Administration and expenditure of the Chancellor's departments, 2007-08 - Treasury Contents


8  The work of the Government Actuary's Department

Background

140.  The Government Actuary's Department (GAD) was established in 1919 and continues to operate as an independent actuarial consultancy working within Government but operating on commercial lines.[170] GAD has four main branches of actuarial work: pensions; social insurance; life insurance; and general insurance. It offers actuarial advice to UK public sector as well as overseas clients.[171] As at 31 March 2008, GAD had 96 staff members including 42 qualified actuaries.[172] On 30 September 2007, Chris Deakin retired from the post of Government Actuary. His successor, Trevor Llanwarne, joined the Department on 1 May 2008 from PricewaterhouseCoopers.

Financial Performance and Reporting

141.  GAD is a repayment department which relies on fee income to cover most of its expenditure. One ongoing challenge for the Department is the maintenance of its fee income. During 2007-08, overall sales by GAD fell by 4% compared to 2006-7, largely as a result of reduced demand for GAD services from UK public sector clients.[173]

142.  Mr Llanwarne admitted that GAD had been losing market share and suffering a decline in income. There were, however, signs of recovery:

the income for the first six months [of 2008-09], which you will not have received yet, shows we have turned the corner and it is going up again because we are focusing on what the client is specifically asking without whatsoever reducing the quality of what we do.[174]

143.  One impact of the drop in income during 2007-08 was that GAD's net operating costs increased 70% from £396,000 in 2006-07 to £672,000 in 2007-08. The Department was also obliged to submit a supplementary estimate in February 2008.

144.  The supplementary estimate submitted by GAD assumed income of £12,906,000 for 2007-08. By 31 March 2008, GAD had in fact generated only £10,093,000 of income. When challenged on the discrepancy between the income level forecast in the February 2008 estimate and actual income achieved by the end of March 2008, Kevin Down, Director of Finance at the VOA, suggested that the estimate included an amount of headroom. He suggested that the substantial discrepancy between the estimated income and the actual income simple reflected a historic tendency to build in 'headroom': stating that the level of "headroom is historic".[175]

145.  We are concerned that the Government Actuary's Department's estimated net expenditure position deviates so far from its actual outturn. We do not accept that the Department is justified in building in 'headroom' of some £2.8m (38%). We recommend that GAD reviews its supply estimate process and improves budgeting to ensure the validity of forecasts and estimates laid before parliament.

Staff Management

146.  In its 2007-08 Annual Report, GAD disclosed that resignations and retirements in the Department had "affected … service in some areas".[176] This is an area the incoming Government Actuary, Mr Llanwarne, recognised as requiring attention. He reassured us that as at October 2008 staff numbers had increased from 96 to 105 and following changes in the HR Department, GAD were "now having absolutely no problems getting recruits coming in".[177]

147.  One key factor in staff retention and morale is the management of staff performance. We note that bonus payments increased 61% to £37,00 in 2007-08. Kevin Down revealed that this increase reflected the move by GAD towards a performance-related bonus system. He stated that:

Previously every member of staff in the Department received a bonus of the same amount so it was a very small bonus. We changed that to a performance-related bonus … In previous years, which was not performance related and made no sense at all … What we did last year was to change the system to make the bonuses performance related so they actually relate to staff performance.[178]

148.  We are concerned to note that prior to 2007-08 the Government Actuary's Department were operating a bonus system which made no reference at all to performance. We recommend that the Government ensures that bonus payments are performance-based and of a reasonable scale.

Miners' pensions valuation

149.  The Mineworkers' Pension Scheme and British Coal Staff Superannuation Scheme together include £27bn of assets and have 350,000 members between them.[179] There is ongoing controversy concerning the valuation of these pension schemes. The most recent GAD valuation, of 2005-06 identified a £1.9bn surplus in these schemes. Under the terms of the privatisation of British Coal, the surplus is subject to redistribution to both members and the Government. Since 1997 it is reported that the Government has received £3.5bn in cash.[180] However the Government is the guarantor of these schemes and is bound to repay funds required to satisfy the liabilities of the scheme as they crystallise.

