In which actuaries discuss mortality, monopolies and migration
The editorial team welcomes readers' letters but reserves the right to edit them for publication. Please email [email protected]. The deadline for receiving letters for the April 2012 issue is 16 March.
>Letter of the month:
Risky business
The writer of the letter of the month receives a £25 Amazon voucher
I was fascinated to read the piece on longevity risk in the Jan/Feb edition. I have been to a number of meetings at Staple Inn that talked about transferring longevity risk - in each case, the topic being promoted by people who wanted to generate 'trades'.
Longevity risk is a very unattractive risk to be stuck with. It's very long tail and, for someone accepting such risks, there is little chance to correct pricing later. So who might choose to be on the other side of the deals that the authors are promoting? Or, asking the question more precisely, on whose behalf might such risks be accepted?
Most investment funds are held indirectly on behalf of individuals who are either saving for retirement or have retired. For such people, a very major risk is a combination of their own longevity and the longevity of those around them (via the operation of annuity pricing). Therefore, the last thing that a 'know-your-client' exercise would suggest is that they should accept financial losses on derivative contracts when general longevity improves! I therefore have a problem with the ethics of this proposed market.
A very interesting partial solution to the longevity problem was put forward some time ago by Martin Weale, then of the National Institute of Economic and Social Research (NIESR). He suggested a tontine, whereby cohorts group together to take/share some of their own longevity risk among themselves, significantly reducing the need for insurance capital. The paper can be found by searching on Google for Annuities and Aggregate Mortality Uncertainty.
Martin White, 3 February 2012
>Response to Home thoughts or abroad?
I would like to reassure David Thomas about some of the concerns alluded to in his letter of 4 December to The Actuary.
That actuaries have been added to the UK Border Agency's shortage occupation list should not be a cause for concern for our members. We understand that many of the larger employers of actuaries lobbied the Migration Advisory Committee directly because the demand for actuaries could not be met. I believe that it demonstrates that the skills and talents of actuaries are in very high demand and that there are many opportunities for our members to excel in their careers.
UK member interests will not be sidelined in favour of those living and working overseas. The Institute and Faculty's strategy was developed following wide consultation with our members, as was published in June 2011. It clearly states that "We believe we should adopt a strategy of 'proactive engagement' for all our members". It goes on to say "We believe that the strategy will be of benefit not only to our members based overseas but also to our UK members, as it will protect the future of the Institute and Faculty in an increasingly competitive global environment".
Jane Curtis, March 2012
President, Institute and Faculty of Actuaries
>Widening horizons
Graham Fulcher suggests that there is a danger that reserving actuaries sit too much in their own cave. This is a thought that deserves generalisation with respect to today's much larger actuarial profession (compared with the one I grew up with a long time ago).
It seems to me that there has been a strong, if perhaps inevitable, tendency for many actuarial posts to become very narrowly specialised. In these circumstances, there must be a serious danger of too often lacking the perspective to distinguish the wood from the trees and not allowing for a wider world that is full of rapidly expanding funnels of doubt. If actuaries are to fulfil their potential to engage in risk management with a broader scope, they will need to become more comfortable with stepping outside the comfort zone of their narrow specialisation.
John Bishop, 9 February 2012
>A game of monopoly
Charles Cowling (Letters, Jan/Feb 2012) says that if pension scheme transfer values were fairer, enabling defined benefit pension rights to be sold at higher prices, then the risk of mis-selling would be reduced. This makes perfect sense. The higher the price, the less there is for the seller to complain about.
But, whatever the price, it is odd that the price is set on a take-it-or-leave-it basis by the only market-maker - the pension scheme trustees. Perhaps the problem isn't the people who set the basis. Perhaps the problem is the monopoly.
If pension-scheme members could sell their pension rights, either entirely or partially, to someone else, other than the trustees, then more views and more information could enter this peculiar market.
Members would then have a better chance of actually achieving fair value.
This is not about trust-busting. It could be stipulated that the proceeds of the sale would still have to be kept within a pension. Nor is it new. Schemes already have the means of enabling partial transfers. But, perversely, they oblige members to get divorced to effect them.
