Select Committee on Treasury Minutes of Evidence

Examination of Witnesses (Questions 20-39)



Kali Mountford

  20.  Just following on the issue of overseas work, I notice from your Report that you are an associate member of the International Network of Pension Regulators and Supervisors. Can you tell us a little bit more about what is going on there, because it is a relatively new membership, in 2000?
  (Mr Daykin) The body was only formed in 2000, so essentially we were there from the start. The International Network of Pension Fund Regulators and Supervisors grew out of the OECD, originally, and has been set up now as an independent network, serviced by the OECD, bringing together pension regulators from around the world, Opra, from the UK, are members, and we are also, because we are advisers to regulators. So we have been keen to participate in that sort of network, both in order to keep informed of what is going on and what international thinking will be, and also because it is an opportunity to meet with and network with potential clients, internationally, in the pension fund regulation area.

Mr Plaskitt

  21.  Returning to the public sector that you advise, you work with both funded and unfunded schemes, what is the principal demand coming to you at the moment from the unfunded schemes, where are they looking for advice and support?
  (Mr Daykin) The large public service schemes are all, in their different ways, going through issues of reviewing the benefits structure, reviewing the way in which they are handling their finances, because, although they are unfunded, they all operate in slightly different ways, in terms of the way the costs are expressed to employers, and so we find a whole number of reviews have been taking place. The Civil Service scheme is introducing a new set of options for civil servants, from later this year, and similar issues are being debated in other schemes, such as the Armed Forces and the Police scheme, and so on.

  22.  Are you involved with any schemes that have been winding up their final salary options, and, again, what are they coming to you for?
  (Mr Daykin) I think, in general, public sector schemes have not been thinking of winding up their defined benefit options; in the case of the Civil Service, there is an intention to introduce a defined contribution alternative, but not to remove the defined benefit scheme, and I think that is the case generally in the public service.

  23.  Are you finding that the recent falls in the stock market are increasing the amount of advice that these schemes are coming to you for?
  (Mr Daykin) It does not affect these unfunded schemes directly, and, I think, even in the funded schemes that we advise, we have a tradition of taking a long view, and we would certainly encourage our clients to think long term and not to be overly perturbed by short-term movements in the stock market.

  24.  Do you think there are any pension funds, on the basis of your evidence, using the falls in the stock market as an excuse to wind up schemes when it is not really necessary, or, at least, that is not a sufficient reason?
  (Mr Daykin) It is certainly a factor which I think is being taken into account by employers. The fact is that not only do the balance-sheet effects of the fall in the stock market come home to roost more quickly, as companies are thinking about implementing FRS17, but also I think there is a bit more pessimism now about the rates of return that might be obtainable in the future, as compared with what might have been the case a few years ago, and that will increase the perception of cost. Many employers have enjoyed contribution holidays for a number of years; for the most part, they are now coming to an end, so the cost, in cash terms, is increasing. And all of that is adding pressure to employers to consider whether or not to maintain a defined benefit scheme, and is part of the equation which is leading some to fold up those schemes.

  Chairman: I am going to turn to the role of Appointed Actuaries now.

