Examination of Witnesses (Questions 1-19)|
WEDNESDAY 10 JULY 2002
1. Can I welcome you, Mr Daykin and Mr Tiner
and your colleagues. Perhaps you could, for the sake of the shorthand-writer,
formally identify yourselves?
(Mr Daykin) Yes. I am Chris Daykin. I
am the Government Actuary.
(Mr Young) I am Andrew Young, Deputy Government Actuary,
with main responsibility for social security policy and pensions
(Mr Tiner) John Tiner, Managing Director, Financial
(Mr Hewitson) William Hewitson, Senior Actuarial Adviser
2. Mr Daykin, following the transfer of responsibility
for actuarial advice from the Actuary's Department to the FSA,
what is your relationship now with Appointed Actuaries in the
(Mr Daykin) We do not have any continuing relationship
with the Appointed Actuaries or the industry.
3. None at all?
(Mr Daykin) No.
4. When we last looked at the work of the Government
Actuary's Department, the Faculty of Actuaries told us, and I
quote: "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" the Faculty said "where that role will lie in
future, once the insurance division of GAD" (the Government
Actuary's Department) "has been absorbed into the FSA . .
." So where does that role lie now?
(Mr Daykin) I think it lies with the FSA. The actuaries
who were dealing with those issues at the Government Actuary's
Department transferred to the FSA on 26 April last year, and with
them went the function of advising the FSA on actuarial matters.
So all matters relating to the supervision and regulation of the
industry and relationships with actuaries in the industry now
fall to the FSA.
5. So the relationships are the responsibility
of the FSA, is what you are saying?
(Mr Daykin) Yes.
6. Do you think that vision of that role
is being fulfilled at the moment?
(Mr Daykin) I think that is really a matter for the
FSA; because we were advisers to the FSA, it was always their
primary responsibility to relate to companies and to their advisers,
and, now that the function of advice has passed within the FSA,
GAD has not been asked to be involved in that. It would be open
to the FSA to seek our advice and our involvement, but they have
not done so, to this point.
7. Now, in your Spring Report, you say that
part of your work involves "assessing and advising on the
regulation of the insurance industry, mainly for non-UK clients".
Has your ability to undertake that work been eroded by the fact
that you are not involved directly yourself in the regulation
of the insurance industry in the UK?
(Mr Daykin) Not in real terms, because we still have
a team who are dedicated to providing that service, it is a small
team, but even in the past it was only a small part of the work
that the insurance team carried out, and, in some respects, it
is easier for us to advise other regulators, now that we are no
longer so closely associated with advising the UK regulator.
8. And what proportion of your work is this?
(Mr Daykin) A very small part. We have two qualified
actuaries, out of the 30 qualified actuaries, are engaged in insurance
regulation work full time.
9. And when you do this, do you consult
the FSA's actuaries?
(Mr Daykin) No, it is nothing to do with the FSA.
10. It is a matter for you. Now, Mr Tiner,
the FSA told us previously that when you were taking in, in-house,
the actuarial advice that was previously provided by the Government
Actuary's Department, you did intend to take a new approach to
the regulation of life insurance; can you set out for us, very
briefly, what that new approach is?
(Mr Tiner) Yes, Mr Chairman, certainly. We have really
taken a new approach which is based around the approach we are
adopting across the FSA for all firms, which is what we call a
risk-based approach to regulation. In the context of the insurance
industry, that means that we are, as we speak, in fact, doing
risk assessments of the major UK life insurance firms, looking
at the risks they run, how they manage those risks, how they are
managed, what their corporate governance is like, and so on and
so forth, and, of course, the actuaries are an integral part of
that risk assessment process. So I would say the role of the actuaries
with us, in fact, has broadened out, beyond just looking at the
regulatory returns, to a more active role in engaging with the
insurance supervisors in looking at the risks of the insurance
11. Are you able yet to say what benefits
that is bringing?
