No. 229]

PRESIDENTIAL ADDRESS

by

A. E. BROMFIELD, M.A. Deputy General Manager of The Standard Life

Assurance Company

[Delivered to the Faculty, 21st October 1968.]

PERHAPS the most difficult task for me this evening is to find proper words to express the pleasure and pride I feel to be speaking to you as President of the Faculty. It is an honour which I treasure highly, and I may be forgiven a natural fear about discharging the duties of office up to the high standard set by previous Presidents. In particular, my immediate predecessor is in many ways a difficult man to follow, not least in his mastery of the spoken word. However, during my spell as Chairman of the Scottish Actuaries’ Club I was conscious to quite a startling degree of a spirit of encouragement and goodwill coming from the members towards the chair, and with the same warmth of support during the next two years I may hope to fulfil an acceptable period of office. Thank you, gentlemen, for the honour of election as your President.

By tradition, it is not required of a President that he shall speak on one particular subject, but if I were to give a title to my address this evening it would be “The Actuary in a Changing World". In preparing it, I have found difficulty in restricting myself purely to the professional or academic angle. We are, most of us, engaged in the business of life assurance and our training is used in that field. Indeed, the professional and business sides are almost inextricably mixed, and I hope it will be permissible for me to consider aspects which affect our day-to-day work, even although some of them may be less academic than practical.

For many years our profession was a sheltered one. To a great

extent we were free to manipulate our commutation columns without interference or undue criticism, and to construct statistical

2 Presidential Address

towers of considerable elegance and rather unnecessary detail on the basis of informed but fallible estimates. In business affairs, security was the major objective, and competition was perhaps more gentlemanly than unbridled. I do not suggest that all this was bad, but good or bad, the times have changed and are still changing, and no matter how we may murmur eheu fugaces, it is right that we should face openly the problems which a changing world outside is forcing on our profession.

I make no apology for beginning the survey with a subject which has featured in many previous Presidential Addresses, namely Recruitment to the Faculty. This must be of major interest to every President, and it has always to be considered afresh as con- ditions change. In his Presidential Address in 1958 Mr A. R. Reid gave a fascinating study of the membership statistics of Fellows and Students of the Faculty, and he has recently brought the figures up to date in a note which will be published in the next volume of the Transactions. He has shown me an advance copy of the results, and has kindly agreed that I may quote from them this evening. The significant index is the ratio of Students to Fellows, which reached a peak of 1·42 in the early thirties, but declined fairly steadily thereafter to 0·89 in 1957. There was a slight recovery in the next few years to 0·95, but the decline has again set in and last year it had fallen to 0·85. These figures have to be read in the light of consistently higher ones for the Institute, and it is of particular significance that their ratio has risen from 1·42 in 1960 to 1·65 last year, which is double the Faculty figure.

Without being unduly pessimistic, one might feel that these statistics contain the seeds of a future problem, namely, the main- tenance of our membership and of our influence in the community. The major change in conditions affecting recruitment with which we have to cope is that so many opportunities are now open to young talent that the exacting discipline of our examination syllabus is a more important deterrent to the choice of an actuarial career than it was twenty years ago. We seem also to be saddled with the incubus of a common belief that the average student cannot hope to qualify in less than six or seven years.

Some light has been thrown on this point by the survey published in May of this year by Messrs. Holloway and Scott, entitled “ Graduates in Insurance and the Actuarial Profession“. This was a report of their enquiry into the training, experience and progress

Presidential Address 3

of graduates entering insurance and the actuarial profession in the years 1955 to 1965, and I would draw particular attention to the Table on page 13 showing the average hours of private study under- taken while pursuing the actuarial degree. Less than half the students claim to put in a minimum of 40 hours’ study per month (excluding day-time release) during the academic year from, say, October to April, and even this minimum is considered by the authors to be an undue burden. They suggest, in fact, that it is sufficient to inhibit the student’s development—socially and as a person. Not every actuary may agree with me, but I dissent strongly from this conclusion, and I am sufficiently old-fashioned to have certain contrary beliefs of my own.

