THURSDAY 1 MARCH 2001 _________ Members present: Sir Michael Spicer, in the Chair Mr Nigel Beard Mr Jim Cousins Mr Michael Fallon Mr David Kidney Judy Mallaber Mr James Plaskitt _________ MEMORANDUM SUBMITTED BY THE GOVERNMENT ACTUARY'S DEPARTMENT EXAMINATION OF WITNESSES MISS MELANIE JOHNSON, a Member of the House, Economic Secretary, DR PAUL MILLS, Head of Debt and Reserves Management Team, MR PETER SCHOFIELD, Head of Public Enterprise Partnership Team, and MR MICHAEL SWAN, Head of Tax Administration/Chancellor's Departments Team, examined. Chairman 93. Good morning. (Miss Johnson) Good morning. 94. Can I start by asking you how important you think it is that the government should have its own Actuary's Department as opposed to contracting out for actuarial work? (Miss Johnson) The aim of GAD is to provide actuarial advice to government departments and to other clients, as you know, in respect of employer-sponsored pension arrangements, the social security and the demographic analyses that are done and their work underpins ministerial decision-making as well. We need access as government to that professional, impartial and, indeed, rather cost-effective actuarial advice on a range of issues, including the demographic projections and pension matters. I think it makes good sense that this is provided by a separate professional body and Government Actuary's Department also has a range of statutory responsibilities under existing legislation. 95. But, Minister, our understanding from the evidence we have taken is that the Actuarial Department does not give policy advice, for instance, on pensions which you have mentioned. (Miss Johnson) Well, it gives actuarial advice which obviously, in effect, informs a policy advice which ministers are receiving. 96. But that could be done by anybody. It is not intimately involved with the policy-making process in any way at all? (Miss Johnson) You could say that of many specialists in government I believe. Obviously there are many specialists who are, in effect, providing the underlying advice of a technical kind which informs the policy advice which is then coming on to ministers and the government. 97. But if it is specialist advice which is being given as it were independently, by actuaries, then surely the cost effective way to do it would be to tender out for it? (Miss Johnson) That would be the case if private sector rates were not so high but Government Actuary's Department is a very cost effective supplier of actuarial advice and its rates are normally considerably under the costs that we would be charged in the private sector. 98. So if it is a cost factor -- (Miss Johnson) Well, it is an independence factor as well, as I have mentioned, but it is a series of factors. 99. Yes. You seem to feel that it is independent advice it is giving but, on the cost factor, are you sure that there are no hidden subsidies involved in the lower costs, if they exist? (Miss Johnson) They fully charge out their time and they recoup their costs on all the work that they do outside, and all the work they do across government departments. 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 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 also are 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 to proceed 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 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 in 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 economy, 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. 120. Could you inform the Committee about that? (Miss Johnson) I will write to the Committee further on that point. 121. Do you think in the light of the discussion that we have just had -- and I accept, of course, that there are issues of confidentiality involved -- that there should be some kind of reporting relationship between the Government Actuary's Department and Parliament itself over the issues which the service level agreement covers -- not specifically identifying individual companies but at least in broad terms? (Miss Johnson) Well, if you are talking about in general, obviously it is perfectly possible for, as I understand it, the Committee to take evidence from the Government Actuary in general about advice, as it were, in these sorts of areas. My understanding of it legally is that the Government Actuary's Department would be unable ever to divulge individual advice to the Committee or, indeed, to any other party. 122. But the situation is that the Committee has already established that the government actuaries regard themselves as having a client relationship with the Treasury and they will not answer questions on any of the issues covered in the service level agreement which, as I hope I have indicated to you, seem to me to be extremely decisive and far-reaching? (Miss Johnson) Well, I have explained the situation, I hope as clearly as I can. 123. Do you think some consideration should be given to the statutory position of the Government Actuary's Department and, indeed, the statutory position of appointed actuaries within insurance companies? Is the government giving any attention to that? (Miss Johnson) No, not at the present time. 124. Are you really saying that, after the Equitable Life saga, the government really does not have under consideration a review of the role of appointed actuaries within insurance companies and how they report to a wider public? (Miss Johnson) It is obvious that there will be points that will need to be considered whenever the FSA report becomes available. It seems to me that that is the time at which evidence will be presented to us all about the circumstances around the Equitable Life situation which will inform what sort of main issues might need to be addressed and how they might need to be addressed, and we are awaiting that report. 