Bristol Actuarial Society

Archive of Past Reports

- Pensions - Joint Meeting with Birmingham Actuarial Society (16/6/1999)
- New Education Strategy (12/5/1999)
- Visions and Values(16/3/1999)
- Pensions Ombudsmen (17/2/1999)
- Pensions Debate (27/1/1999)
- Financial Reinsurance (3/12/1998)

- Return to BAS Main Webpage

SHP + SSP + MFR = BAS^2

(Summary of the joint meeting of the Bristol and Birmingham Actuarial Societies held on 16th June at Eagle Star, Cheltenham.)

As we all know, the Government is proposing some major changes to UK pensions provision. The meeting covered three of the most important areas of change:

Stakeholder Pensions

Tim Gordon (Bacon & Woodrow) led us through the major items in the green paper "A New Contract For Welfare : Partnership In Pensions". In particular, the maximum charging structure caused some debate. There are certainly tough times ahead for pensions offices.

Second State Pension

The government’s plans for the replacement for SERPs were presented by Terry Simmons (PricewaterhouseCoopers). Terry’s presentation covered how the phasing in of the new Second State Pension will happen. The result is that there will be a gradual redistribution of pensions from the higher to the lower earners.

One particular area of interest was contracting out of the new state scheme. Showing that the benefits in a final salary scheme exceeded those in the reference scheme structure would be more difficult to establish after the proposed changes. We are likely to end up with bands of members in scheme where contracting out would not be advisable. This may have to lead to a re-think of scheme design, with money purchase underpinning possibly coming more to the fore.

Minimum Funding Requirement

The review of the minimum funding requirement caused most debate at the meeting. Michael Clare (William M Mercer) presented his views on the subject with great gusto. Whilst the subject matter was complex (especially for non-pensions actuaries, such as myself) the presentation and debate which followed were very interesting.

Michael questioned some basic actuarial principles concerning investment risk and matching. There seems to be a lot of hard thinking for the profession to do in order to come to a universally accepted minimum valuation standard.

Overall it was a very useful and interesting meeting.

New Education Strategy - Elisabeth Goodwin and John Bennett

(12th May 1999 - Bacon and Woodrow, Bristol)

Lis and John came to Bristol to discuss the new education strategy and to receive feedback on the first sitting of the new 200, 300 and 400 series exams.

There was a wide ranging discussion that included:

• A discussion on the forthcoming 100 series exams and the allocation of exemptions based on success in A-D exams and on univeristy course work.
• Discussions on the possible reintroduction of Associateships for exams up to and including the 300 series
• Concerns over the amount of time pressure in the exams
• Concerns over some of the core reading for the new subjects (in particular 304)

BAS Meeting: Vision and Values by Paul Thornton, President of IoA

(16 March 1999, CMG Ltd, Bristol)

Paul came to present the main topics in his recent paper (Vision and Values) and to generate debate on the proposals within it.

His focus was on the shape of the profession in 2020, which is sufficiently far into the future that some radical ideas and changes will be appropriate.

The debate covered all the topics in the paper (which will not therefore be repeated here), and those that generated the most divergent views were:

• to what extent should actuaries seen to be representing the public interest ? Is the ‘public interest’ a well defined term and do we run the risk of getting involved in politics ? Many speakers felt that the profession should speak out (eg pensions mis-selling) when it was ‘obvious’ that the public interest was at stake, and that although this may conflict with the wishes of employers, it would also strengthen the position of actuaries working within those companies. The converse view was that the range of valid views on most issues was so wide ranging that a clear public interest position could not be reached and therefore it would be unhelpful for the profession to take a stance with which many of its members disagreed.
• what is the best way of getting into wider fields and should we necessarily be experts in those fields ? There was general agreement that actuarial skills have wider applicability and value that is currently not appreciated. However, the present set-up of the exams, and the high standards that we hold, deter many from entering wider fields and put off future candidates who could see the actuarial profession as a stepping stone. There was dis-quiet about reducing the intellectual barrier to entry, although this in itself prevented achieving a wider fields role.

These give a flavour for the lively discussions that ensued. Greg Campbell managed to both keep the slides in the correct order and to document the points that were made to feed into the Vision and Values document.

All in all, a thought provoking and entertaining evening (and continued in the dining club afterwards).

Role of the Pensions Ombudsman

(17^th February 1999)

Mark Grant of Cameron McKenna gave this talk to the Bristol Actuarial Society on 17 February 1999. The audience consisted mainly of pensions actuaries and selected guests from the legal profession, and the meeting was chaired by Andrew Udale-Smith.

Mark is the author of a new book about the Pensions Ombudsman entitled "The Pensions Ombudsman: Powers, Procedures and Decisions". He works in Cameron McKenna's specialist Ombudsman Unit.

The talk started with a little gentle scene-setting, explaining how the post of Pensions Ombudsman was first established in the early 1990s, and that it was fairly uncontroversial until Dr Julian Farrand took up the position. The Pension Ombudsman's main role is to deal with cases of injustice caused by maladministration. "Maladministration" has no statutory definition, and is not limited to administration in the usual sense. This has implications for pension scheme advisors as well as administrators.

