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The Actuary The magazine of the Institute & Faculty of Actuaries
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Letters to the editor

Letter of the month

Misleading habits in pension analyses
The project team on retirement savings, suggested by Michael Pomery, could well consider several misleading habits adopted by politicians, advisers, the press, pension professionals, economists — and even some actuaries.
1 There cannot be a choice between ‘property and pensions’, the former is a method of investing, the latter a series of payments at retirement.
2 The ‘pension’ is payable from retirement, not the accumulated fund to provide the pension.
3 The yield on long-dated gilts or corporate bonds is only a current calculation, not the only rate for valuing future accruals.
4 The dividend yield on an equity is merely the dividend divided by the price; the market index average is still only a current calculation.
5 The practice of bankers and accountants to ‘mark to market’ should not be encouraged by actuaries and regulators for long-term future benefits.
6 Pension fund valuations/deficiencies relate only to current circumstances. Long-term discounting rates and future inflation are unknown and estimates or alternatives could provide a clearer picture.
7 A collapse in bond prices with a rise in yields (as mentioned before) could produce a rising surplus on a higher valuation rate of interest. A contradiction in circumstances. Recent deficiencies have been partly explained by the abnormally low yields following the Chinese investment of massive surplus dollars in US Treasuries.
8 There is nothing unsound in providing defined contribution pension benefits rather than defined benefit; actuaries need to ensure the employers’ and employees’ contributions are maintained or increased to give reasonable resulting pensions.
9 Finally, a plead to all actuaries to ensure that advisers, the press, politicians, economists, and pension professionals in all numerate percentage calculations know the exact definition of the 100% employed. I hope that these points may reach an effective target.

Kent Sandom
15 November 2009

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The writer of the letter of the month receives an iPod Shuffle and a £15 iTunes voucher kindly supplied by Hazell Carr

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Global cooling defended, The Actuary, July 2009
With reference to my previous letter and replies to it, I would like to give an update on the most recent position. The Hadley Centre has published an estimate of the Global Temperature Anomaly (GTA) for 2009, though I imagine that it may be subject to slight revision in 2010. I have again calculated smoothed values using the method of Herbert and Scott (2006), with formulae of length 21 which are exact on cubics and allow for four-year cycles. The Hadley Centre uses another method (a 21-point binomial filter), but its graphs show a recent decline in the GTA, similar to that shown by my method. For those old enough to have studied this subject in the actuarial examinations, I mention that the formulae I used are rather like Spencer’s 21- term formula. See the results (below).

Year GTA (crude) GTA (smoothed)
2004 .432 .4399
2005 .479 .4446
2006 .422 .4419
2007 .403 .4307
2008 .315 .4102
2009 .437 .3793

I shall confine myself to stating these facts and avoid entering a debate on the politics and economics of global warming (now often referred to by the uncontroversial term ‘climate change’).

William F. Scott
14 December 2009


The name of the game: Response to C. Mackie, November 2009
I was interested in the letter from Clive Mackie. Clearly, if we had included the word ‘chartered’ in the two names from the start, way back in the 19th century, that would have been fine. But to add the word now might give the outside world the impression that we lack confidence in ourselves and feel in need of the boost that ‘chartered’ might seem to give.

I think the key point is this. Professions that include ‘chartered’ in their name do so to distinguish themselves from similar professional bodies that are not chartered. Think accountants or engineers. So far as I know, there are no other actuarial bodies out there (in the UK), and so no-one saw any need to differentiate the Institute (or Faculty) from them.

One of my other fellowships is of the Royal Astronomical Society. They have a charter, but I don’t think there is any great pressure for a FRAS to be called a chartered astronomer. Some years ago, the Institute of Mathematics and its Applications established the status of Chartered Mathematician which fellows could use (for a fee). But the interesting point is this: they introduced the C.Math status even though the word ‘chartered’ does not appear in the name of their Institute.

If there were a perceived need for Chartered Actuary (C.Act? — or does that sound like an accountant?) status then presumably the Institute and/or Faculty could similarly arrange this for their fellows. I would not be very happy with ‘Institution’ which has pejorative overtones. An ‘Association’ or a ‘Society’ would be fine. However, any brand-new name throws away part of the long history of the two bodies, just one reason for preferring ‘Institute and Faculty of Actuaries’.