Owen Kellie-Smith, 9 February 2012
The editorial team welcomes readers' letters but reserves the right to edit them for publication. Please email [email protected]. The deadline for receiving letters for the April 2012 issue is 16 March.
>Letter of the month:
Risky business
The writer of the letter of the month receives a £25 Amazon voucher
I was fascinated to read the piece on longevity risk in the Jan/Feb edition. I have been to a number of meetings at Staple Inn that talked about transferring longevity risk - in each case, the topic being promoted by people who wanted to generate 'trades'.
Longevity risk is a very unattractive risk to be stuck with. It's very long tail and, for someone accepting such risks, there is little chance to correct pricing later. So who might choose to be on the other side of the deals that the authors are promoting? Or, asking the question more precisely, on whose behalf might such risks be accepted?
Most investment funds are held indirectly on behalf of individuals who are either saving for retirement or have retired. For such people, a very major risk is a combination of their own longevity and the longevity of those around them (via the operation of annuity pricing). Therefore, the last thing that a 'know-your-client' exercise would suggest is that they should accept financial losses on derivative contracts when general longevity improves! I therefore have a problem with the ethics of this proposed market.
A very interesting partial solution to the longevity problem was put forward some time ago by Martin Weale, then of the National Institute of Economic and Social Research (NIESR). He suggested a tontine, whereby cohorts group together to take/share some of their own longevity risk among themselves, significantly reducing the need for insurance capital. The paper can be found by searching on Google for Annuities and Aggregate Mortality Uncertainty.
Martin White, 3 February 2012
>Response to Home thoughts or abroad?
I would like to reassure David Thomas about some of the concerns alluded to in his letter of 4 December to The Actuary.
That actuaries have been added to the UK Border Agency's shortage occupation list should not be a cause for concern for our members. We understand that many of the larger employers of actuaries lobbied the Migration Advisory Committee directly because the demand for actuaries could not be met. I believe that it demonstrates that the skills and talents of actuaries are in very high demand and that there are many opportunities for our members to excel in their careers.
UK member interests will not be sidelined in favour of those living and working overseas. The Institute and Faculty's strategy was developed following wide consultation with our members, as was published in June 2011. It clearly states that "We believe we should adopt a strategy of 'proactive engagement' for all our members". It goes on to say "We believe that the strategy will be of benefit not only to our members based overseas but also to our UK members, as it will protect the future of the Institute and Faculty in an increasingly competitive global environment".
Jane Curtis, March 2012
President, Institute and Faculty of Actuaries
>Widening horizons
Graham Fulcher suggests that there is a danger that reserving actuaries sit too much in their own cave. This is a thought that deserves generalisation with respect to today's much larger actuarial profession (compared with the one I grew up with a long time ago).
It seems to me that there has been a strong, if perhaps inevitable, tendency for many actuarial posts to become very narrowly specialised. In these circumstances, there must be a serious danger of too often lacking the perspective to distinguish the wood from the trees and not allowing for a wider world that is full of rapidly expanding funnels of doubt. If actuaries are to fulfil their potential to engage in risk management with a broader scope, they will need to become more comfortable with stepping outside the comfort zone of their narrow specialisation.
John Bishop, 9 February 2012
>A game of monopoly
Charles Cowling (Letters, Jan/Feb 2012) says that if pension scheme transfer values were fairer, enabling defined benefit pension rights to be sold at higher prices, then the risk of mis-selling would be reduced. This makes perfect sense. The higher the price, the less there is for the seller to complain about.
But, whatever the price, it is odd that the price is set on a take-it-or-leave-it basis by the only market-maker - the pension scheme trustees. Perhaps the problem isn't the people who set the basis. Perhaps the problem is the monopoly.
If pension-scheme members could sell their pension rights, either entirely or partially, to someone else, other than the trustees, then more views and more information could enter this peculiar market.
Members would then have a better chance of actually achieving fair value.
This is not about trust-busting. It could be stipulated that the proceeds of the sale would still have to be kept within a pension. Nor is it new. Schemes already have the means of enabling partial transfers. But, perversely, they oblige members to get divorced to effect them.
Owen Kellie-Smith, 9 February 2012
The editorial team welcomes readers' letters but reserves the right to edit them for publication. Please email [email protected]. The deadline for receiving letters for the April 2012 issue is 16 March.
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