The Ombudsman's decisions can be appealed on a point of law to the High Court; recently Dr Farrand has had some setbacks in the High Court, but he can claim seven successes out of seven cases taken to the Court of Appeal.

Mark then moved on to consider maladministration by act uaries. He noted a trend towards naming more and more respondents in Ombudsman cases, including actuaries, lawyers, etc. Essentially, anyone with deep pockets is at risk of being included. Although few such cases have yet made it all the way to a deter mination, Mark discussed two examples where actuarial firms had been found liable and were ordered to pay compensation.

The talk concluded with consideration of what practical steps actuaries could take to reduce their exposure. The importance of written a dvice and of keeping meeting notes was stressed. "Passing the buck to lawyers" was also said to be helpful, at least from the actuary's perspective! Mark advised the audience to consider "best practice" in the eyes of the Ombudsman when designing scheme procedures in areas such as death and ill-health benefits, prevention being better (and usually cheaper) than cure.

"UFO’s more believable than receiving state pension" *

(27^th January 1999, Axa Sun Life, Bristol)

The Bristol Actuarial Society held a popular debate on Wednesday 27 January with over 80 actuaries and pension professionals from local organisations attending.

The motion debated was "This house believes that Government should only provide pensions for those in need". Joanne Hindle, a well known pensions expert and the Director of Pensions Development at NatWest Life proposed the motion, whilst Chris Daykin, the Government Actuary opposed. Richard Moore, a partner at Bacon and Woodrow chaired the debate.

This subject was particularly topical since the Government published a Green Paper on Partnership in Pensions in December.

The debate concentrated on whether the government should just provide means tested pensions for those in need, or provide a basic level of pension for everybody (i.e. the Basic State Pension), irrespective of need.

Key points that came up included:

• State welfare will always be needed, provided by the state via redistribution from the rich to the poor.
• There is however another form of redistribution. Redistribution from one time in our lives to another. This is purely individual in nature, and does not require state involvement.
• A scheme only for those in need would have the advantage of
• Eliminating some of the financial thresholds which can remove the incentive to save
• Providing an individually funded pension which
• • Increases the sense of individual ownership
  • Allows individuals to benefit from investment income
  • Benefits economy as a whole though increased investment
• Focusing welfare spending on those areas of greatest need
• A central scheme for all would however
• Have low unit administration costs
• Provide opportunities for redistribution between rich and poor
• Not be degrading to the recipient, unlike some means tested benefits
• Provide cohesion and social solidarity
• At the end of the debate the motion was put to the vote. 25 members of the audience were for the motion, 39 against (with the rest abstaining); confirming that there was a role for the government in providing pensions for more than just those in need.

(* In a survey in the US, more individuals believed in UFOs than believed that they would benefit from a state pension)

 Dr Fin Re's Case Book

(3^rd December 1998, Clerical Medical, Bristol)

 This was a ‘learner session’ on financial reinsurance and successfully covered both the basic concepts and some of the very recent developments.

Financial reinsurance was presented as a service, rather than a product, which re-organises cash flows to the mutual benefits of both parties. The characteristics of a typical arrangement are:

• A cash advance by the reinsurance company.
• Re-payment of advance from specific part of surplus until all repaid.
• Interest rate typically linked to LIBOR.
• Term of agreement is 5-7 years
• If no surplus then re-insurer does not get paid.
• Repayment of advance does not show as a liability in HMT returns, but advance shows in assets.
• No/minimal impact on EV.

Uses of financial reinsurance include relief of new business strain, improved tax treatment of expenses and smoothing of the cost of annuity guarantees.

A very topical and interesting topic was the securitisation of NPI. Bonds have been issued on the stock market via a vehicle (a charity) in Dublin. The bonds are very long term (15 - 25 years) and the interest payments are being met from the management charges on in-force business. Because the stock market is very risk-averse on bonds, the coverage of expected surplus over interest is high. In addition there is a ‘reserve fund’ such that if the surpluses start to fall below a pre-determined level then money must be paid into the fund, which can be called on for future interest payments. This level of security has enabled the bonds to be issued a very attractive (to NPI) rates of interest.

Dick went on to illustrate that the cost to NPI could be made lower if the re-insurer acted as a guarantor of the interest payment (e.g. Swiss Re has a AAA rating), thus relieving the need for a reserve fund.

A key area for future development is to relieve the fluctuating nature of guaranteed annuity rates. However, there is a real cost in these instances which should ultimately be borne by the insurance company - it is not a re-insurance against an unlikely event.

John and Dick emphasised the need to consider the wider picture for any particular arrangement. For example, is there any risk of problems elsewhere in the company (law suits, unreserved for risks) which may endanger the solvency of the company, and the GAD should be included early in the discussions so they are happy with the proposals before too much progress is made.

Questions were asked throughout the presentation as well as at the end (e.g. ‘why do re-insurers seem to have so much money ?’), which all contributed to a very enjoyable and informative evening.