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The Actuary The magazine of the Institute & Faculty of Actuaries

Morris identifies clear choice for actuarial profession

Speaking to The Actuary on the day his interim assessment was published, Sir Derek Morris saw two very different directions which the profession might take in future.
‘One option is for the profession to concentrate mainly on its unique competence in relation to long-term liabilities and on its reserved roles. In this case, it may well find itself in difficult competition with others for services such as ALM and asset allocation advice, and it may ultimately contract’, he said. ‘The alternative, as the Australian profession appears to have done, is to develop the really valuable skills of actuaries in dealing with risk and uncertainty and to promote the application of these in a much broader and different range of contexts, supported by an independent oversight regime.’
‘There is a mood for change in the profession’, Sir Derek continued, ‘and I hope that my review can be a constructive influence in moving onto a different path within the next one or two years. The overwhelming majority of actuaries are capable and professional, but the review has identified serious problems in the profession which do need to be addressed.’
Several opportunities for change identified by the review are in relation to recruitment, education, and professional development. Sir Derek contrasted the careers followed by many of his economics students, ‘who use their education and training to go off to highly paid jobs in the City’, with the narrower focus of actuaries, ‘who have a knowledge of many of the same concepts’. He favours a close partnership with the universities to develop a more diverse profession with innovative education and development techniques supported by active research. ‘It should start with working actively with the four universities which already offer actuarial courses, including development of fast reliable tracks to qualification, which I would then hope to see other universities join in supporting.’
‘I am concerned at the relatively low proportion of those who embark on an actuarial career who eventually qualify’, Sir Derek added, ‘and I would like to see actuarial education add more value for those who do not stay the full course. The difficulties in the way of qualifying under present arrangements must be a deterrent for many promising potential actuaries.’
Interestingly, Sir Derek identified the relatively long history of the actuarial profession in the UK as a factor which was potentially a barrier to change. ‘There has been a tradition of following in the footsteps of predecessor actuaries in the traditional employers’, he said, ‘my impression is that the more recent development of the profession in countries such as Australia and Ireland has favoured more innovative approaches to research and education in those countries’.
Sir Derek identified the question of whether certain roles should be reserved for actuaries as one of the most interesting which his review had considered. ‘On the one hand, there is no other group who are so well placed to measure long-term liabilities’, he said, ‘but on the other reserved roles can reduce the incentive to embrace new and useful techniques for dealing with uncertainty, such as those of financial economics’. He acknowledged the relative vibrancy of actuaries’ contribution to the general insurance and investment fields where they have to compete with others, ‘but I do also see the value to regulators and society of being able to rely on professional standards and codes of conduct in life and pensions’, he added.
‘The review has identified four urgent change issues for the actuarial profession:
– standard-setting, including compliance monitoring and discipline;
– scrutiny of actuarial work and advice;
– innovation in education and professional development; and
– independent oversight.’
Sir Derek emphasised: ‘and the need for changes in relation to all of these had already been recognised by many actuaries themselves. I do hope that the review can lead to significant change in all of these areas in a short time’.
‘I hope the Financial Reporting Council will be considering oversight proposals in response to my assessment’, Sir Derek concluded. ‘The accountancy profession is larger in numbers, but the actuarial profession is of critical importance, and of course there are issues common to both professions which could best be dealt with by a single party.’

Sir Derek Morris is seeking actuaries’ reactions to the options he has identified at consultation meetings hosted by the actuarial profession on 17 January (in Glasgow) and on 24 January (in London) and the review team welcomes responses until 4 February 2005 to morris.review@hm-treasury.gsi.gov.uk.

Press comment
Prediction is easy, it is sometimes said, except when it’s for the future. The actuarial profession used to be regarded as a dull old business that made accountancy look interesting, yet in recent years it has managed to get its predictions so spectacularly wrong that all of us have been forced to sit up and take notice. The purpose of an actuary is to help pension funds, savings institutions and governments assess their long-term liabilities, which necessarily involves making certain assumptions about the future.
The charge sheet is damning. Most of them wholly failed to predict the downward path of inflation and interest rates during the 1990s, or its persistence. They also failed to allow for the collapse in the stock market and more generally they failed to question the prevailing orthodoxy that equities could be expected to provide healthy long term returns.
Independent (18 December)

George Bernard Shaw was right. All professions are conspiracies against the laity. The actuarial profession is a particularly fine example, if you believe Sir Derek Morris’s damning assessment published yesterday. Slow to adapt to change, opaque, inadequately scrutinised, poorly regulated and not properly held to account by its customers the charge sheet against actuaries is lengthy. The former Competition Commission chairman only just stops short of accusing the profession of sacrificing the public good to its own narrow self-interest.
Until now, it has largely escaped the brickbats thrown at other professions, such as accounting and the law. This is partly because it is so tiny just 4,500 people are fully qualified actuaries, having passed the fiendishly difficult exams.
It is partly because no one understands it. Actuaries are the anoraks’ anorak, speaking their own quaint statistical language and spending most of the time peering 30, 40 or 50 years into the future. Yet they stand at the heart of the financial system. To the extent that capitalism is about creating enough wealth to see us right in our old age, actuaries are the experts who are supposed to ensure the sums are got roughly right.
The Times (18 December)

