Examination of Witnesses (Questions 20-39)|
WEDNESDAY 10 JULY 2002
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.
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
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.
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 thatand, again, this was raised
in the Baird Reportthere 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 companiesit
is perhaps difficult to see how that would be proportionate and
efficient and really adding value to the protection policyholders
should enjoyI 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
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 atand,
again, we are consulting on this in our review of "with profits"
business more generallyis 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
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
35. Would you feel happy to make that available
to the Committee?
(Mr Daykin) Yes, certainly.
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.
1 Not printed. Back