125. Do you not accept, Minister, that it is rather odd that the reports that appointed actuaries and insurance companies make are all public documents available to Parliament, available to policyholders, should they be able to get hold of them and understand them if they did, but the analysis of what they mean that is done by the Government Actuary's Department is not publicly available? Do you not accept that there is a contradiction there? (Miss Johnson) You are saying that the information effectively is available but the judgments of the actuaries, possibly on the basis of it, are not available to you. 126. The information is being made available in appointed actuaries' returns in a form which is extremely opaque and difficult to understand. Do you not think there is a role for somebody to take these appointed actuary's reports and, in the public interest, either advise the government or independently provide some analysis of what these reports contain and what they mean? (Miss Johnson) I think, given the reason that this is of such interest is primarily at the moment due to the situation surrounding Equitable Life, it makes sense, the FSA having undertaken to produce a report on the circumstances which have led to the present situation with Equitable Life, for us to wait to see what the recommendations of that report are and what issues arise as a result of the analysis that no doubt the FSA internal audit and other folk who are doing this are undertaking, and what is being identified there and respond to that report. It is premature for us to decide at this stage which particular issues might need to be addressed because clearly that report will point the way ahead. 127. Minister, surely you accept, however, that at the moment there is a great deal of debate about the nature of with-profits products generally -- the terminal bonus system, lapse rates, and so on -- and all the key information on those issues has been analysed throughout by the Government Actuary's Department and it is spelt out extremely clearly in the service level agreement that information on all of those matters has been going to the DTI when it was the insurance regulator, to the Treasury when it was the insurance regulator and now to the FSA. Do you not accept that there is now a public interest in opening this up and getting a better quality of information to inform those debates which are now going on? (Miss Johnson) I am sure there is a public interest in better information and we do support better information for consumers and have done a lot to address that. I will not go through any of what we are doing because it is, in a sense, tangential to the point you are making but what is appropriate in these circumstances is to see what is being identified as recommendations or issues arising out of the FSA report and to tackle those, because they should be the most important issues which we need to address out of the circumstances surrounding Equitable Life. Clearly, just on the with-profits point, the FSA and Sir Howard himself said, I believe when he was here, that they would be looking further at with-profits. He has certainly since made a speech in Wales on this subject indicating that the FSA will be looking further at with-profits policies. Chairman 128. Arising out of that, given that the role of the Actuary's Department has changed with respect to insurance companies, do you think there really is a continuing role for the Actuary's Department in its present form? (Miss Johnson) Yes, because they provide us with cost-effective and independent advice. There are a number of key statutory roles that they carry out and they are a major supplier of actuarial advice across government. It does not make very much sense to fragment that across government: it makes sense to hold it in a central, specialised resource given the nature of their work. It would cost government a lot more to have that work done by the private sector on an ad hoc arrangement than via the Government Actuary's Department. 129. You mentioned in answer to an earlier question I asked about contracting out that this was not only allowed but it happened. Can you give us an example of where a government department has contracted out actuarial services? (Miss Johnson) I know in one or two cases, for example, the Inland Revenue have used non Government Actuary's Department actuarial advice for some work they have been doing on one or two occasions. Obviously I am not aware across government - and I do not think you are really expecting me to be - where this is happening more widely but I know of that because it interrelates with work that is being done for me. 130. Would any of your officials be able to help on that? (Miss Johnson) I very much doubt it. 131. Finally, what about overseas work? Are they allowed to make profits on that? (Miss Johnson) Well, they are allowed to fully recoup all their costs associated with it. As you are aware, they do a small but significant proportion of overseas and outside work. I think that helps them to offer opportunities of an actuarial kind in terms of professional development which otherwise might not be available and strengthens the organisation in terms of its experience. Generally speaking, we are very comfortable with the work they do on all of that. 132. What is the reason for not allowing them to make a profit? (Miss Johnson) Basically because it is public sector and it is the rules under which the public sector operate. There could be questions about the competition law and in Europe presumably on state aid as well, conceivably, if there was an organisation that was basically public sector but which was going out on another basis and making a profit. 133. That does seem a little bit odd in view of the discussion we are going to have in a few moments' time about the Royal Mint, which does seem to be in a similar situation? (Miss Johnson) Those are the rules that have operated for the Government Actuary's Department, certainly and Michael Swan, who is responsible for the Government Actuary's Department on the Treasury side, is saying that the difference is that there is a trading fund for the Mint and it is via the trading fund arrangements that the Mint is on a different footing. 