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The Actuary The magazine of the Institute & Faculty of Actuaries

Pensions publicity crisis

In response to the article in the March issue, reader Victor Hughff writes from Norwich:

It is not a new experience for actuaries, or anyone else for that matter, to feel angry about ‘misinformation’ leading to misrepresentation by press feature writers. The problem concerns whether there is a danger that their writings will be taken seriously by anybody with significant influence in the field under discussion.

Probably it was right for the presidents to respond as they did by letter to the Financial Times on 17 February, but I would have liked them to draw attention to the futility of using current market prices as a basis for valuing assets held to cover long-term liabilities. That is where the attack on Goldman Sachs, rules for statutory solvency tests, and composers of screaming headlines should begin. That battle they could not win, and they have no reinforcements on which to call.

Surely there has never been a better time to discredit the market value of quoted securities as basis for valuation, other than in a fire sale. Simply plotting a graph of the All-share Index from the end of 1996 to January 2003 is enough to show how impossible it is to take seriously the suggestion that market prices on a particular day, or month, or year, can be used for assessing the ability to meet liabilities maturing ten, 20, or 50 years away. In seeking an alternative, Mr Plender might like to give his definition of ‘economic reality’ and ‘moonshine’.

I close by quoting from the Daily Telegraph (9 April 2003) concerning the L&G solvency waiver: ‘An FSA spokeswoman said: “We have invited applications because some firms’ regulatory solvency positions do not reflect their real position. This means the regulatory requirements may unreasonably constrain the firms’ ability to pursue their chosen investment strategy to the detriment of their policyholders.” The message is getting home in some places.