Select Committee on Treasury Seventh Report


SEVENTH REPORT

The Treasury Committee has agreed to the following Report:—

GOVERNMENT ACTUARY'S DEPARTMENT

Summary of Conclusions and Recommendations


(a)We appreciate the high regard in which GAD is held by those who deal with it (paragraph 7).
  
(b)GAD should continue to play a role in the supervision of life insurance firms even after the end of its contractual relationship with the regulator (paragraph 13).
  
(c)We consider it important that Parliament should be regularly informed about the condition of the life insurance industry, particularly in light of the recent problems affecting Equitable Life. GAD is well placed to provide such information, even after the FSA takes over responsibility for actuarial advice on life insurance firms, by developing its relationship with firms' appointed actuaries. We recommend that GAD be given statutory responsibility for publishing a regular report on the life insurance industry (paragraph 14).
  
(d)We consider it vital that the independence of GAD should continue to be upheld (paragraph 15).
  
(e)We have received the impression that GAD is a rather under-utilised resource of which the Government could make more use in future (paragraph 16).
  
(f)We recommend that the Government review GAD's activities with a view to identifying areas where the department could usefully make regular reports to Parliament (paragraph 17).
  
(g)We recommend that the Government consider giving GAD a budget for carrying out work on matters of public interest, for example when commissioned by Select Committees (paragraph 18).
  
(h)We recommend that the Government review the scope for GAD to be given more commercial freedom to pursue work overseas (paragraph 21).
  
(i)There may be merit in re-examining GAD's status, to ensure that the Government continues to get the best value actuarial advice (paragraph 22).
  
(j)We look to the Government to ensure that GAD's expertise is fully exploited in future: this will help it continue to attract high-quality actuarial staff (paragraph 24).

Introduction

1. The Treasury Committee established a Sub-committee in 1998 to scrutinise the work of the various bodies for which Treasury Ministers are accountable. The Sub-committee has completed inquiries into the Office for National Statistics (ONS),[2] the Inland Revenue,[3] the Valuation Office Agency,[4] HM Customs and Excise,[5] the Government's cash and debt management,[6] HM Treasury,[7] and the Royal Mint.[8] The Sub-committee's report on its work from 1998 to 2000 was published as part of the Treasury Committee's report on its work during this Parliament in December 2000.[9]

2. We announced an inquiry into the work and future status of the Government Actuary's Department (GAD) in December 2000. We heard oral evidence from the Government Actuary on 8 February and from Miss Melanie Johnson MP, Economic Secretary, and officials, HM Treasury on 1 March; and we also received a number of written submissions, most of which we have published with this volume. We are grateful for the evidence we received, written and oral.

3. The Government Actuary's Department is a non-ministerial Government department which was set up in 1919 to provide actuarial advice to Ministers and departments. According to its memorandum, "the original focus of GAD was on the financing of social security, but this rapidly expanded into all area 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".[10] GAD's client base has also expanded. Although "priority must be given to providing actuarial services to Ministers, to Government departments and to financial regulators in the UK", it now serves "the wider public sector", both in the UK and overseas, and has 800 clients.[11]

4. GAD's main focus is on the provision of advice to support policy-making by others. It does not have policy-making responsibilities of its own.[12] Nor does GAD oversee or regulate the actuarial profession, although GAD staff are active members of the Faculty and Institute of Actuaries.[13]

5. GAD's work falls into three broad categories:

    —  advice on pensions, which accounts for around 45 per cent of the department's gross resources. GAD advises the Occupational Pensions Regulation Authority, the managers and trustees of public sector pension schemes, and the Department of Social Security (DSS) on a range of policy and pension management issues. It publishes a survey of occupational pension schemes every four years[14]

    —  advice on the supervision of insurance companies and friendly societies, which accounts for around 30 per cent of the department's gross resources.[15] This work is being transferred to the Financial Services Authority (FSA) in April[16]

    —  projections of the size of the National Insurance Fund and demographic projections which contribute to several areas of Government policy, and which account for around 25 per cent of the department's gross resources.[17]

GAD is also responsible for checking that the monthly premium bond draws are free from bias and for the composition of the Ogden Tables on the discount rates which apply in relation to the compensation claimed for personal injury or fatal accidents.[18] GAD undertakes much of the work listed above, particularly in relation to pensions and social security policy, for overseas Governments as well as for the UK public sector.

