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The Actuary The magazine of the Institute & Faculty of Actuaries

A personal view - from the president of the Institute of Actuaries

I am writing this on the morning after my President’s Dinner, held in Staple Inn Hall. It was attended by the minister for pensions, Stephen Timms MP, and many distinguished guests from the City, other professions, and the world of higher education. We were fortunate to have as the guest speaker Adair Turner, chairman of the Pensions Commission. In my welcoming remarks, I observed that radical reform of the UK pension system is firmly on the agenda, as we await the second report from the Pensions Commission later this year. It is not an exaggeration to say that over the next few months the shape of the UK pensions scene could be set for a generation to come. I went on to comment that there is a perfect opportunity, early in a new parliament, when the Pensions Commission report is published, for the government to take a long-term view, to plan ahead in a rational and statesmanlike way, and to take some difficult and possibly unpopular decisions.

The UK actuarial profession has made a significant contribution to the work of the Pensions Commission, as Adair Turner acknowledged in his speech. Indeed, his very first talk on the subject was given at Staple Inn at the invitation of the profession back in September 2003, when he discussed the macroeconomics of pension provision.The Commission’s first report, which analysed the current state of UK pensions, was published in October 2004. It concluded that the system is too complex, unsustainable, and not fit for purpose.

The Social Policy Board, on behalf of the profession, responded in writing to the consultation aspects of the report. We were generally supportive of the analysis but commented that the use of ‘point estimates’ of future investment returns in the commission’s macro-model of future pension contributions and retirement incomes unhelpfully masked the uncertainty in the eventual outcomes. Reference was also made to the profession’s recent work on equity release and a consumer understanding of risks. Subsequently, I joined Social Policy and Pension Board representatives at an oral hearing with the three members of the commission to discuss our response.

One of the areas the commission has highlighted is the uncertainty around estimates of future longevity. Indeed, in a recent lecture at Cass Business School, Adair Turner expounded his views on the fundamental difference between ‘quantifiable risk’ and ‘unquantifiable uncertainty’, an interesting distinction which we might all want to adopt as part of our communication armoury. He has been working with the Government Actuary’s Department to get a handle on just how wide the ‘unquantifiable uncertainty’ in estimates of future longevity might be. His conclusion seems to be that it will be very wide indeed – a case of an ‘uncertain uncertainty’!

In the past two months there has been a flurry of activity, starting with the well-attended sessional meeting in May, ‘Is there a retirement savings crisis?’. A large number of you also responded in June to my invitation to email responses to four specific questions that the commission had asked. There was a large majority in favour of a basic state pension, financed on a pay-as-you-go basis from taxation, at a level sufficient to eliminate most means testing in old age, coupled with strong ‘encouragement’ by government for additional private provision. Similarly, a large majority favoured some form of built-in automatic adjustment of retirement ages to reflect changes in expected longevity. The question about how to provide cost-effective products for the lower paid in a low interest rate environment proved to be a harder nut to crack.

Meanwhile, Adair Turner held, at his request, a special double-headed meeting with representatives of the actuarial profession. The first part covered investment issues, including estimates of future investment returns, the risks in equity investment, and whether they reduce the longer equities are held, and the equities vs bonds debate.

I am told that a ‘lively’ discussion took place! The second part covered longevity issues, including the uncertainty referred to earlier in this article, the likely future supply and demand for annuities, and whether the government should issue longevity bonds.

It is clear that we have, as a profession, been active in contributing to the national debate on reform of the UK pension system. One speaker at the sessional meeting in May referred to a previous contribution to a national debate on pension reform nearly 60 years ago. Sally Grover, the profession’s librarian, kindly researched this for me, and I was able to include in my speech last night a couple of quotations from the paper published by the Councils of the Institute and Faculty, which was entitled ‘An Appeal to Statesmanship’. The language is that of the 1950s but the sentiments are as relevant today as they were then:

‘Pensions are different from any other problem with which Parliament has to deal. Promises of pensions are given now but the cost of their fulfilment grows through the years into the distant future and an unexpectedly large proportion of the future national income can become committed. The voice of the future is noticeably absent from present discussions: our responsibility as actuaries is to make that voice heard.

‘We recommend the setting up of a National Pensions Council – an authoritative and independent body to guide the country through the financial, economic and technical aspects of this peculiarly difficult problem. Ultimate decisions must rest with Parliament but only after thorough and quiet examination by an independent body.’

I particularly liked the word ‘quiet’ in the final sentence. Compared to our raucous world of 2005, the 1950s were obviously a gentler era!