Select Committee on Treasury Appendices to the Minutes of Evidence


Memorandum from the Faculty and Institute of Actuaries

  1.  Members of the actuarial profession provide commercial, financial and technical advice underpinning the operation of insurance companies, pension funds and other financial institutions. The actuarial profession welcomes the opportunity to assist the Treasury Sub-Committee with its current inquiry into the Government Actuary's Department (GAD).

  2.  The profession has always worked closely with the GAD, since its creation early in the 20th century, and has valued the continuity of expertise that the Department has demonstrated even as it has adapted to changes in Governmental and social structures over the years.

  3.  A further significant change is now imminent, with the transfer of certain of GAD's responsibilities to the Financial Services Authority (FSA). This submission offers comments under two headings:

    —  the handling of GAD's role of actuarial adviser on insurance supervision, and the implications of transferring this role to the FSA

    —  the handling of the GAD's other responsibilities in the recent past, and after this transfer.


  4.  In the profession's view, 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. This role has been performed by the Government Actuary who has exercised influence through personal and professional liaison. 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.

  5.  Looking ahead in relation to the supervision of general insurance (GI) business, it is possible that the FSA will move towards a so-called risk-based approach to understanding company security. The profession would suggest that the analysis and understanding of this on behalf of FSA should best be done by actuaries. Issues of consistency arise, for example, in relation to the actuarial requirements proposed for Lloyd's under FSA consultation paper 66. There must be a danger that different elements of British GI entities will start to have a variety of different types of GI supervision. This would be the opposite of what the unified FSA is trying to achieve.


Experience in relation to Contracted-Out Schemes, and the Pension Schemes Office

  6.  In August 2000, as on earlier occasions, GAD consulted on rebates and reduced rates of National Insurance Contributions for members of contracted-out schemes. We found this consultation most helpful, and we would like to commend to the Treasury the principle of non-statutory consultation.

  7.  It is akin to consultation on draft clauses in Finance Bills. Given the complexity of actuarial funding work, the normal time that might be available to consider draft regulations would be inadequate to enable suitable modelling work and response on proposals. The informal three months or so of discussion and request for feedback has been very welcome.

  8.  We have however found much more difficulty in entering satisfactory dialogue with the GAD in its role as adviser to the Pension Schemes Office (PSO) of the Inland Revenue. One of our concerns over the last five years has been a major change to the decades-old actuarial practice of funding for routine early retirements in pension schemes. A change in PSO requirements was announced without warning in 1995 and the PSO referred us to GAD for discussion on their reasons. Many meetings were followed by a serious delay in responding to correspondence and we have failed to reach agreement. This experience has been shared with the Association of Consulting Actuaries.

  9.  We have recently concluded that the advice GAD has given the PSO has been the fundamental obstacle, rather than the policy intent of the Revenue. We are disappointed that the Revenue's extensive discretionary powers to set their funding rules were used in this way and that the GAD's advice was prayed in aid of such a major change without any facility for proper representation. The outcome appears to have been contrary to DSS' intentions to improve the security of pension scheme members.

Expectations for the future

  10.  The transfer of certain of GAD's current responsibilities to the FSA should not lead to the absorption of its remaining functions into other Government Departments. The profession sees powerful reasons why such a dispersal should not take place, and why those functions should continue to be held in a separate unit (ie GAD):

    —  it provides an independence from any departmental "vested interests"

    —  it provides for a degree of consistency of approach

    —  there is value in keeping a pool of expertise that can be called upon for various purposes together (eg as GAD was able to pick up the work on AIDS).

  11.  Furthermore, any greater dispersal of current functions would run the risk that the post of Government Actuary itself might disappear. The profession would argue strongly that the post, with its substantial responsibilities, should be maintained:

    —  as a senior government adviser, with expertise to make recommendations in the following important areas:

      —  State, company and personal pensions

      —  pension schemes for State employees

      —  long-term saving, and tax treatment

      —  long-term social welfare and health costs

    —  and as an "ambassador", both for the UK system of regulation and for the profession generally; and as an impartial adviser to Governments in other countries on the areas set out above. This is a role which recent Government Actuaries have fulfilled, and which has undoubtedly garnered an enormous amount of goodwill towards the UK around the world.

  12.  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.

19 January 2001

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