The first is that 40 hours of study per month, which is 3 evenings per week for about 7 months of the year, is no excessive demand, and is in fact too low a target. If the average student were to step this up to, say, 60 hours per month, he could well reduce the time taken to qualify by two or three years. I do not think we do a service to the profession by minimizing the effort it takes to become an actuary, and I would rather hold out to a student the prospect of three or four winters sacrificed to intensive study, than a longer period of less concentrated effort.

My second belief is that the rewards of the actuarial profession, both material and otherwise, justify the demands it makes on the student. It can, I think, be claimed without undue pride that to be an actuary carries a certain cachet, and the satisfaction of passing probably the stiffest professional examinations in the world is both real and lasting. In addition, the profession offers a wide choice of different careers in the investment, computer, statistical, marketing or management fields, and it is a real advantage that the choice need not be made until after the student qualifies. He will then be in a much better position to know where his talents and interest lie than immediately after leaving school or university.

Finally, although it may be too much to claim that every student can expect interesting and challenging work in his employment during the early years, this may be an advantage rather than a disadvantage, in that he will be fresher to concentrate on his evening studies. Responsibility can come only with expertise, and in seeking to master complicated skills the student must control for a little longer his natural impatience to test his talents in the field of experience. What can be claimed, however, is that after qualifica- tion and the training period, there will be interest and challenge to

4 Presidential Address

the full extent of his abilities, if not from one employer then from another, and if emigration is in his mind, there is a constant demand for young actuaries from many foreign countries.

On the purely financial side, the Report of the Royal Commission on Doctors’ and Dentists’ Salaries published in 1960 showed that actuaries rank with barristers and medical consultants as the most highly paid professional men. You may know that the Institute and Faculty are preparing to collect more up-to-date statistics of earnings in our profession, and I am confident that they will show a big advance even over the favourable range of actuarial salaries recorded by the Royal Commission. The particular advantage we have over the opportunities offered by industry, for example, is that equal rewards are available to the gifted minority, but at the same time, by virtue of the technical skills which they have acquired, a much higher minimum salary is available to those actuaries who fail to reach the highest appointments.

Despite these attractions, in today’s conditions when the voice of the student is louder and clearer in the land than ever before, we must continue to do all we can to ease his progress to the degree without lowering the standard of the examinations. The intro- duction by the life offices of day-time release, the granting of several weeks’ leave for Part II tutorial study, and the recent revision of the syllabus by both the Institute and the Faculty are all moves in this direction.

For the future, I hope we shall aim to build a closer co-operation with the universities, and the recently introduced actuarial course at St. Andrews is a welcome step. It will require considerable study to determine the best lines of co-operation, and of course any progress will depend on the attitude of the universities, but I am confident that at some points our joint interests will coincide, as they have done at St. Andrews. For example, it could be argued that an honours degree in mathematics is an unnecessarily specialized pre- liminary training for our profession, and that a more general degree in statistics, economics and finance, for example, might enable more exemptions to be granted and thus shorten the period of actuarial study. New degree courses have been and are being introduced at many universities, and it might be possible to have appropriate ones slanted in our direction.

With the growing importance of specialized fields, it is tempting to think of the possibility of post-qualification diplomas in investment or computers or pension funds, for example, if only to prevent any

Presidential Address 5

tendency to earlier specialization in our degree itself. I deplore this tendency in the schools, and I would deplore it in the actuarial syllabus, since I firmly believe that a broadly based training is an asset to any actuary, no matter what subject he specializes in after qualification. It would probably be beyond our teaching resources to set up post-graduate courses, but there is no harm in considering the possibility, and this may be another way of collaborating with the universities.

If we go back to the beginning, actuarial science developed out of the need for a training, and the appropriate tools, to enable life assurance companies to be administered on the basis of more than intelligent guesswork. A more scientific way of calculating the premiums and the corresponding reserves for the life risks covered had to be found, and gradually the necessary techniques were developed into an acceptable mathematical and statistical system. With this origin, and with the growth of the science taking place during a period when investment was fairly straightforward, being largely confined to stable Government stocks, it is not surprising that actuarial attention was focussed on mortality and the mathe- matical structure. For many years, the majority of its practitioners, one might guess, were closer to being mathematicians than men of business. The science was acknowledged to be esoteric, and there was little need for actuaries to develop any great skill in com- municating with the outside world. Indeed, there was possibly a certain modest pride to be taken from the fact that no layman could hope to understand what an actuary was talking about.