The man in the hot air balloon shouts down to the man on the ground: ‘Where am I?’ ‘You’re in a wicker basket suspended from a hot air balloon’ comes the reply. ‘Are you an actuary?’ asks the balloonist. ‘Yes. How did you guess?’ ‘Because your reply was completely accurate and absolutely useless.’ Yesterday those of us who always suspected as much at last got confirmation. An actuary may have a brain the size of a planet, but when it comes to seeing beyond the end of their mortality tables, they have proved themselves about as good at spotting problems as, say, a financial journalist. A couple of jobs ago, Ruth Kelly asked the former chairman of the Competition Commission, Derek Morris, to take a look at the actuarial profession, and his report is a corker. Insular, inflexible, and often offering a false sense of security are some of his more printable conclusions.
Daily Telegraph (18 December)
What do you do if you are too boring to be an accountant? Become an actuary. That is the old joke, but the doings of actuaries do not seem quite so tedious when it is your pension or endowment that is going down the pan.
The profession, which has so far governed itself, is likely to be independently regulated for the first time, by the Financial Reporting Council, following the interim report into its conduct by Sir Derek Morris, commissioned by the Treasury in the wake of the Equitable Life disaster. In the past, actuaries seem to have escaped much public scrutiny, probably because people either do not understand or are not interested in what they do.
But the scale of the current pensions crisis is so great that questions finally had to be asked over their role. Actuaries are highly paid and highly educated, so how come they did not sound the alarm bells? Not only was Equitable run by three mathematically brilliant Oxbridge-educated specimens, all once respected by their peers, actuaries are also deeply implicated in the company pensions crisis engulfing Britain.
The Actuarial Profession, the number-crunchers’ lobby group, chose to stress the positive side of the interim Morris report yesterday mainly that it exonerates them for not forecasting the bear market. They chose not to dwell on the scathing criticisms, including the description of professional standards as weak, ambiguous and limited.
Daily Mail (18 December)

There is an inherent conflict of interest at the heart of the actuarial profession. Actuaries advise pension fund trustees as well as the sponsoring company. Actuaries will say that often these two groups want the same thing a healthy pension fund. But that view is rather out of date. Companies increasingly want to plug pension gaps by spending as little as possible, while trustees have a duty to ensure the scheme is well funded. An interim review of the profession by Sir Derek Morris, published on Friday, pinpointed this conflict but suggested little to resolve it.
The Morris review, set up after Lord Penrose’s inquiry into the débâcle at Equitable Life, contains some damning criticisms of the actuarial profession. It says actuaries are too insular and inflexible, offer opaque advice and are not necessarily best placed to advise on asset allocation. Actuaries have been criticised widely for not predicting the fall in inflation and interest rates in the 1990s and for recommending too heavy a reliance on superior equity returns. To be fair to actuaries, they were reflecting the prevailing orthodoxy in the investment world at the time.
Predicting the future is a black art and involves a great deal of uncertainty. Actuaries must give insurers an estimate of future liabilities, based on longevity projections. While this can be nothing other than a range, insurers demand one number to fit into their financial reports. Clients have expected too much of the numerate boffins who make up the actuarial profession and who, crucially, have not dissuaded them from this view, appearing to provide certainty where there is little.
Financial Times (20 December)
ACA to respond ‘constructively’ to interim assessment report
The Association of Consulting Actuaries (ACA), the body that represents actuaries working as consultants, has welcomed the acknowledgement in the Morris Review of the Actuarial Profession Interim Assessment Report that there is a healthy, competitive market for actuarial services in the United Kingdom. The ACA also welcomes the positive comments made by Sir Derek Morris about the dedicated contribution made by actuaries, but says it will map out in greater detail and in a constructive way its disagreement with some of the criticisms made of actuaries in the report in the next phase of consultations.
Ahead of the Interim Assessment Report, the ACA submission to the Morris Review had noted that over the past 15 years the number of firms of consulting actuaries has more than doubled (to more than 75 firms) and the number of consulting actuaries, measured by ACA membership, has more than trebled. No fewer than 25 different consulting firms provide actuarial services to the ‘largest 750 occupational pension schemes’, many more providing services to smaller schemes, with trustees and scheme sponsors free to switch advisers with some ease, given the choice available in the market. There is fierce competition in the market for consulting services these days and many trustees now have formal processes in place to review advisers regularly and these are usually rigorous.
The ACA chairman, Adrian Waddingham, added: ‘The commercial market requires actuarial consulting firms to have strong quality control to satisfy clients, including trustees and sponsoring companies. Yes, there are areas where actuaries could do better notably in explaining our role and limitations across the range of our work. These issues are being addressed by developments within the profession and in parallel actions being taken by consulting firms.’
‘We want to examine in detail what the review has to say about insufficient transparency in actuarial advice and the suggestions that there is inadequate scrutiny, challenge, and market-testing of actuarial advice by users. I suspect many of our members will disagree with the conclusions here there may be serious extra costs involved for users in the proposals but we will be open-minded in our appraisal of the conclusions.
‘On the issue of the “lack of clarity” in respect of accountability of actuaries to the wider public interest, referred to in the interim assessment, consulting actuaries well appreciate the importance of ensuring their advice is professionally balanced. For instance, in the area of pensions this involves trying to resolve amicably the aspirations of employers, trustees, and members. In the main, this has worked well to the satisfaction of all. But, actuaries, like any other professional person, have a contractual role that they must perform, providing that this must also square with the law of the land. Consulting actuaries are well aware of the dangers of conflicts of interest and are very careful in addressing situations as they arise.
‘Our initial thoughts are that, of the three alternative models of regulation outlined in the interim assessment, the model of “independent oversight” is certainly favoured, but we will take a lot of persuading that the Financial Reporting Council is the appropriate body, given its prime responsibilities are to regulate a quite different profession.’