I recently attended a lecture given by Professor Raymond Hill on Mathematics and the Law. It focused on a number of cases where a misunderstanding of probability and statistics in particular had led jurors to acquit or convict in the teeth of the evidence presented, to prosecutors to construct cases which made no logical sense, to expert witnesses to mislead and for judges to misdirect juries.

One particular case he mentioned concerned the tragic death of two babies born to Sally Clark, a solicitor from Cheshire, within 2 years of each other. Sally was charged with the murder of both babies once the second had died. At her trial in November 1999, Professor Meadow, a paediatrician but clearly not a mathematician, claimed that, in this case, the chance of two babies dying from sudden infant death syndrome or cot death was 1 in 73 million. This figure came from a study of the deaths of all babies in five regions of England between 1993 and 1996, which estimated that the chance of a randomly chosen baby dying a cot death fell, if the child was from an affluent non-smoking family with the mother aged over 26 like Sally Clarke’s, from 1 in 1303 to 1 in 8543. Piling travesty upon travesty, the chance of Sally Clark suffering two cot deaths was then calculated as 1 in 8543 times 1 in 8543, which is where the 73 million figure comes from. Sally Clarke was convicted on the basis of this ludicrous kangaroo statistical “evidence” and spent over 3 years in jail and needed two appeals before she was finally cleared. A full account of the case, and how Professor Hill went about presenting the absurdity of it, can be found here.

As Blaise Pascal wrote: “You always admire what you really don’t understand.”

Mathematics and law can come into conflict for a number of reasons, but one thing that doesn’t help is that they share a lot of the same words. Proof, for instance. But where this means an immutable truth in mathematics, as true today as it was thousands of years ago and as it will be thousands hence, proof in law will depend on the time in which the trial takes place and the burden of proof required. When there was the threat that Syria would be bombed by the UK and US, some opponents used the idea that you shouldn’t pass a death sentence on whoever would be standing under the bombs unless the Syrian regime had used chemical weapons “beyond reasonable doubt”. I saw one estimate of this as an 80% probability, however I have since seen 99% probability presented as a definition. So proof in law is a more elastic concept.

As a pensions actuary, I have had my own, rather different, problems with the interaction of mathematics and law. Defined benefit pension schemes are mathematical constructs as well as legal constructs. If you do A and B and earn C, then the pension scheme to which you belong should deliver benefits to you of D. However a pensions lawyer would see it rather differently, in terms of obligations of certain parties towards other parties under the legal construct of a trust.

When drafting pension scheme rules, lawyers often have to set up quite complex conditional relationships between possible events and outcomes. It is quite possible for some of these to be left out (in which case we hear that “the trust deed and rules are silent”), and also for them to be included but in a way which displays a certain amount of ignorance of mathematical logic, meaning either that the rules are very difficult to implement or have unintended consequences. This generally then creates work for a different set of lawyers down the track.

As a result, actuaries have long accepted that trying to interpret the rules of any pension scheme without legal advice is just asking for trouble. And the list of legal disclaimers actuaries populate their reports with grows year on year as a new threat of future second guessing emerges. There is therefore certainly considerable respect for the importance of the legal elements of the construct of a pension scheme by actuaries, if not always full understanding. Unfortunately, the same does not always hold in reverse. I have seen numerous examples of rules drafted without the mathematical elements of the construct fully taken into account by the drafters:

  • benefits either too ambiguous to value or in contradiction with each other;
  • double revaluation of benefits built into the rules in one instance;
  • elements of scheme design which would obviously need to be reviewed in the future, like commutation factors of 9 to 1 for instance, hard coded into rules so that they can only be changed by a deed of amendment.

Actuarial input into any issue around a pension scheme is frequently dismissed by lawyers as “crunching the numbers”. I think most of them would be mortally offended if an actuary turned to them and asked them to crunch the words.

Pensions lawyers and actuaries need each other if pension schemes are going to work properly. And they need to understand each other rather better too.

It looks very strange from the outside looking in.

INEOS, the 3rd largest independent global chemical company is seeking to recruit highly motivated technicians, the advert read, posted only 3 weeks ago on 30 September.

These posts are based at our sites at Grangemouth, INEOS’ largest asset which includes Scotland’s only crude oil refinery and Finnart on Loch Long. This is an exciting time to join us: we are fully committed to our business in Scotland and are looking to develop our technology business globally.