That picture of the actuarial world has changed in several startling ways. The computer has by-passed many of the elegant mathe- matical tools which the genius of earlier actuaries had constructed for our use. Medical science has so improved mortality during the active life span that its residual effect on our calculations is of diminishing (although not yet negligible) importance in many areas of our work. Growing competition is attacking our ivory towers and the developing science of business administration is forcing itself on our attention. Finally, the age of the equity share, or of resignation to continued inflation, would appear to have arrived, so that the investment factor is assuming an ever-growing im- portance in many sides of our work. Indeed, this cult of the equity has also had side effects of almost equal significance to actuaries as its main one on the investment policy of life assurance companies.

6 Presidential Address

In these changing conditions we must maintain constant vigilance to ensure that our profession does not lose its honoured place. I remember from many years ago a pearl of wisdom dropped by my old professor of Economics. “Those businesses which stand still will soon go backwards. Therefore they must go forwards.” It is a warning which has relevance to a professional body as well as to a business and the danger of encroachment from outside specialists has never been greater than it is today. I suggested a moment ago that for many years the majority of actuaries were probably closer to being mathematicians than men of business. Nowadays our goal must be different, and an actuary should be more a man of affairs than a mathematician, even though mathematics still lies at the heart of our science. It is our continuing aim to widen the scope of the profession, and the widest field is that of industry, where we have made relatively little penetration. If, in fact, we are satisfied to be mainly specialists in actuarial science, it is unlikely that our services will be in great demand in the world of commerce. On the other hand, if we take our training as an excellent base on which to develop the more general skills required by industry, we may gradually bury the idea that an actuary is a clever specialist of the genus “Back-room". There is no doubt that our training is an excellent base. Not a few of the modern ideas being applied in industry are simply concepts which for years have been an integral part of actuarial methods, although some of them are cunningly disguised under impressive new titles. For example, “discounted cash flow” seems little different from our time-honoured concept of

"present value". May I make a specific point? I referred to our complacency with

what I believe to be a general lack of skill or perhaps interest in communicating effectively with the non-actuarial world, a weakness which was never one to be proud of. It is noticeable, for example, that actuaries in this country are seldom called as expert witnesses in the courts when compensation cases are being assessed, in contrast to the position in Ireland, for example, where they are frequently called. One is tempted to wonder if this is because the judges feel that we are more likely to cloud the issue with scientific mysteries than to clear the way to a satisfactory verdict. However that may be, our contacts with the outside world are important in helping to shape the public’s opinion of the actuarial profession, and the more articulate we are the higher that opinion will be. Clarity in com- munication is more an acquired than an inborn skill. It is not

Presidential Address 7

taught in our syllabus and the need for it can easily be overlooked. We should all of us take much greater pains to make ourselves intelligible to the layman in our reports and correspondence than I believe we do even today.

In the field of management studies the wind of change is blowing strongly, and in so far as the subject impinges on the work of many actuaries, it is one which demands our consideration. It is gradually being accepted that management is not just something which can be picked up satisfactorily as a by-product of experience. It is being taught at dozens of universities and colleges in the form of a post- graduate degree or a post-experience course of short or long duration. Indeed, there are literally hundreds of these courses to choose from, although one might guess that only a limited few are likely to be really effective. The hope is that over the next few years opinion will crystallize as to the best teaching methods, and that we shall be left with a manageable number of effective courses, but at the present time it would seem that enthusiasm is to some extent outrunning judgment.

I am not suggesting that we must necessarily add to the current confusion by trying to introduce the subject of business administra- tion into our syllabus. On the other hand, it is surely desirable that the actuarial training should be accepted as a suitable base for a management candidate, just as it is gradually being recognized as an effective background for an aspirant in the investment world. In addition, there is the possibility that special management tech- niques may be required, because of the different nature of life assurance business from that of a normal industrial company. I do not know where the solution lies, but neither do I think that the Faculty can ignore the new science. It can be argued that it is up to our employing companies to send their chosen men to whatever courses seem appropriate, and in the end of the day this may be the only answer. We should not arrive at this decision, however, without a full survey of the position, and I should like to see a study group set up to consider the whole problem. This would involve consult- ation with the universities, and as a minimum it would enable the Faculty to form its own opinion of how effective the available courses are and how feasible it would be for us to take some interest in a young and exciting science.

