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The Actuary The magazine of the Institute & Faculty of Actuaries

Ian Farr

Timothy Bramham: First, congratulations on being appointed chairman of the Association of Consulting Actuaries (ACA). Can you tell us about your background and why you became an actuary?
Ian Farr: From my early teens I had always been interested in the world of business and had thoughts of becoming a chartered accountant. At about the age of 15 I first heard about actuaries. It was explained to me that actuaries applied mathematics to business, particularly in the fields of insurance and pensions, as compared to accountants who were more involved with applying arithmetic in the world of business, particularly auditing. You have to remember that this was in the early 1960s. And so I became one of the last cohort of actuarial students who joined the profession straight from school walking through the portal of Scottish Mutual’s head office in Glasgow in 1966. I qualified as an actuary in 1971. My ‘university’ was being posted by Scottish Mutual to London in 1972 as the London actuary my predecessor was Fraser Low and my successors were Harvie Brown, Ron Amy, and Robert Birmingham with my bosses 450 miles up the road in Glasgow. I advised group defined benefit schemes and met a whole raft of young actuaries, many of whom are now among ‘the great and the good’ of our profession. In 1980, I joined Friends Provident to head its operation in the Republic of Ireland, and had a happy time there serving, for a short period, on the council of the Society of Actuaries in Ireland. I was drafted back to Friends Provident head office in Dorking in 1983 to manage the group pensions department. In 1987, having been a life office executive for 15 years, I decided on a change of career and applied to R Watson & Sons to become a consulting actuary, as over the years I had always enjoyed that type of work more than the executive/managerial role. Much to my surprise, I was given a chance, and I am still there in what is now Watson Wyatt mainly advising trustees of UK pension funds, from the modest in size to the very large.
For those who do not know, can you explain briefly what the ACA is and what role it plays?
The ACA was formed in 1951. Its main role is to represent the interests of consulting actuaries and this will often mean the interests of the clients we serve. Of the 4,500 fellows currently practising in the UK, about 1,500 are members of the ACA, employed by consulting firms. The Faculty and the Institute are the Actuarial Profession; the ACA is effectively the ‘trade body’ for actuaries working for consulting firms. ACA can therefore lobby government on some actuarial issues on which the profession cannot, owing to the latter’s role as a professional body. Generally, the ACA and the profession will provide advice to government on the same issues. While the approach will often be similar, sometimes it will be different because of the different roles of the two bodies. It is important, therefore, that the profession and the ACA remain closely in touch with each other, which we do through half-yearly meetings of the two presidents and the chief executive of the profession and the chairman, honorary secretary (Keith Barton) and honorary treasurer (Stuart Southall) of ACA, as well as informal regular contact.
A significant activity of the ACA is the holding of sessional meetings to discuss current topics of interest (which qualify for CPD for members). Each year there are normally eight held in London, at the St Ermin’s Hotel, two in Birmingham, and one each in Edinburgh, Glasgow, Leeds, and Manchester. The meetings are from 5.30pm to 7pm, followed by drinks and dinner. At some recent London meetings, we have had more than 200 members attending.
What will be the focus of your chairmanship?
In recent years, a lot of emphasis within ACA has been on the pensions front. But we operate through a widely representative committee system, with committees on general insurance, life assurance, investment, international matters, accounting standards, and on different aspects of pensions. ACA relies on many willing volunteers to serve on these committees who give freely of their time.
I would like ACA to offer more to consulting actuaries who operate in the fields of life assurance, general insurance, and investment, and I shall be working with the chairmen of these committees to that end. Also, I intend to follow up the good work of my predecessor, Adrian Waddingham, in providing a forum for consulting actuaries in small firms. There has of course been a large increase in the number of small consulting firms in recent years, which is an interesting and welcome development. That’s my internal focus on ACA externally, the focus will be to influence government, in a non-political way, in areas where actuarial expertise is relevant.
Lord Turner commented, after the publication of his second report last year, that final salary schemes were ‘60% dead’. His proposed national pension savings scheme (NPSS) would be unlikely to reduce this figure; have we therefore seen the end of defined benefit pension provision?
Perhaps I can best answer your question by explaining ACA’s vision of the future pensions market in the UK.
The first tier of provision would be a simplified and consolidated state pension that meets essential living costs, increasing in line with national average earnings.
For the second tier, we recognise that many employers, particularly smaller ones, will want to use a defined contribution arrangement as the vehicle for pension provision to their employees. The proposed NPSS is one approach. Our main concerns are that:
– NPSS does not result in employers with currently far better pension schemes opting out of better workplace provision and simply leaving their employees to participate in NPSS;
– the issues concerning the choice of investing in assets with lower volatility and lower expected return or higher volatility and higher expected investment return are made much more clearly than has been the case to date.
However, our main contribution is to promote what we describe as ‘risk-sharing’ pension schemes. We have chosen that terminology, as defined benefit schemes are synonymous in the press with final salary schemes. Clearly there will be relatively few employers who will be able to afford 1/60ths final salary schemes in the future but there will be some. On the other hand, if government is not careful, it will find that eventually the vast majority of employees in the private sector will be shouldering 100% of the investment and longevity risk through participation either in NPSS or their employer’s defined contribution plan. We respect the role that defined contribution plans have to play but are they ideal for people with modest incomes? And what about the resulting polarisation between the private sector and the public sector where defined benefit schemes are still the norm? Would that be sustainable?
If government can remove some of the restrictions of current pensions legislation which apply to defined benefit schemes, and create a more positive environment for workplace pension provision, then encouragement can be given to the mid-size to large employers, which have closed their final salary schemes to new entrants (and in some cases to future accrual) and replaced them with defined contribution plans, to convert these new plans into risk-sharing schemes. Such schemes would provide benefits at a lower level than typical final salary schemes and share the investment and/or longevity risk with the scheme members. Of course, key to all of this will be the employer’s appetite for risk but a new environment, if the white paper’s deregulatory review is successful in getting some ‘quick hits’ in legislation, can start to be created. With the vast amount of publicity given in recent years to pensions, many employees now realise the value in employer pension provision and will appreciate, much more so than in the past, arrangements where they don’t have to take all of the risk. ACA has given the government proposals for some legislative ‘quick hits’.
Finally, if you were starting your career today, would you still become an actuary?
Most certainly, yes. Compared to when I started, the areas of activity are far wider. OK, there are others who operate in different parts of our work. But I believe that a profession has still got a lot to offer the public because of the standards it requires of, and the disciplines it exerts on, its members. Moreover, members of a profession have a sense of belonging to a community in which you respect your fellow practitioners and you do not want to let the side down. The actuarial profession is still small and its members benefit from this sense of community. I know of no finer profession than ours.