The UK’s Government Actuary’s Department (GAD) is something of an unusual entity. Although constituted as a government department, it functions within the public sector as an actuarial consultancy firm run on commercial lines.
It generates fee income by providing actuarial advice to both the public and private sector. Fees charged to clients fund more than 90% of its work, which since a management review in 1989, notably include the government itself. From this work, it is expected to recover almost all of its costs. But recently it has been tough going financially for the GAD with the transfer of its insurance monitoring business to the Financial Services Authority (FSA), the UK’s principal financial regulator. According to the GAD’s 2001/02 annual report, the transfer has “impacted significantly” on its gross and net outturns. Total income has dropped from £7.3m (e11.1m) in 2000/01 to £5.9m in 2001/02. In spite of this, the department has still managed to operate within the financial targets set by the government.
Financial independence has meant that the organisation receives only a very limited budget, controlled by parliament, to cover its core activities. These consist of the department’s occupational pensions and life expectancy statistics. With 30 fully qualified actuaries within the department and around 35 trainees, as Chris Daykin, the government actuary and responsible for running the department explains, “there are actuaries in public sector roles in many countries, but nowhere else is there such a strong concentration of actuaries within a government department and nowhere else do these actuaries advise on such a comprehensive range of topics”.
Principally, the GAD’s remit is to provide actuarial services to the public sector in the UK in pensions, social security and demographic areas. More than 50% of the GAD’s work is for central government, mainly the Cabinet Office, Department for Education and Skills, the Department of Health, the Department for Work and Pensions (DWP) and the Ministry of Defence. In theory, the GAD’s services also extend to the regions, but in practice, “we’ve never done much work for local government”, comments Daykin. On pensions, it advises on policy, regulation and supervision, within which its predominant area of activity is occupational pensions. More recently, it has been involved in, amongst others, the development and implementation of the new civil service pension scheme, launched in October 2002; aided the review of provisions of the Armed Forces Pensions Scheme and helped major public service pensions schemes select stakeholder pensions and additional voluntary contributions (AVC) providers. The GAD also continues to play a pivotal role in protecting the pensions of employees affected by Public Private Partnership (PPP) and the Private Finance Initiative (PFI).
Along with detailing population and demographic trends, the GAD also gives specialised advice on social security issues such as that to the DWP and the Inland Revenue on the financial aspects of national insurance benefits and contributions. It has statutory obligations to report on this annually, in addition to which it produces a five-yearly outlook on the long term prospects for the UK national insurance fund. These projections are themselves based on the GAD’s biennial population projections, which in turn form the basis for all public expenditure planning in the UK. A substantial proportion of the GAD’s work for central government also happens in relation to transfers of people moving out of the public sector under contracting out.
The NHS, research agencies and other bodies which lie within the public domain also use the GAD’s services; notably the Occupational Pensions Regulatory Authority (OPRA). The annual survey of occupational pension schemes produced by the GAD is principally used to advise both OPRA and government on such issues as the cost of pension benefits; scheme design and investment policy. The GAD’s 11th survey of occupational pension schemes’ preliminary results for the private sector are already out and it is due to produce a corresponding report on the public sector in early 2003.
The role and reputation of the GAD has meant its services have long since extended beyond the UK to overseas clients, no doubt says Daykin, facilitated by the relationship between the UK and the commonwealth. The countries in which actuarial advice has been provided are interestingly diverse. From Ireland to the Middle East; Mexico to Russia, the GAD provides advice on anything from traditional reviews of social security schemes; long-term financing of social security systems; public pension reform considerations to advising countries on regulatory infrastructure for pension funds who are seeking to move from pay-as-you-go to bringing in a funded component.
An area in which a lot of time has been spent with overseas clients is in insurance regulation. This has particularly been the case with countries seeking to join the EU, says Daykin. One such client is Cyprus who has been seeking to bring its regulation into accordance with EU directives; Malta is also being helped in the same direction as are a number of eastern European countries. In 1991, a major project was undertaken in Russia to create and develop an actuarial profession. “It was very important and exciting development to restart the profession after a gap of 80 years or so,” remarks Daykin. Specific actuarial training programmes were set up for graduates which currently run in four locations in Russia; responsibility for which now resides with the Russian actuarial society.
As abroad, although the GAD does provide actuarial services to the private sector, in the UK much of this work involves advising those with a previous history in the public sector. Ex-public sector organisations such as the coal industry, who the GAD now advises on its pension arrangements, illustrate well the type of non-governmental client that the GAD has, alongside small executive schemes. In all, the GAD provides valuations and advice on pension schemes covering some three million employees in the public and private sector. Although it is keen to develop its client range for non-governmental bodies, one must bear in mind, says Daykin, that the GAD is not resourced to take on a significant additional workload in order to compete with the big players in the field, who don’t specialise in actuarial advice only, but are multi-disciplinary consultancies.
Not discounting competitive forces, the actuarial marketplace has certainly been a frenetic environment to be in over the last few years. Changing legislation and the big pensions issues where minimum funding requirement (MFS); FRS 17 accounting standard and the switch from defined benefit (DB) to defined contribution (DC) have all made big waves across the pensions industry has meant that demand for actuarial services has been higher than ever. In turn, this has placed pressure on supply. As Daykin says, “we’re getting that sort of demand from our existing clients so there hasn’t been a necessity for us to go out and find lots of new clients”. Naturally, there are benefits to taking on more clients such as spreading overheads; providing income as well as giving broader experience to the GAD’s actuaries, says Daykin, but serving the needs of government organisations is principally what the GAD is all about, not “fighting for private sector business” against the big consultancies.
If the switch from DB to DC is something that the GAD is advising private sector clients on; its services have recently been required on the part-funding of schemes in the public sector. Subsequent to the first major review of the scheme for over 30 years, a funding component was brought into the principal civil service pension scheme in October 2002. Other public sector pension schemes are also undergoing reviews that could lead to “extensive restructuring” according to the GAD’s latest annual report. Yet, Daykin does not believe that a wholesale move from DB to DC schemes for the public sector is on the cards any time soon. “There are certainly pressures to have pensions schemes in the public sector subject to discipline in the way that applies to the funding sector and various ways are being developed to try and impose that discipline on the way in which contributions are determined. On the other hand I think Treasury doesn’t necessarily believe that it’s appropriate to impose the volatility that arises from market investment on organisations which are not investing in the market”.
Under the ‘fair deal’ policy for those who transfer out of the public sector, or their function is privatised, the department responsible for the people transferring out of the civil service has to ensure that the contractor taking on the work has in place a pension scheme that is “broadly comparable” to the civil service pension scheme. To smooth this particular path, the GAD issues ‘passports’ when the organisation taking over the work can demonstrate that they meet this comparability requirement. “For a wide range of possible groups of individuals we would pre-certify by issuing a passport of the particular scheme being offered so then they can go along to tender for a job and they already have a passport from the GAD”, explains Daykin. “If they don’t have a pre-certification then it has to be looked at each time they tender”. Demand for ‘passport’ certification of the pension arrangements of private sector contracts has continued to be strong, with more than 200 passports being issued in 2001/02.