6. GAD has 111 staff, of whom 71 are trained actuaries.[19] Since 1989, GAD has charged all clients for most actuarial work, exceptions including work on population projections and the four-yearly survey of occupational pension schemes.[20] In 1999-2000, GAD's expenditure (on a cash basis) of £7.547 million was almost entirely offset by income of £7.178 million, the bulk of which came from fees for actuarial services. The balance was made up by money voted by Parliament.[21]

7. Witnesses were generous in their praise of the Government Actuary. The Pensions Management Institute wrote that "the availability of a highly respected Government Actuary backed up by an experienced and dedicated team in GAD has, we believe, proved invaluable to the Government, Government departments, and all of us who work in the pensions field ... it is difficult to see how a Government and its departments could operate as effectively without a Government Actuary's department".[22] The Southwark Pensioners' Action Group said that "over the past century, the Government Actuary's department has acquired a reputation for professionalism, independence and objectivity".[23] The Continuing Care Conference said that "the work of the GAD has been critical in enabling projections to be made in relation to the possible future demand for and cost of long-term care".[24] We appreciate the high regard in which GAD is held by those who deal with it.

Life Insurance

8. A major focus of our inquiry was the role of GAD in relation to the regulation of life insurance, following the problems which have affected Equitable Life and the plans for the Financial Services Authority (FSA) to take in-house the actuarial advice on the sector currently provided by GAD. The Government Actuary set out his current role in a memorandum to the Committee and we also received a copy of the Service Level Agreement between GAD and the Treasury which was in force until the Treasury transfered responsibility for insurance regulation to the FSA on 1 January 1999.[25] GAD's main function is to provide actuarial advice to the FSA about the financial position of life insurers and the position of the life insurance industry as a whole. The FSA is a client of GAD and pays for the department's services.[26] GAD also has "direct contact with appointed actuaries on technical issues".[27] The Faculty and Institute of Actuaries told us that GAD "has exercised influence through personal and professional liaison" with appointed actuaries in life insurance firms.[28]

9. The nature of GAD's role in relation to the life insurance industry was illustrated by the Equitable Life affair. On 8 December 2000, Equitable Life closed its funds to new business following an adverse House of Lords ruling on the level of final bonuses payable to with-profits policyholders who had been offered guaranteed annuity rates, which it is estimated could cost the firm £1.5 billion, and the failure of the firm's efforts to find a buyer for its business. The Treasury Committee is conducting an inquiry into the regulatory environment and the management of risk in the life assurance sector following the Equitable Life affair and heard oral evidence from Equitable Life and the FSA on 15 February. We asked the Government Actuary about the advice he had given the FSA about the financial position of Equitable Life and the way in which the business was run but Mr Daykin said that he was "not really able to answer on the specifics of Equitable Life because that would be a matter of client confidentiality between the Government Actuary's Department and its respective client".[29] He explained that all the advice given by his department in the past to the regulators of the life insurance industry "is the responsibility of those bodies".[30]

10. GAD has provided actuarial advice to the Government in support of the regulation of the life insurance industry since the 1960s.[31] Shortly after responsibility for such regulation was transferred from the Treasury to the FSA in January 1999, the FSA decided that it wished to develop its own actuarial resource to replace the arrangements with GAD. The FSA explained that "the physical and managerial separation inherent in the arrangements does not help promote the integration we seek, and hinders flexibility. Nor is the continuation of the existing arrangements likely to represent the most efficient and economical use of resources by the FSA for the future".[32] In April 2001, those GAD staff engaged on work for the FSA, around 20 in number, will be transferred to the FSA.[33] At the same time as taking in-house the actuarial advice previously provided by GAD, the FSA intends to take a new approach to the regulation of life insurance firms. The FSA told us that "we have no plans to reduce the amount of actuarial input to insurance supervision. Indeed, overall we are likely to be devoting additional resources to regulating the insurance industry. But in our new regime regulatory activity will involve much more cross-sectoral work, undertaken in multi-disciplinary teams formed for the purpose of using a flexible approach to the deployment of resources".[34] The Minister told us that the Treasury did not have a view about the new arrangements.[35]

11. Several concerns were expressed to us about the transfer of actuarial work on the supervision of life insurance firms from GAD to the FSA and the FSA's proposed new approach to the regulation of the sector. The International Underwriting Association of London argued that the transfer of GAD staff to the FSA "is to be considered with caution" because "incorporating GAD staff with the FSA, thus increasing the regulatory function of the actuaries, may lead to a conflict of professional interest".[36] The Faculty and Institute of Actuaries called for actuarial input into the FSA's new approach to the regulation of the insurance industry because "there must be a danger that different elements of British general insurance entities will start to have a variety of different types of ... supervision".[37] GAD's branch of the Institution of Professionals, Managers and Specialists said that "while GAD continues to have responsibility for its current broad range of work the Department will be able to continue to attract high calibre graduates. It is difficult to see how a steady flow of qualifying actuaries could be maintained if actuaries were not contained in one body". It also thought that "without a centralised department, career paths would be much more limited or non-existent".[38]