Closely allied with business administration is the expanding world of the computer. Unless he means to specialize in this field, it would seem unnecessary for an actuary to know how to programme

8 Presidential Address

or how to be a systems analyst, but the time is rapidly approaching when the task of a life office executive will be vastly more difficult if he does not understand a good deal of what automation is all about. Once again we are faced with the conflict of an already crowded syllabus and the clamour of a new skill for recognition. Once again I have no easy solution to put forward, and only a close study of the alternatives will lead us to the right decision.

It is almost with relief that I turn to the other changed conditions under which we work, and I should like to consider first the side effects of the thriving cult of the equity, prefaced by a point of quite general application. In so far as the cult springs from an acceptance of the inevitability of continued inflation, it is an effort by people and institutions to protect themselves against an expected evil, which is a natural reaction. Unfortunately it carries the seed of a future danger, because, as the acceptance of inflation and the attempt to protect against it spread, they feed on each other and together nourish the inflation which gave them birth. It is probably too much to expect people, or perhaps even institutions, to behave differently because of a resulting threat to the national economy, but it is not too much to expect whatever Government is in power to realize the danger and to act vigorously against it. It may be claimed that they are already acting, but successive Governments have so far failed to convince the public of the sincerity of their intentions or the strength of their belief in success. Until they do convince the public, their fight against inflation will be so much the more difficult, and getting the message across is therefore a vital first step.

Let us now look at the side effects on our profession of the equity cult. We all know that life assurance began as risk sharing, and then developed into a risk bearing enterprise. As premiums were found to be too large, and as mortality rates improved, surpluses built up and the practice of paying bonuses was gradually adopted. In due course, it became apparent that, with the help of tax relief on premiums, a with-profits endowment assurance was a good investment as well as providing life cover, and a substantial amount of savings money flowed in to the assurance companies. All this happened in what, I suppose, we must now refer to as the old days, when people were content to pay their premiums into the companies’ funds and were satisfied—as indeed they had good reason to be— with the bonuses declared by the companies.

Presidential Address 9

Little money was invested by the offices in equity shares, which were considered too risky for such solid and conservative societies as the life assurance companies. Even in more recent times when equities began to feature more prominently in the companies’ portfolios, it was accepted as prudent practice that bonuses should not be paid out of capital appreciation. There was an acceptable rationale to support this practice, and it was not unfair to the policyholders. The yield on equities was normally higher than that on fixed interest stocks, because of the assumed extra risk involved, so that current policyholders were not penalized by equity invest- ment, and it was fitting that any capital gain should be held in reserve in case markets took a downward turn and the gain disappeared. This was the position until recent years when a considerable change in outlook has developed, and it is not one which actuaries can ignore, however much re-thinking it may involve of the precepts which we have been trained to respect as sacrosanct.

The change in outlook may be said to spring from two causes, first the sustained rise in equity share prices, and secondly the prolonged period of inflation. According to theory, there is no guarantee that these two movements should happen together, but the fact is that over roughly the last twenty years they have, and this has led to the fairly widespread belief that both movements are likely to continue indefinitely. Until some fairly major event occurs to disprove the belief, it seems probable that people will go on holding it. So long as they do, our traditional life assurance policies, particularly endowment assurances, will be at a disadvantage, since people will tend to favour holding equities themselves so that the expected capital appreciation will be theirs immediately and in full. Whether or not we agree with their theories is relatively unimportant.

The issue before actuaries in their capacity as managers of in- surance companies has therefore become fairly clear-cut over the last two years, if they are to retain their present share of the nation’s savings. They can either introduce equity-linked policies of one type or another, as quite a few have done, and promote them actively, or they can break the principle of not declaring bonuses out of capital profits. At first sight, neither alternative looks very attractive, but I believe that an acceptable case can be made for both.

