were. Much of the advice is clearly not going in all cases to ministers, but I cannot see any reason why the FSA, in doing its job and I expect it to do a thorough and complete job in preparing its report, as I am sure you do, cannot cover these matters in terms of the background to the report.

  117. I understand that but, Minister, you do see the dilemma that Parliamentary scrutiny is now faced with—and I do not want to labour this point this morning but it does seem right at least to draw this to your attention—where Parliament is being told that it cannot ask the FSA questions about the advice that was given to the Treasury and to ministers prior to 1 January 1999 and, therefore, it is to ministers that Parliament must come to seek some explanation of the quality of the Government Actuary's advice to the Treasury before 1 January 1999 and, of course, what was done with that advice?
  (Miss Johnson) Well, as I have said, the report is down to cover the background to the events prior to 1 January 1999 and, clearly, issues can be brought into consideration in that background.

  118. I am grateful for that reply but can I just leave you with this thought: that perhaps this is something you might care to discuss with Sir Howard so that Parliament can be assured that, should it wish to, these matters about what happened between the Government Actuary's Department, the Treasury and actions that were taken before 1 January 1999 can be properly scrutinised because, as of now, I think there is a gap which seems to block effective Parliamentary scrutiny. I am sure that is not being done wilfully but it is there nonetheless, and I think we need some clarification about how that gap is to be closed.
  (Miss Johnson) I understand the point you are making but I think it is also important to recognise that there are elements of information which you may be interested in which are down to the confidential individual relationship between the Government Actuary's Department and any of its clients which—in the case of Equitable—are a matter for Equitable as a client to decide whether they make them available.

  119. Is the Government Actuary's Department involved in the FSA inquiry into Equitable Life directly?
  (Miss Johnson) I am not aware of them being involved.

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