(Mr Tiner) It is quite early days, and we are in the
midst of these risk assessments; but I would say that, over the
last year, our actuarial team, led by William, have been very
heavily involved in many of the day-to-day regulatory insurance
issues that come up, as part of the team that is contributing
towards the decisions we have to take. So I think the early signs
are very positive.
12. And what about my initial question,
does the Senior Actuarial Adviser have a relationship with the
Appointed Actuaries similar to that previously enjoyed by the
(Mr Tiner) I will ask Mr Hewitson to answer that in
a minute, because he is our Senior Actuarial Adviser. Certainly,
from my perspective, Mr Hewitson does have that relationship with
the Senior Actuaries, Appointed Actuaries, of the large insurance
firms; it goes beyond him, of course, to some of his colleagues,
and, indeed, I would say that, although I am a non-actuary, I
probably see quite a bit of those Appointed Actuaries as well.
But, Mr Hewitson, why do you not have a stab at that?
(Mr Hewitson) Yes, indeed. I think the relationship
between myself and the other actuaries at FSA, and Appointed Actuaries
of life firms, indeed, continues and, if anything, deepens; we
also have, of course, ongoing dialogue with the actuarial profession,
of which we are all members, and our more formal meetings that
take place on a regular basis between members of FSA and the actuarial
profession, discussing various policy initiatives. And then, at
the supervisory level, on individual firms, if anything, it has
been broadened out, so that it is not just actuaries talking to
actuaries but there is much more emphasis now on developing relationships
between the supervisors and supervisory managers at FSA and the
Chief Executive and other senior managers within insurance firms.
So, I think, if anything, the relationships are deepened and broadened
since we have joined.
13. Mr Daykin, you say, in the introduction
to your Report, that fee rates have had to increase by more than
inflation; can you just expand on why that was?
(Mr Daykin) In principle, we would expect fee rates
to go up in line with earnings, rather than inflation, since they
are driven largely by salaries; we have tried, however, for a
number of years, to keep the increases to within consumer price
increase levels, as a courtesy to our customers and to try to
keep the value for money for our public sector customers. Last
year was a really exceptional year for us, because of the transfer
of about 20 per cent of our staff to the FSA, one-third of our
qualified actuaries, so it really changed the whole dynamic of
our finances. And, in order to be sure that we could remain within
the net resources voted by Parliament, we had to increase our
fees by more than the rate of inflation last year, but we hope
that will not be required on a regular basis.
14. What sort of rate did they go up by?
(Mr Daykin) I suppose, by about 10 per cent, on average,
across the board; it varied according to grade.
15. Have you had any squeals of protest
from your customers about that?
(Mr Daykin) None at all, because, actually, our fees
remain significantly below the consultants that we are competing
with, which, for the most part, are going up considerably faster
16. You could have raised them by more then?
(Mr Daykin) Possibly; we are trying to be good value
for money for our public sector customers.
17. Your Report quotes a very wide remit,
in respect to pensions, it talks about ongoing and wide-ranging
consultancy advice to the public sector, the near public sector
and the private sector. Can I look at the private sector first;
how many private sector schemes do you advise?
(Mr Daykin) I think it is only about four or five;
these are mostly schemes that at one time were connected to the
public sector and have moved into the private sector, they include,
for example, the rump of the Coal Board scheme and the new scheme
for workers in the coal industry, and the Industrial Training
Board. So I think the number is small and we do not compete actively
in the private sector market, our focus is on public sector schemes.
18. So when you say in the introduction
that you have now got significant opportunities to develop new
clients, you are talking about public sector clients, are you?
(Mr Daykin) We are actively looking for public sector
clients and international work with Government; so the focus of
our work is very much Government and public sector orientated.
19. What sort of international contracts
are you after?
(Mr Daykin) We have worked with a number of Governments;
some of them are reviews of pension schemes, or social security
schemes, we have done a risk and reserve analysis for the Mexican
healthcare, social security organisation, we have been advising
on pension reform and transformation of pension systems in a number