Letters from this month
Creative counting
On 24 February, The Institute of Health Equity at UCL published Health Equity in England: The Marmot Review 10 Years On, which made various statements regarding life expectancy trends in England during the past decade. One was that, because life expectancy improved “year on year” during the 20th century, this should have been expected to have continue without interruption.
This is arguable, to say the least. Much as we would wish medical developments to come along with the regularity of Number 8 buses, and much as we would like increasing obesity, pollution, type 2 diabetes and so on not to impact our health and longevity, actuaries know it doesn’t work like that.
The Institute of Health Equity at UCL has, in the past, demonstrated its creativity with statistics. In 2017, it issued a report that said there were ‘120,000 unnecessary deaths’ as a result of austerity between 2010 and 2017. This was calculated on the basis that, had the improvements in life expectancy in the period immediately before 2010 continued to 2017, then there would have to have been 120,000 fewer deaths. However dubious the figure, it immediately became an internet meme and was widely quoted, particularly in the run-up to the 2019 General Election.
As experts in demography – particularly life expectancies – actuaries should take an active interest in research such as this, and respond when necessary to ensure any ensuing debate has the right balance. I believe this is compatible with the Actuaries’ Code and is in the public interest.
James Roberts
5 March 2020
Illustrating the point
I would like to make the point that policy illustrations at a life insurance policy’s point of sale are misleading. The key figures on the illustration are expressed in pounds sterling, whereas the operative figures should be in terms of real purchasing power.
I have used the Financial Ombudsman Service’s final decision letter DRN8874505 and invoked the Actuarial Working Party report into mortgage endowments. This report was dated in 1999 and applied to endowments which commenced in 2000. The case of DRN8874505 commenced in June 2000.
The Working Party’s two key quotations are:
1) An 8% investment return is commensurate with an inflation rate of 4.5%
2) A 4% investment return is commensurate with an inflation rate of 0.5%.
The 4.0% difference necessitates a comparator of (1/1.04)25, as the requisite case was for a 25-year term. This comparator equals 0.38.
DRN8874505 quotes the possible surplus and the possible shortfall on the illustration.
An 8% return results in a surplus of £16,400.
A 4% return results in a shortfall of £12,300.
The surplus reduces to £6,232 after the application of the comparator – less than the shortfall of £12,300.
The illustration is highly misleading as it shows a possible surplus in excess of the possible shortfall. After the comparator the surplus is less than the shortfall.
Life offices must comply with contract law. This case should have been upheld on the grounds that the illustration was misleading – overplaying the possible surplus.
Anthony Pepper
11 March 2020
Long-term financial economics: Time for a debate?
During the last 15 years or so, challenging the applicability of ‘financial economics’ to long-term entities such as defined benefit (DB) pension schemes has been seen as heretical for UK actuaries. Indeed, in a recent sessional paper, the author’s favoured reference papers all took that as established. However, there is no evidence whatsoever for this. One aspect that is totally ignored is ‘path dependence’, which really matters, as opposed to taking just one year at a time. That might help explain why the British Actuarial Journal literature has appeared so one-sided.
Tackling the commonly adopted approach has been hard, and many actuaries have just accepted what they were told – a clear example of groupthink. In my own way, I am one of the few UK actuaries to have tried to examine the evidence (discrate.com).
Three years ago, the UK actuarial profession had the opportunity to explain why the current DB funding system is unfit for purpose. That chance was wasted, and we are now faced with an even worse version.
The UK profession should schedule a debate as soon as can be arranged. If evidence can be produced supporting the applicability of ‘financial economics’ to long-term entities such as DB pension schemes, that would be welcome; I don’t think there is any.
Jon Spain
16 March 2020