It might be assumed that the true function of an assurance com- pany is risk bearing as regards both mortality and investment. (It could perhaps be argued that its function under with-profits policies is closer to risk-sharing than risk-bearing. To the extent

10 Presidential Address

that the bonus loading protects the company against loss in adverse circumstances, it cannot be said to be incurring substantial risk.) Under equity-linked policies, the company is not asked to undertake any investment risk at all, but only to perform the service of invest- ing, so that the assurance company’s true function is seriously curtailed. On the other hand, assuming that the position is properly understood by the policyholder, the company need not be concerned that the security offered by the equity-linked contract is much less than that of a traditional policy.

The main objective of a proprietary company must be accepted as making profits for its shareholders, who after all own the company. To some extent the interests of shareholders and participating policyholders march hand in hand since the proportion of surplus allocated to the former has come to be accepted as something like 10% of the total. The main difference is that an increase in total surplus benefits shareholders no matter how it arises, since capital is fixed, whereas it may not benefit participating policyholders if it arises from a disproportionate increase in their numbers. A mutual company would appear to have two objectives ; to make profits for its with-profits policyholders and to perform a national service by providing life assurance facilities. If the former were the only objective, there would be a strong argument in favour of closing the fund, since this would result in the greatest increase in bonuses to existing with-profits policyholders.

There is an interesting theoretical difference between a pro- prietary and a mutual office as regards the relative desirability of participating and non-participating policies. It would seem that participating policies are likely to generate relatively more profit than non-participating to the owners of a proprietary company, i.e. the shareholders. Since the bonus loadings in the premiums are thrown up as surplus the shareholders receive their percentage of these loadings as well as their percentage of the true profit. Under without-profit policies, the shareholders receive a percentage only of the true profit. In the case of a mutual company, without-profit policies are more attractive to the owners of the company, since every with-profits policy increases the volume of ownership, and therefore spreads the total profit over a bigger area. This is not the whole picture, but I believe that there is an essential difference between a mutual and a proprietary office on this point.

It would seem that the equity-linked policy falls within the objectives of both proprietary and mutual companies, since it can

Presidential Address 11

be expected to produce some profit and its issue represents a service

to the community. There is, therefore, no compelling reason why

it should not be included in an office’s normal portfolio of policies,

although we may deplore the restriction it places on the functions

which the company normally performs. For a mutual office, it

becomes more welcome to the extent that it replaces traditional

with-profits contracts, since it has no claim on the profits of the

company; it becomes less welcome if it replaces without-profit contracts, which might be expected to be more profitable. It would

seem that the reverse is the case for a proprietary company.

Here then is a change that the times have forced upon us—that we

should welcome the equity-linked policy, a risk-it-yourself policy

which the public wants, but which I am sure most of us looked

askance at only a few short years ago. There is also a special service

in this field which we can give through our assurance companies,

and that is to foresee and do our best to control two dangerous

developments which increasing competition is likely to foster. The

first is the growing use of misleading figures based on the past

performance of equities and carrying the implied assumption that

the future will be as favourable. The second concerns the order of

priorities of the average policyholder in making his family pro-

visions: first—protection, second—available savings, third—

locked-in savings, equity-linked policies coming within this last

category because of the possibility of an equity slump coinciding

with the policyholder having to surrender his policy. The pressure

of competition will inevitably encourage a tendency to persuade the

potential policyholder to ignore these priorities, particularly with

the unit trust companies which do not have alternative policies to

sell. As professional men, we have a duty to restrain any tendency

of this kind in the companies under our guidance.

So long as the equity market continues to rise, traditional endow-

ment assurances may well lose some ground, and as an alternative or

in addition to introducing an equity-linked policy the feasibility of

declaring capital bonuses under traditional policies on a regular as

opposed to a once-and-for-all basis may well become a problem for

actuaries to consider. Incidentally, with the advent of the reverse

yield gap, it can no longer be argued that the policyholder has not

suffered a loss of interest through the office having invested in

equities, and to that extent he could have a claim on what is now

fashionably called the “total performance” of the shares held.