150.  There are those, such as pensions consultant John Ralfe, who contest the method of valuation used by GAD.[181] They argue that if alternative valuation methods are employed the scheme appears to be in deficit and thus represents a liability for the British Taxpayer. As a relatively recent appointee, Mr Llanwarne admitted that he had not been involved in the valuation of the miners' pensions but he maintained that:

There is not one unique number as to what the surplus is or not. What is critical about this pension scheme is that the way in which the valuation is done is set out in specific legislation relating to it as to what you do, how you calculate the surplus and it is reasonable to do that because, unlike the private sector, where it is absolutely critical that you get things in balance between your assets and your liabilities, this one has the underlying government guarantee which makes it quite different. When someone asks whether the surplus is this or that, I will say to you that if you do your calculation on one basis you get that surplus, if you do your calculation on another basis you might get another surplus or a deficit.[182]

151.  We note the controversy surrounding the valuation of miners' pensions and recommend that the Government Actuary's Department issues a statement addressing the risk of future liabilities being faced by the ultimate guarantor of these schemes, the UK taxpayer.

Equitable Life

152.  The Parliamentary and Health Service Ombudsman issued her final report in July 2008[183] which identified GAD as falling short of acceptable standards. Her determinations in respect of GAD's actions appear in the table below. Table 5: Extracted determinations of the Parliament and Health Service Ombudsman
that the failure, as part of the scrutiny process, to question and seek to resolve questions within the Society's regulatory returns for each year from 1990 to 1993, related to (i) the valuation rate of interest used to discount the Society's liabilities and (ii) to the affordability and sustainability of the Society's bonus declarations, constitutes maladministration by GAD
that the failures, when the introduction of the Society's differential terminal bonus policy was identified as part of the scrutiny of the 1993 returns, (i) to inform the prudential regulators about the policy, (ii) to raise the matter with the Society, or (iii) to seek to identify what the rationale was for the introduction of the policy and how it was being communicated to policyholders, constitutes maladministration by GAD;
that the failure, as part of the scrutiny process, to question and seek to resolve questions within the Society's regulatory returns for each year from 1994 to 1996, related to (i) the valuation rate of interest, (ii) the affordability and sustainability of bonus declarations, (iii) apparently arbitrary changes to the assumed retirement ages, and (iv) the holding of no explicit reserves for the liabilities associated with prospective liabilities for capital gains tax, for pensions mis-selling costs, and for guaranteed annuity rates, constitutes maladministration by GAD
that the failures (i) to ask for the information GAD needed in respect of the Society's 1995 returns to enable them, as part of the scrutiny process, to be sure that the Society had produced a valuation that was at least as strong as the minimum required by the applicable Regulations, and (ii) to pursue the information before them that the omitted information had led to the users of the returns misconstruing the financial strength of the Society constitutes maladministration by GAD;

Source: Parliamentary and Heath Service Ombudsman, Equitable Life: a decade of regulatory failure HC 815-V, 16 July 2008, Part 5, para 6.4

153.  When questioned on the potential risk to GAD's reputation resulting from the Equitable Life report, Mr Llanwarne was adamant that GAD's reputation had not been tarnished, stating:

Firstly, I do not feel it will have any impact. Secondly, we have done surveys of our clients in the few months I have been here and it is not coming out whatsoever as an issue. One of the points which is perhaps worth tabling on this is that nobody in the Department as it is was involved in doing the insurance work that related to whenever it was done. That is not to imply any criticism whatever; it is simply a matter of fact. Purely as a matter of fact, that does significantly help in terms of our relations with our current clients. We are not hitting any problems whatsoever.[184]

154.  We note the Government Actuary's equanimity regarding the impact of Equitable Life on the reputation of Government Actuary's Department. We hope that GAD have learnt lessons from its involvement in Equitable Life and will reflect on the findings of the Health Service Ombudsman.




170   Government Actuary's Department, Our History, www.gad.gov.uk  Back

171   Government Actuary's Department, Departmental Report and Accounts 2007-08, HC 615, July 2008, p 2 Back

172   Ibid., p 2 Back

173   GAD 2007-2008 Annual Report, p 14 Back

174   Q 141 Back

175   Q 149 Back

176   Government Actuary's Department, Departmental Report and Accounts 2007-08, HC 615, July 2008, p 13 Back

177   Q 130 Back

178   Q 130-132 Back

179   John Ralfe, Financial Times, 14 July 2008 Back

180   John Ralfe, Financial Times, 14 July 2008 Back

181   Ibid. Back

182   Q 137 Back

183   Parliamentary and Health Service Ombudsman, Equitable Life: a decade of regulatory failure, HC 815, 16 July 2008 Back

184   Q 146 Back


 
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