134. On the question of recruitment, apparently the Government Actuary's Department is having problems recruiting staff at the moment. Is that correct? (Miss Johnson) I think the evidence I have seen which has been sent to you indicates a declining problem on recruitment and retention, in fact. 135. Is there a way round this problem, that you can see? (Miss Johnson) It is always the case that, where people are trained and there is a high degree of training and there are high rates of pay to be had outside the organisation, there will be a certain attrition rate from within the organisation to outside, because people as they become trained and it is a lengthy period of training to become an actuary, become very valuable commodities and can be made offers that the public sector cannot compete with. Having said that, the analysis that has been sent to you shows a growing convergence between the public and private sector in the Government Actuary's Department in this regard in terms of turnover of staffing. I believe that we do not have a significant issue of any kind to address on this: we always keep this in mind and I am sure the Government Actuary's Department are keeping in mind in the way they are recruiting and retaining people, but there is not a significant issue on this at the present time. There was one a couple of years ago, as I think the figures show. Judy Mallaber 136. I would like to return to this question of client confidentiality and whether that can mean that we do not have some of the information that might be of assistance in looking at what is happening. Relating to the minimum funding requirement introduced by the Pensioners Act in relation to the Maxwell pension scandal, it was rather puzzling to us that it was the Institute and Faculty of Actuaries that took the lead in reforming minimum funding requirement rather than the Government Actuary's Department giving advice to what would have been I think the DSS. When we questioned the Government Actuary's Department on that, he speculated that maybe they had not been asked to do it because they would not have had the same acceptance from the profession, in that they would have been seen to be giving advice behind closed doors because of client confidentiality between themselves and a government department, as it would have been. Is there any reason, however, why, on a matter of developing public policy such as this, the Government Actuary's Department could not give advice in public in order to enable there to be a debate and then for the government department to reach its decisions with us knowing what Government Actuary's Department were doing? It appeared they had not been asked to do the work but that it had been given to the professional organisation and that might have been solely because of client confidentiality. (Miss Johnson) It would be for me to speculate on the reasons why the DSS decided to go to the Faculty and Institute of Actuaries, except for the obvious reason: clearly they are the lead professional body in actuarial matters so it does not seem prima facie an unreasonable decision on the part of the DSS to decide that that is where they are going to get their advice on this particular issue. Clearly, the Government Actuary's Department were involved via the Faculty and Institute of Actuaries' involvement in it and involved in other ways. They clearly played a role and it is in their capacity as advisers to the DSS. 137. But, in principle, subject presumably to having to change that constitutional arrangement relating to client confidentiality, would there be any reason that would stop GAD from being asked to give advice on the development of a policy issue to a government department and for that advice to be made public? Is there any constitutional reason why it could not operate in that way? (Miss Johnson) I do not think there is any reason why Government Actuary's Department could not have been asked to do the DSS work; the DSS simply decided to ask the Institute and Faculty of Actuaries and that was the choice they made. I do not think that this issue is a significant issue in this kind of context. 138. Would you have any difficulty in the Government Actuary's Department's advice to you being made public? What would be the areas where you felt it could be made public and the areas where you felt it could not be? (Miss Johnson) It is a question of giving their advice in terms of analysis rather than policy. I think there is a difference there which we need to bear in mind. 139. Are there any areas where their analysis should be kept secret rather than being in the public domain? (Miss Johnson) It depends on the contractual relationship. If they have one, just as anybody else who is going out and getting a service, there can be reasons why that client or person does not want that advice or that analysis to be made public, and it is up to the client then whether the advice is made public. Where the client is government and it is an analysis, I do not think in many cases that that would cause a problem if it had been sought in a general way to inform policy. We do not normally go through the process of revealing the details of policy formulation in a public arena: probably select committees are the nearest place in which such issues get discussed but, as you are aware, it is perfectly normal in government for the finished policy to be submitted and it is only where there has been engagement through public consultation or processes like that where government decides to release the information about the way in which that work has been done and the results of the consultation, for example. 140. In this case, the Government Actuary's Department would be giving you technical advice on the issue and that would be why you were seeking their advice in that client relationship. Can you give us any indication of the circumstances in which you think it would be unhelpful for that technical analysis to be made public? I would have thought it would usually have helped inform our understanding of the decisions of the government? (Miss Johnson) I am sure many matters might inform people's understanding of the decisions of government but it is typically the case that the underlying information and advice that goes into the final policy decisions is not a matter of public property: nor, indeed, is it envisaged to come under the Freedom of Information legislation. Chairman: Thank you very much.