No matter how optimistic the public may be, equity prices can

12 Presidential Address

fall as fast as they can rise, and it will, I hope, be agreed that the

principle of declaring regular reversionary bonuses out of capital

profits during the life time of a policy is unacceptable. At the date

of termination of a policy however, the position is different, and a

case can be made for paying a terminal capital bonus to ensure that

the policyholder receives his fair share of the net capital gain arising

from the premiums he has paid. “Fair share” may not be equiva-

lent to 100%, since he has been guaranteed against capital loss,

and individual actuaries will have their own opinions as to the

equitable proportion to distribute, ranging, I have no doubt, from

0% upwards.

It will obviously be a matter of some complexity to determine

what extra gain (if there is a gain) has accrued to the office through

the investment of a proportion of the policyholders’ premiums in

equities. How far has the difference in interest revenue arising from

the equity investment already been allowed for in previous bonus

declarations, which were presumably made on the basis of actual

income received? To what extent has the existence of a substantial

appreciation in book values influenced the actuary in fixing past

bonuses? Has the equity appreciation arisen from a real increase

in dividends or only from the public’s expectation of future

increases? These are some of the complex problems which arise,

but I believe that the principle of a terminal bonus directly related

to capital appreciation should be acceptable, and warrants close

investigation to determine a viable method of putting it into practice.

It is interesting to reflect on how quickly the investment picture

has changed, or so it seems to us older actuaries. We can contrast

the period when it was rather dashing to have more than 5% in

equities, compared with today’s average of over 20% on book

values, and probably over 30% on market values. We have seen

the initial tentative mortgage advances on large scale property

development grow into a search for more and more equity-

participating opportunities in this field. Now we seem to be on the

threshold of even more unaccustomed country—the regular dis-

tribution in one form or another of capital profits. Truly our

forefathers must be wondering what is happening to traditional

actuarial caution.

It might possibly be admitted in this hall that actuaries have

tended to over-emphasize caution in their thinking, and if this is so,

we must not be afraid to accept the need for change. Time was when

the weakening of a valuation basis would have seriously endangered

Presidential Address 13

an office’s reputation. Time may be when not weakening it becomes equally harmful. Time was when declaring a capital bonus would

have raised actuarial eyebrows to unprecedented heights. Time

may be when not declaring one has the same effect. These contrasts could be multiplied, but already I have said enough, and perhaps

even too much, because I am far from suggesting that caution

should be thrown to the winds. The ability to exercise proper judgment in all things is probably the most important, and certainly

the most elusive, quality which we have to acquire, and it will be

needed to an increasing degree as we start to open the purse strings.

In the valuation of pension funds, for example, there is no great

skill required to use a basis which will almost certainly throw up a

comfortable, not to say embarrassing, surplus. The skill and

judgment come in as you try to approximate more closely to the

most likely future.

Turning now to the subject of mortality, perhaps the most

significant change over the years is that rates are now relatively

low during active service life, and the emphasis has moved more

towards the post-retirement period. We, in Britain, have found a

marked decrease in immediate annuitants’ mortality following the

1956 Finance Act, but it emerged from the recent Munich Congress

that many countries are experiencing a levelling off of the improve-

ment which has persisted for so many years. It may take a few

years yet to establish the correct pattern, but in general, so far as

rates for immediate annuities are concerned, we can probably be

satisfied to continue to work on the basis of past observed statistics,

extrapolated in most cases on the assumption that no rapid change

of trend is likely. For deferred annuities, however, where the

period of deferment can be long, we are dealing very much in futures,

and we should perhaps be concerning ourselves more with likely

developments in the medical field.

This is moving into the realms of speculation, and we can never hope to do more than canvass the possibilities foreseen by informed

medical opinion. There is one point on which we should focus our

attention, however, namely the chance of a startling discovery

which might lengthen the life span by an appreciable period, the

financial effects of which could be quite startling. It might be well to ensure through our medical friends that we are kept advised of

any progress being made and of the degree of optimism current in

medical circles, particularly in America where a great deal of money

14 Presidential Address

is being spent in research into lengthening the normal expectation

of life.

This leads me to another point which may soon give rise to

difficulty. It has always been assumed that the word “death” was

self defining, but this is no longer true. Hearts are being kept

beating artificially, deep freezing is no longer science fiction, and

we do not know what other developments are round the corner.