David Purchase
16 December 2009

The sad saga of Equitable Life: Response to D. Webber, December 2009
Donald Webber asserts that: “Equitable Life was actually destroyed by a well-meaning but totally flawed judgment from the Law Lords in 2000.”

“This judgment,” he says, “imposed on the Society a bonus policy...” Not so. The Lords did not impose a bonus policy; rather, it interpreted the policy documents. Key portions of the judgment are: ‘When policies such as the one now under consideration have been issued, the wide powers of allotment of bonuses conferred on the directors by article 65(1) have to be exercised in the light of those policies. The powers and the policies have to be read in conjunction.

‘The directors will not be entitled to exercise the powers for a purpose subverting the basis of the policies, fairly interpreted.’ And, ‘... the general discretion in article 65(1) is inadequate to justify such an adjustment of policy benefits.’ Mr Webber’s quarrel, it seems to me, is with the people who drafted the policies in the first place, not with the judges who declined to rewrite them.

Brian A. Jones
30 December 2009


Equitable Life: Response to D. Webber, December 2009
Don Webber in his letter called the House of Lords’ judgment in the Equitable case “wellmeaning but totally flawed”. Four years ago I wrote in The Actuary that ‘although the verdict had to be accepted in law it was an industry-wide travesty of actuarial justice’. In 1989, when sanctioning the Scheme of Merger between London Life and AMP, Mr Justice Hoffman, as he then was, stated that: “The court in my judgment is concerned in the first place with whether a policyholder would be ‘adversely affected’ by the scheme in the sense that it appears likely to leave him worse off”.

Would that Lord Hoffman had applied that concern towards formulating his opinion in the Equitable case. Would, also, that the Institute had come publicly to the support of those Equitable policyholders who had been grievously wounded by the judgment; a decade of confusion and misunderstanding, with nonsense talked about ‘over-bonusing’ and ‘black holes’ — even after the injustice had been inflicted the Equitable remained solvent — might have been avoided. So to what compensation are the wronged Equitable policyholders entitled? The sums taken from their asset shares to overpay GAR policyholders, of course, not a penny more; and I believe the Ombudsman’s report points in that direction. And who should meet the cost? Why, the taxpayers, of course, whose ‘protectors’, the House of Lords, inflicted the losses upon those so wronged. Nothing to do with events after 2000 and, especially, nothing to do with the GAD!

It is not too late for the Institute to take up this cause, and so to make a start to repairing the severe damage to the profession’s reputation, to which Don draws attention, occasioned by its squalid persecution of Equitable actuaries and its failure publicly to support GAD actuaries. The current ‘investigation’ into the latter gives the chance at least to right that wrong.

Brendan McBride
6 January 2010


Every actuary should be a man-made climate change sceptic: Response to T. Maynard, December 2009 December’s letter of the month draws attention to the flaws in relying on computer modelling for forecasting investment market behaviour.

On page 6, Trevor Maynard notes a range of forecasts in relation to climate change, including: “there is a 1% chance of temperatures rising by 20 degrees centigrade by 2200”. No reference is made to the fact that the forecasts are based on computer models, nor to the likelihood that many climate change influences are less understood than those of the investment markets.

What seems even more incredible to me is that, with no perceptible global warming over the last 11 years belying previous model forecasts, there are many still prepared to ‘believe’ further model forecasts 100 and 200 years ahead. Even investment market modellers don’t go that far! Combined with the admitted need by climate scientists to adjust the raw data, the reliance on computer modelling should make every actuary a climate forecast sceptic.

More importantly, we should also be sceptical of the claims that any perceived climate change is due mainly to human activity. There is little direct evidence of more than minor influence — the claims by alarmists rely largely on the spurious correlation of rises in CO2 levels with global temperatures in the period from 1976 to 1998. Unfortunately, CO2 levels have continued to rise (in itself not a problem because CO2 is not a polluting gas) while temperatures haven’t.

As IPCC lead author Kevin Trenbarth said in one of the ‘climate-gate’ e-mails, “The fact is that we can’t account for the lack of warming at the moment and it is a travesty that we can’t”.

Geoff Dunsford
8 January 2010