12. The Faculty and Institute of Actuaries were also concerned that the relationship between GAD and insurance firms' appointed actuaries would be affected by the transfer of responsibilities to the FSA. It wrote "it has been important that there has been within Government a respected senior actuary with whom Appointed Actuaries, who hold key responsibilities in relation to the financial condition of life assurance companies, can discuss matters ... It is not clear where that role will lie in future, once the insurance division of GAD has been absorbed into the FSA with no 'functional head' equivalent to the Government Actuary able to exercise moral suasion on Appointed Actuaries".[39] Mr Daykin told us that he was "in continuing discussion with the FSA about how we can maintain something of the special relationship which existed before between the Government Actuary and the appointed actuaries of the insurance companies".[40]

13. There is a danger that, as a result of the transfer of responsibility for actuarial advice relating to the life insurance industry from GAD to the FSA, GAD's relationship with appointed actuaries in the industry could be undermined. GAD should continue to play a role in the supervision of life insurance firms even after the end of its contractual relationship with the regulator.

14. As our questioning of the Government Actuary about the advice he tendered to the regulators about Equitable Life showed, GAD does not have an obligation to report to Parliament on the state of the life insurance industry. Mr Daykin told us that "in this area, there is no general rule given to the Government Actuary to be involved from a public interest perspective. We are solely involved as the professional advisers of the regulator".[41] GAD does have a duty to report to Parliament on other matters, particularly in relation to the National Insurance Fund and occupational pensions.[42] Mr Daykin told us that he "would like to regard" himself as having an independent voice to express concern about developments in the life insurance sector "but nobody has ever given me that statutory responsibility".[43] The Minister told us that "we have not contemplated" giving GAD a statutory duty to report to Parliament on the life insurance sector and said "it has not seemed obviously desirable to us in some way". She thought it "unlikely" that the problems with Equitable Life could have been avoided if GAD had been able to speak out at an early stage.[44] There is no guarantee that this position will change with the transfer of responsibility for actuarial advice on life insurance firms to the FSA, although the FSA's inquiry into the Equitable Life affair may recommend reform.[45] We consider it important that Parliament should be regularly informed about the condition of the life insurance industry, particularly in light of the recent problems affecting Equitable Life. GAD is well placed to provide such information, even after the FSA takes over responsibility for actuarial advice on life insurance firms, by developing its relationship with firms' appointed actuaries. We recommend that GAD be given statutory responsibility for publishing a regular report on the life insurance industry.

Relationship with Government

15. Several witnesses cited the independence of GAD from other Government departments as a key feature of the organisation.[46] The Faculty and Institute of Actuaries said "the current Government Actuary has a well-deserved reputation for objectivity and a willingness to express his views on matters of Government policy which would be unlikely to be seen without the independence that a separate GAD provides".[47] The Southwark Pensioners' Action Group argued that it was "essential that [GAD's] independent status should be preserved. Any suspicion that GAD was taking orders from the Treasury or the Department of Social Security would quickly and permanently undermine it".[48] The Group suggested that the Department of Social Security had tried to delay GAD from publishing a report on the cost of restoring the link between state pensions and earnings in autumn 2000.[49] We consider it vital that the independence of GAD should continue to be upheld.

16. In its written evidence, GAD told us about its relationships with various other Government departments, most notably the DSS.[50] We were surprised to find that on several issues where the development of Government policy required an actuarial input, GAD's role has been marginal. In particular:

    —  the actuarial profession, rather than the Government Actuary, was given the task of designing the Minimum Funding Requirement (MFR), which was introduced in 1995 in response to the Maxwell pensions scandal to provide security to members of pension schemes in the event of employers becoming insolvent and no further funds being available to pay into schemes, and led the review of the MFR[51]

    —  GAD has no formal role in the inquiries announced into the Equitable Life affair and its implications for the regulation of the life insurance industry[52]

    —  the International Underwriting Association of London thought that "valuable advice had not been sought from GAD by the Inland Revenue in order to clarify outstanding issues" in relation to the taxation of general insurance reserves. It called for "organisational changes to get GAD more involved in providing advice to a number of government departments, such as Customs and Excise, the Inland Revenue, the FSA, and possibly the Office for National Statistics, as this would help create a seamless advice and decision making process that is suited to a modern government".[53]

We have received the impression that GAD is a rather under-utilised resource of which the Government could make more use in future.