It seems only a matter of time before a case will arrive in the courts

where the verdict will depend on whether or not a particular person

was dead at a particular moment. Since our work centres itself

so much on life and death, we should surely be using what influence

we have with the legal and medical professions to encourage them

to pronounce on the subject of a definition of death.

As regards pension plans, no speaker whose theme is the effects

of a changing world need lack for material, but I propose to ration

myself severely. We have been free for some time of alarms and

excursions regarding the imminent introduction of a comprehensive

new State Scheme, although in recent weeks renewed reports have

been circulating about the Government’s intentions. It is clearly

desirable that adequate pensions should be available for everyone,

but if they are to be provided by the State, it will inevitably involve

a substantial increase in taxation in one form or another. There is

a growing body of opinion that taxation in this country is already

near to the point of diminishing returns, and a further increase

could have serious effects. It is to be hoped, therefore, that before

any action is taken, the vital question will be asked and answered:

“Can the country afford a comprehensive State pension scheme at

the present time?”.

This is not a suitable occasion to elaborate on the economics of the

situation, but I should like to emphasize again our firm belief that

State pension provision should be above party politics, and that any

State Scheme which does not give living room to the extensive

arrangements already existing in the private sector will gravely

damage the economy of the country. The logic behind these

warnings has been set out at length in previous statements by the

Faculty and Institute and the Appeal to Statesmanship issued by

them in 1959 is still as cogent and compulsive as ever in 1968.

There seems little doubt that the sensible way to shape the nation’s

policy on such a technical and financially important matter as State

pensions is to submit it for prior consideration to an authoritative

Presidential Address 15

and independent body set up by mutual consent between the

political parties.

A development in the pension field which I should like to consider

for a moment is the advent of the managed fund. The ground to be

covered is similar to that of the equity-linked policy, and the choice

open to the offices is the same; i.e. to offer managed fund services,

with negligible risk-bearing by the office, or to adjust insured

contracts in accordance with the demands of the market. The

employer who chooses a self-administered fund (which includes a

managed fund) is making the same type of decision as the proposer

who takes out an equity-linked policy. The reason why an employer

rejects a traditional insured contract is presumably because either

he underestimates the risks he will be taking by going it alone, or

because he feels that the price charged by the assurance company for

the guarantees it gives under a traditional plan is too high. The

position is not made any easier by the fact that neither the risks nor

the price can be measured accurately in advance, and it would

be helpful if some means could be found of satisfying an employer

that the cost of the extra security provided by an insured fund will

be reasonable in all circumstances. One might guess that the main

point at issue is the destination of any capital gains, and if it were

possible to show employers that bonuses will reflect capital gains

more rapidly than at present, it would be a big step forward. The

arguments discussed in respect of equity-linked policies point to a

maturity bonus system, say, on the date of each member’s retire-

ment, but there are many practical difficulties to be overcome. I

recommend this field of study to the young talent amongst us

tonight. Another pension subject which I should like to touch on concerns

the problem of the employer who seeks disinterested advice regarding

the provision of pensions for his employees. I am conscious that

this is controversial ground, but I shall tread warily. Before dealing

with the general point, may I emphasize again a very specific one?

With the growing tendency to move to final salary plans, it is of

great importance that employers should understand what an

estimated rate of contribution really is. It can easily be mistaken

by them for a quotation of actual cost instead of a rate of funding.

In conditions of severe competition such as we have just now, there

may well be pressures on actuaries (and I do not mean only those

in private practice) to suggest minimum rates of contribution; in

16 Presidential Address

those circumstances, it is mandatory on them to take whatever

steps they deem necessary to ensure that the employer fully under-

stands the recommendation which he is being given.

On the general point of disinterested advice, we start with the

obvious fact that the pension field is now highly complicated and

technical. It is also one of considerable financial importance to

any business, and employers are very much in need of skilled and

unbiased guidance. There is no lack of skilled technical assistance

available from specialist insurance brokers and consulting actuaries,

but the former are identified with insured plans and there is a

tendency, however unjustified, for the latter to be identified with

privately administered ones. The position will be further com-

plicated if the managed fund development catches on, and the

effect of our ban on any form of advertising by consulting actuaries

must be overlooked.

