The Times They Are a Changin’

Brian Spence

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Regularly ridiculed by many a wannabe stand-up as socially dysfunctional number-crunchers seeking refuge from all the glamour and glitz that is the world of accountancy, actuaries have found themselves the brunt of many a witticism reflecting their somewhat stuffy reputation for some time now but, in the words of Bob Dylan, ‘the times they are a changin”.

With actuaries now assuming a much more prominent role across a greater number of areas of corporate life than ever before, there’s probably never been a more exciting time to be involved in the profession.

Not long ago, few people would have believed that actuaries could be instrumental in hindering major City takeover bids involving the likes of Marks & Spencer and WH Smith . Yet, unaccustomed as they have traditionally been to such a high profile, this is the role they have been forced to assume in setting out to the pension scheme trustees the risks they face if the bidders did not stump up substantial extra cash to close the gaps in employees’ retirement funding. It is certainly something of a change from the conventionally held view of actuaries as rarely seen boffins.

Perhaps it is no surprise that others tended to consign them to the back room, given their two traditional core skills: statistical mathematics and mortality analysis. These tend not to get the conversation swinging at parties. Yet they ensured actuaries an important niche, particularly in the life assurance industry, where they have continued to use their expertise to assess risk based on past mortality rates and recommend both premium rates as well as the reserves a company should hold to be able to keep paying benefits in the longer term.

At the same time, their expertise in analysing demographic movements and mortality rates had already long proved vital to Government, particularly through the Government Actuary’s Department, as a source of advice on projected state income and expenditure and, for instance, the creation and development of the National Health Service.

The actuary’s principal role – described as analysing past events to assess the present risks and so make financial sense of the future – has remained unchanged. But in the last 20 years the range of ways in which actuaries have been asked to apply those skills has grown enormously. As a result, the career opportunities in the profession have also become a great deal more exciting than the old actuary jokes may lead anyone to believe.

Actuaries’ core skills very naturally transferred into the associated area of pensions and as the pensions market rapidly expanded and became a lot more complicated, as also did the Welfare State, the actuary’s role developed in to ever more diverse areas.

In such areas as the provision of State benefits and in public services like health and education, actuarial skills are now increasingly being called upon to help plan where scarce resources can be directed to have the greatest impact, at a time of rapidly changing need, whether caused, say, by an increasing preponderance of one-parent families or declining numbers of school-age children. In the NHS, actuaries help clinicians and administrators plot and address emerging trends, such as the spread of AIDS or the increasing care needs of the elderly.

The fact that people generally are living longer is a major factor in what has been more than 20 years of incessant change in the area of pension provision. With the State ever less likely to be able to fund the future aged population’s retirement, successive governments have tried to encourage people to make their own provision through occupational or personal pensions.

But with that has come a plethora of legislation, ostensibly to protect their interests. That has led in turn to the emergence actuarial consultants who advise employers, pension scheme trustees, and the financial institutions investing contributions, on how to best comply with the funding regulations, reporting rules and so on as well as provide statutory reports on the adequacy of the funds to scheme members and regulators.

Many actuaries are also engaged in advising on and creating self-administered schemes for the directors of small businesses, and meeting a growing demand for independent trustees to sit on pension scheme boards. Consulting actuaries also find themselves in demand for special situations, such as assessing the pension obligations of a target company and their consequences for another company looking to buy it – or, as in the case of the recently failed bids for WH Smith and M&S, advising the pension fund trustees on what their scheme’s situation might be if the company is taken over.

All this legislation still hasn’t prevented the emergence over the last couple of years of large funding deficits in final salary pension schemes. As a result, companies unable to afford to close their scheme’s funding gap have become insolvent and an even bigger number of schemes have been closed or wound up leaving major shortfalls in their members’ future pensions.

The Government is now introducing yet more legislation, including sweeping simplification regulations applicable to all types of pension scheme and, through the Pensions Bill, tougher new regulation and funding requirements to protect members’ future entitlements. All this increases the demand for actuaries’ skills.

In addition to their usual advisory and statutory reporting roles, actuaries now find themselves guiding companies and pension scheme trustees on how to best address their funding problems, including how much money is needed to meet their future obligations before they wind them down, and helping design more realistically affordable types of pension provision. They are also being asked to explain the consequences of the new legislation and how best to prepare for it.

In addition, actuarial skills are being sought in ever newer and more diverse areas, wherever assumptions about the future need to be analysed, tested and refined. These may be anything from forecasting the incidence of home burglaries for insurance companies to set their premiums, to assessing risks and future use for those involved in constructing a new road bridge or some other major capital project.

Heck, Hollywood’s even making movies about actuaries these days, though if Jack Nicholson’s portrayal of Warren Schmidt, a retiring actuary, in ‘About Schmidt’ is anything to go by, the profession has some way to go yet before actuaries shed once and for all their ill-deserved reputation as socially dysfunctional number-crunchers.

Geoff Nathan is a consultant and actuary with independent consultants Spence & Partners.

1054 words

Published Scotland on Sunday on 22/08/04

Brian Spence

Post by Brian Spence

Fellow of the Institute and Faculty of Actuaries and Society of Actuaries in Ireland, scheme actuary, professional pension trustee

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