Relationship with Parliament

17. As we have noted, GAD has a number of statutory requirements to report to Parliament, particularly in relation to the National Insurance Fund.[54] Mr Daykin suggested that it might be desirable for more such requirements to be placed on his department. GAD provides advice to the managers of various public sector pension schemes including, for example, on long-term projections. Mr Daykin told us that "we do not, at the moment, have any statutory responsibility to report to Parliament on [such schemes] 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".[55] We recommend that the Government review GAD's activities with a view to identifying areas where the department could usefully make regular reports to Parliament.

18. In the past, GAD has undertaken work for Select Committees and individual Members of Parliament.[56] Mr Daykin argued that Parliament could make more use of his department, suggesting, for example, that "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".[57] At the moment, Committees and others seeking such advice are charged, like any other client of GAD, on a full cost basis.[58] Mr Daykin said that, if it was thought to be in the public interest for GAD to provide advice to Select Committees for free, "we should, in principle, have more of a core budget which we could use for such purposes".[59] We recommend that the Government consider giving GAD a budget for carrying out work on matters of public interest, for example when commissioned by Select Committees.

Future Prospects

19. The transfer of work on the insurance industry to the FSA in April will reduce GAD's staffing level and income. GAD told us that it had "reviewed its future work programme to ensure that the anticipated future financial position remains reasonably stable" and reduced accommodation costs by moving to a different building in order to remain financially viable.[60] Even after the change, GAD will employ more staff than it did in April 1999, and 65 per cent more than it did in 1989.[61] GAD was keen to stress that it could cope with the loss of its insurance division by finding new sources of work, both from existing and new clients. The department said "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".[62] Work for overseas clients has been identified as a particularly promising area for expansion.[63]

20. GAD already provides actuarial advice to a number of public sector bodies overseas, including in Greece, Cyprus and Gibraltar on public sector pensions, in China, Greece and Jordan on demographic projections, and in Russia, Lithuania and Bahrain on the supervision of insurance firms.[64] This work currently accounts for around 15 per cent of GAD's workload, a proportion that will increase from April.[65] Mr Daykin told us that "the fact that we are the Government Actuary's Department of the UK is a selling point overseas because governments in other [countries] are quite interested in the idea of using our services rather than a firm that is operating for profit because they see us as specialists in the area of social security, pensions policy and financial services regulation".[66] GAD has recently established a unit dedicated to overseas work, to focus on gaining more work of this sort and to help manage occasional conflicts of interest with GAD's UK work.[67] As well as helping GAD earn extra income, Mr Daykin emphasised that "the experience that is gained from doing overseas work can be very beneficial both for the staff and also for our clients in the UK in terms of the better understanding we gain of worldwide activities".[68]

21. GAD competes with private sector actuaries to win contracts for overseas work, but is not able to make a profit as it is currently constituted.[69] Although this may help GAD secure work, Mr Daykin identified the organisation's "unique selling point" as being a centre of expertise on public sector actuarial work.[70] There may be scope for GAD to market its services overseas on a more commercial basis than hitherto, so as to earn more fee income and to allow it to market itself more professionally abroad.[71] More commercial freedoms in relation to overseas work might help GAD overcome the loss of its UK insurance work and permit the department to offer more generous remuneration packages to its actuarial staff, an issue we return to below in the context of recruitment.[72] We recommend that the Government review the scope for GAD to be given more commercial freedom to pursue work overseas.

22. UK Government departments are allowed to seek actuarial advice from other sources, including private sector firms.[73] The transfer of insurance work to the FSA shows how GAD is subject to competitive pressures in the UK, at least to an extent. Mr Daykin told us that outright privatisation of GAD had been considered and rejected in 1989.[74] The arguments against privatisation then were that there might be conflicts of interest between the work undertaken by private sector firms for the Government and for other clients which would not affect GAD, with its public sector focus; GAD "provided extremely good value for money"; and that GAD was "trained and equipped to provide services to Government in the areas where it particularly needs those services which do not in all cases correspond directly to the sort of work which might be done by most actuaries in the private sector".[75] There may be merit in re-examining GAD's status, to ensure that the Government continues to get the best value actuarial advice.