Mr Cousins

  25.  Really, this is for you, Mr Tiner. The Financial Services Authority recently proposed some fairly considerable changes in the status and role of Appointed Actuaries in insurance. I wonder if you could just tell the Committee why you thought those changes were necessary, and when they are likely to be implemented?
  (Mr Tiner) Yes, certainly. We were encouraged to look at the role of the Appointed Actuaries in the Baird Report, but, in fact, we felt that we should be looking at the governance arrangements that surround insurance companies anyway, because of what we had learned from the way in which insurance companies operated and also because we were moving towards a regime which applied common fundamental principles across all types of firms. And one of the principles that sits at the heart of our regime overall is senior management responsibility, and we think this is a very important tenet of our regime. And we think that, in insurance firms, that responsibility, which, in fact, has always been there, although it has been enhanced somewhat by the Financial Services and Markets Act, needs to be reinforced, and, in particular, boards of insurance firms, whilst, of course, they have responsibilities to their shareholders, they also have a responsibility, a quite clear responsibility, to treat their policyholders fairly as well. And we feel that they need to have direct responsibility for the valuation of the fund, for bonuses that are declared, for the general risk management of the balance-sheet, and so on and so forth, and that really they are not able to distance themselves from that responsibility. The Appointed Actuary was a sort of unique sort of oddity, if I can put it that way, in the context of governance of all the firms that we regulate, in that the insurance industry has this particular role established in law, which does not exist elsewhere, and yet it seems to us that the business of insurance companies, with one exception, is not so different from other activities that we regulate as to warrant a completely different system. The one area which is different, in insurance firms, is within `with profits' funds, where there is discretion which is reserved to the board, and we have felt that it was appropriate, therefore, to maintain the Appointed Actuary position to have responsibility for how that discretion is exercised, and to have a responsibility to policyholders in respect of that discretion. But, beyond that, we think that the actuary has a terribly important role to play in a company's governance, in advising the board and in doing the analyses that support all decisions the board need to take. So what we put in the Appointed Actuary's place, for all the other functions the Appointed Actuary had, was an actuarial "controlled function," which has a particular meaning within the context of our Approved Persons regime, under the Financial Services and Markets Act, if anything, I think that will enable actuaries in insurance firms to have a broader, more prominent role and that they will be more engaged, if you like, I think, with the decisions of the board. So we do not think that we have weakened in any way the actuarial input, our view is that we have strengthened it. So that is a rather long-winded way of explaining how we have got to where we have got to. Of course, now, we proceed to consult; what we have done, to date, is to put, if you like, this idea, this notion, into the marketplace. The process now is to develop the rules, which will implement the idea, on which we have to consult, under the Financial Services and Markets Act, and we will take input on that over a period of three months. We will listen to that consultation, we will read the responses and then implement the rules, as they emerge. So I would expect that we would have this new regime sometime perhaps in the middle of next year, having gone through those disciplines.

  26. The structure, as you have outlined it, does place the actuary, with regard to `with profits' funds, as being very much the servant of the policyholders, but, in terms of the broader actuarial function, the servant of the board, or the society, depending on whether it is a mutual or a shareholder; now do you see any conflict between those two, rather distinct sets of obligations?
  (Mr Tiner) I do not think I do, simply because, firstly, the boards, in both cases, have a formal responsibility to policyholders, and, in the case of `with profits' funds, they differ in one important respect, which is this discretion that they are allowed to utilise, in terms of smoothing payouts to policyholders, which, for example, in a unit-linked fund, is not present. The unit-linked funds are a much more transparent and open product. And so the risks to policyholders, I think, are less, from the point of view of the governance of the organisation, they may be just as high in market risk terms, compared with a `with profits' fund. So my own feeling is that the balance we have struck between `with profits' business and non-profit business is sort of responsive to the risk to policyholders in those two lines of business.

  27. The Sandler Review, which was published yesterday, creates a new style of `with profits' fund, which, if I can summarise it in this way, involves the remutualisation of `with profits' funds within either company or mutual organisations. In the context of that, do you not think that there is a potential source of conflict between the management and the actuarial advice to those funds and to the management and the actuarial advice to the structure as a whole?
  (Mr Tiner) No, I do not think I do. I think that perhaps for two reasons. Firstly, the interests of policyholders and the interests of shareholders, under Mr Sandler's proposals, are quite clearly separated now, as we move from the 90/10 fund to a 100/zero fund, and so I think that inherent conflict within the fund is eliminated, because simply the fund pay expenses to the shareholder interests, if you like. Secondly, Mr Sandler proposes there be quite clear and transparent disclosure of both smoothed and unsmoothed asset shares; so, in other words, policyholders and their advisers are able to see the impact of the use of discretion. This is now going to be a very open issue for advisers and policyholders; so, whereas in the past that discretion was hidden to the policyholder, it is now going to be in the open, and so, therefore, I think that the system we have proposed works actually quite well in the new environment.