There is a problem in this whole area, and I should prefer to see

it tackled openly, and I hope solved, rather than kept in the back-

ground for as long as possible. The need for the specialist and

unbiased pension consultant is clearly there, and it is up to us to

do what we can to remove any existing obstacles and thus promote

conditions under which that need can best be met. It would be

wrong of me to make specific suggestions from this platform on

such a controversial problem, but I am not unhopeful that progress

will be made.

In recent months a new problem has arisen in the pension field,

the question of how pension costs should be treated in a company’s

accounts. There are several reasons for the growing concern of

company auditors in this specialized area; the substantial sums

which are now involved, the possible effects on a company’s profits

from year to year of pension contributions which can be varied

within quite wide limits, and the necessity that any substantial

unfunded liability for pensions should be known and noted in the

accounts. The problem bristles with difficulty because of the highly

technical nature of pension plan financing, and I do not think that

the correct solution has been found in America. There, a booklet

has been issued by the Accountants Society to its members, pur-

porting to summarize all pension funding methods so that the

auditors will know exactly what questions to ask the actuary. I

doubt if any booklet can hope to achieve such a very ambitious

purpose, and one may be forgiven for guessing that a certain amount

of confusion may follow.

Presidential Address 17

In Scotland we are happy to be in consultation with the Society

of Chartered Accountants in a joint endeavour to arrive at a workable

solution, and I am confident that simple guide lines will be found

which will enable the auditor to satisfy himself on the essential

accounting points without adding unnecessarily to the work of the

actuary. Co-operation of this kind between professional bodies is

always helpful and very much to be encouraged.

I commented a moment ago on the complicated nature of pension

business. Some of this arises from the more sophisticated types of

plan now being adopted, but there is no doubt that a great many

complications arise from increasingly involved legislation, and the

same comment might be made about ordinary business. I made an appeal to our legislators in another place quite recently, and I should

like to take this opportunity of repeating it.

When any piece of financial legislation is contemplated, various

different aspects are no doubt considered, such as equity, social

desirability, political viability, financial effect, etc., but so far as

a bystander can estimate, away down at the bottom of the list

comes simplicity of administration. As a result, we struggle along

under a crushing burden of complicated legislation, and an enormous

proportion of the country’s brains is occupied in understanding,

administering, avoiding and invigilating the application of our

laws. Although I agree that equity, social desirability and so on

are eminently sound objectives, it is still my absolute conviction

that if the economy of our country is to avoid strangling itself in

the convolutions of its own hancial legislation, the consideration

of simplicity in operation must be moved immediately from the

bottom of the list to the top, or very near the top. No legislation, however equitable or desirable, is good legislation if it is so com-

plicated that few people properly understand it, and it is a pity that

this basic principle is so consistently overlooked by our legislators.

Finally, if I may summarize, it seems clear that the changing world

is having a powerful effect on our profession. I am sure you will

agree that it is incumbent on us to keep an open mind regarding possible changes in our traditional outlook and functions without

sacrificing the deep-rooted principles on which our training is based.

You may not accept my few proposals of how we should adapt to

the modern environment, but if each of us faces up to the challenge

for innovation which our changing world presents, I am confident

18 Presidential Address

in the soundness of our actuarial training and in a flourishing future

for the Faculty.

Mr. J. B. Dow.—You have already indicated by your applause your appreciation of our President’s address and so, in availing myself of the past President’s traditional privilege to speak at this time, I need do no more than put that appreciation on record.

In the field of literary criticism there is an old and trite saving that the style and the man are the same thing. I am sure that nothing we have heard tonight would lead us to any other conclusion, for the address to which we have just listened reflected both in manner and in matter the qualities of mind and character that we know our President to possess. It was practical and forthright; it revealed a wide range of interests; it acknowledged the existence of problems and difficulties but refused to be dismayed by them or to be persuaded that they cannot be solved by intelligent thought and concerted action.

These qualities in your address, Sir, indicate some of the reasons why we chose you to be our President and why, in addition to our warm thanks for your most interesting and stimulating address, we can confidently offer you our best wishes and high hopes for a successful term of office. May all the affairs of the Faculty flourish in your hands!