RECRUITMENT

23. GAD identified the recruitment of actuaries as one of its most pressing challenges. The department told us that it engaged in a "virtually continuous programme of trying to recruit qualified, or nearly qualified, actuaries. Because of the severe shortage 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".[76] Mr Daykin said "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".[77] GAD supplied us with a memorandum showing the department's staff turnover rates in recent years. Those rates are consistently higher than those reported in the private sector, although the gap between the public and private sectors is being closed.[78] The Minister argued that this indicated that "we do not have a significant issue of any kind to address on this".[79]

24. One constraint on recruitment is the salary levels GAD can offer. Mr Daykin said "we do have a salary structure ... which is quite competitive by civil service standards" but "given public sector constraints, it is inevitable that salary levels are increasingly out of line with the private sector, especially for senior staff".[80] Salary levels are linked to the fees which GAD earns,[81] so if the department was able to earn more money from overseas work, as we have suggested, better salaries could be paid. The nature of GAD's work can also help with staff recruitment and retention. GAD's branch of the Institution of Professionals, Managers and Specialists argued that "to continue to attract and develop high quality entrants, the department needs to maintain a good range of actuarial work".[82] We look to the Government to ensure that GAD's expertise is fully exploited in future: this will help it continue to attract high-quality actuarial staff.


2   Treasury Committee, First Report, 1998-99, Office for National Statistics, HC43 and Second Report, 2000-01, National Statistics, HC137 Back

3   Treasury Committee, Sixth Report, 1998-99, Inland Revenue, HC199 Back

4   Treasury Committee, Tenth Report, 1998-99, Valuation Office Agency, HC420 Back

5   Treasury Committee, Second Report, 1999-2000, HM Customs and Excise, HC53 and Sixth Report, 2000-01, HM Customs and Excise: Collection of Excise Duties, HC237 Back

6   Treasury Committee, Sixth Report, 1999-2000, Government's Cash and Debt Management, HC154 Back

7   Treasury Committee, Third Report, 2000-01, HM Treasury, HC73-I Back

8   Treasury Committee, Eighth Report, 2000-01, Royal Mint, HC239 Back

9   Treasury Committee, First Report, 2000-01, Work of the Treasury Committee and Treasury Sub-committee, HC41 Back

10   Ev, p1 paragraph 1.1 Back

11   Ev, pp1-2 paragraphs 1.3, 2.4 Back

12   Ev, p3 paragraph 4.10 Back

13   Government Actuary's Department, Annual Report, 1999-2000, (hereafter Annual Report) section 4 Back

14   Annual Report p3 and section 1 Back

15   Annual Report, p3 and section 3 Back

16   See paragraph 10 Back

17   Annual Report, p3 and section 2 Back

18   Annual Report, section 2 Back

19   Ev, p6 annex 1 Back

20   Ev, p1 paragraph 1.2; and see Qq99, 101 on absence of hidden subsidies Back

21   Annual Report, p11 Back

22   App 1 Back

23   App 7 Back

24   App 5 Back

25   Ev, pp11-12 Back

26   Qq43-4 Back

27   Ev, p12 paragraph 16 Back

28   App 6, paragraph 4 Back

29   Q15 Back

30   Q18 Back

31   Ev, p11 paragraph 2 Back

32   App 2, paragraph 14 Back

33   App 2, paragraphs 9, 14-16; also Ev, p3 paragraph 5.2 Back

34   App 2, paragraph 13 Back

35   Qq108-9 Back

36   App 4 Back

37   App 7, paragraph 5 Back

38   App 3 Back

39   App 6, paragraph 4 Back

40   Q48 Back

41   Q42 Back

42   Ev, pp1-2 paragraph 1.4 and Occupational Pension Schemes 1995, GAD, 2000 Back

43   Q65 Back

44   Q103 Back

45   Q124 Back

46   For example Apps 3, 4 Back

47   App 6, paragraph 12 Back

48   App 7 Back

49   App 7, appendix Back

50   Ev, p3 section 4 Back

51   Qq66, 69 Back

52   Qq31, 119 and see App 8 Back

53   App 4 Back

54   Paragraph 14 Back

55   Q89 Back

56   Social Security Committee, Fifth Report, 2000-01, The Contributory Principle, HC56-III, App 28 and How to Pay for the Future: Building a Stakeholders' Welfare, F. Field, Institute of Community Studies, 1996 Back

57   Q87 Back

58   Qq37, 85 Back

59   Q88 Back

60   Ev, p4 paragraphs 6.1-6.2 Back

61   Ev, p6 annex 1 Back

62   Ev, p4 paragraph 6.3 Back

63   Q9 Back

64   Annual Report, pp6-8 Back

65   Q7 Back

66   Q6 Back

67   Qq8, 12 Back

68   Q9 Back

69   Q6, 132-3 Back

70   Q9 Back

71   See Q11 on marketing Back

72   Paragraph 24 Back

73   See Q129 for an example Back

74   Q4 Back

75   Q5 Back

76   Ev, p4 paragraph 7.4 Back

77   Q90 Back

78   Ev, pp22-3 Back

79   Q135 Back

80   Q90 and Ev, p4 paragraph 7.2 Back

81   Q90 Back

82   App 3 Back


 
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