  28.  Your own proposals for the general nature of actuarial advice that is available to insurance companies involves independent review; who could supply the means of that independent review, who could judge whether there were conflicts of interest between the actuaries' responsibility to policyholders and the actuaries' responsibility to the organisation as a whole?
  (Mr Tiner) Again, in our document, we have not come out firmly, at this point, on what the independent review might mean. What we think is that—and, again, this was raised in the Baird Report—there is a role, from time to time, for the work of the actuary to be subject to an independent review, perhaps by an actuarial consulting firm, or someone like that, in the way that perhaps auditors look at companies' accounts. However, I think our feeling is that, rather than having that mandated as a systematic process, every year, all insurance companies—it is perhaps difficult to see how that would be proportionate and efficient and really adding value to the protection policyholders should enjoy—I think we see that we might utilise that more as a "skilled persons" review. So where we believe that there is a reason to look at the judgements of the Appointed Actuary, or perhaps at the judgements and the advice which the actuarial function has provided for the board, then we might ask a firm to go and look at the assumptions that have been made about growth rates.

  29.  That is something you might ask?
  (Mr Tiner) We might ask; yes, absolutely. We might call for it, in the same way that we might call for a firm of accountants to look at the finances of a particular company, or the systems and controls.

  30.  Would this be publicly known, that you would ask for this?
  (Mr Tiner) No.

  31.  It would not?
  (Mr Tiner) No.

  32.  Would it be known to the policyholders?
  (Mr Tiner) No. All of these types of reviews, which I am describing, under this what we call the "skilled persons" regime, is a matter between the regulator and the firm, and it is quite a routine thing, it is just a normal part of the supervisor and firm relationship.

  33.  Do you visualise policyholders, either in existing or Sandler new-style "with profits" funds, being able to appoint their own actuaries, that might be independent and different from the actuaries that were appointed to the firm as a whole?
  (Mr Tiner) One thing that we are looking at—and, again, we are consulting on this in our review of "with profits" business more generally—is how policyholder representation on the board, in some way, can be strengthened, if you like. And one of the ideas that we have floated is the idea of a "with profits" committee, who would have particular regard to the interests of policyholders, and it may well be that that committee, if they were dissatisfied with how things were being handled, could themselves appoint a separate reviewer of the work of the actuary; but that is still, again, all in the melting-pot at the moment.

  34.  Mr Daykin, were you consulted about these proposals, do you have any views about them?
  (Mr Daykin) No, we were not consulted. We did submit a memorandum in respect of the issues, Paper 5 of the "with profits" review, because we thought the issue of the future role of the Appointed Actuary was quite important, from a public interest perspective.

  35.  Would you feel happy to make that available to the Committee?
  (Mr Daykin) Yes, certainly.[1] But I think the FSA did not take much notice of it.

  36.  They did not?
  (Mr Daykin) No.

  37.  Are you surprised by that, because, after all, you were responsible for, if you like, the independent function, under the old system, prior to your people going over to the FSA?
  (Mr Daykin) Well, indeed; but I do not have any particular locus now, and I think the FSA, by their own admission, in the feedback statement, did say that most of the comments had been in favour of keeping the Appointed Actuary system, but they had decided to abolish it.

  38.  Mr Tiner, why did you reject it?
  (Mr Tiner) Well, reject, that is too strong a term.

  39.  Not pursue the advice that was given to you by Mr Daykin?
  (Mr Tiner) We had quite a number of responses to the paper to which Mr Daykin refers, and some argued for the complete abolition of the Appointed Actuary role and relying entirely on the senior management responsibilities, others argued strongly for the status quo; we have got something of a hybrid, I think, in those two. It is true to say that most of the responses argued for the status quo, but we worked through these very carefully. I would not say we just dismissed them, we thought through the issues to do with policyholder protection, the issues to do with the consistency with our regime overall and the level playing-field between firms, and we felt that the system we propose, in fact, enhances policyholder protection and, at the same time, is consistent with the overall approach, and that is just an overall view we have come to.

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