…Successful candidates will receive an extremely competitive salary including shift allowance and benefits package including a competitive pension scheme.

Cut to yesterday when the chairman of INEOS Grangemouth announced that the workers had to accept the company’s survival plan or the plant would close, as they were losing £150 million a year and had a pensions deficit of £200 million. Today Unite said around 680 of the site’s 1,370-strong workforce had rejected the company’s proposals, which include a pay freeze for 2014-16, removal of a bonus up to 2016, a reduced shift allowance and replacement of the final salary pension scheme with a money purchase scheme. INEOS responded by confirming the closure of the petrochemical operation at Grangemouth.

It was in 2008 that INEOS originally took the decision to close the company’s final salary pension scheme to new employees due to the costs associated with its continued operation. Following a strike organised by Unite, the company relented following various interventions including by the then President of the Faculty of Actuaries, Stewart Ritchie, keeping the scheme open to new employees in exchange for a 2% employee contribution. Unite made, and then withdrew, a claim that INEOS had asset-stripped the Grangemouth refinery business which had been spun off from BP in 2006. It also claimed that workers at Grangemouth were paid £6,000 less than workers at other similar facilities. One estimate was that the average salary at Grangemouth was £40,000 per year at the time.

Assuming the average has increased to, say, £50,000, that would represent a total wage bill now of around £70 million a year, based on a total workforce of around 1,400. The proposals on increases and bonuses would therefore look inadequate to make much impact on losses of £150 million a year. The pension changes may be more significant (the company estimates pension costs are currently 65% of salaries, although a large part of this is likely to be payments on the deficit which would be likely to remain after any restructure).

However, things are not what they seem. The £150 million pa quoted by the company is negative cashflows rather than losses. The company’s is investing £150 million more than the profits it makes each year at Grangemouth. The refinery is expected to make a profit in 2013.

Atleast it was. INEOS had warned that unless the survival plan were accepted, it would close half of the plant in four years’ time. The action to permanently close the petrochemical plant and not to reopen the refinery while they felt there was still a “threat of strike action” therefore represents a pre-emptive strike by the company, after Unite had agreed to call off strike action last week. The three day stoppage in 2008 was said to have cost the UK economy at least £100 million.

And the strangeness does not stop there. There is another dispute going on alongside the economic one. Unite originally threatened industrial action in July over the suspension of Stevie Deans, a Unite official allegedly involved in the selection of a Labour parliamentary candidate in Falkirk, who was subsequently reinstated and cleared by the Labour Party’s internal investigation. Dean is currently being investigated by an undisclosed third party on behalf of INEOS for allegedly using his position to recruit staff to the constituency party, with the investigation due to conclude on Friday. It is not clear where the announcements today leave this investigation.

If the petrochemical plant is to go into insolvency, possibly followed by the closure of the rest of the site, the next question for the workers after the loss of their salaries will be what is to happen to their pensions if INEOS sell up. To paraphrase Lynyrd Skynyrd, there are definitely things going on that we don’t know here.

A couple of days ago I received my statement from Royal Mail plc, confirming my allocation of 227 shares at the offer price of £3.30 each, therefore costing me £749.10. At the time of writing the share price is at £5.14 (although it was at £5.31 a few hours ago), equivalent to a value for my 227 shares of £1,166.78.

So I am sitting on a paper profit of over £400, and the Government is under fire for undervaluing Royal Mail, from everyone from the trades’ unions, to the Labour Party, to the Commons Business Select Committee to even some stockbrokers and to 51% of the general public. In response, Vince Cable, the Business Secretary, has suggested that everyone calms down a bit and waits to see what the price is in a couple of months.

But what if the issue was not mis-priced at all? What if the short-term profits were intended all along?
Remember that this is a Government still in the business of quantitative easing (QE). A process described by the Bank of England thus:

…the asset purchase programme is not about giving money to banks. Rather, the policy is designed to circumvent the banking system. The Bank of England electronically creates new money and uses it to purchase gilts from private investors such as pension funds and insurance companies. These investors typically do not want to hold on to this money, because it yields a low return. So they tend to use it to purchase other assets, such as corporate bonds and shares. That lowers longer-term borrowing costs and encourages the issuance of new equities and bonds to stimulate spending and keep inflation on track to meet the government’s target.

However, the critics of QE have become increasingly loud. It is untested, no one is quite sure what the long term consequences will be of the amounts that have been invested in this way and many of the short term benefits appear to have been benefitting the wrong people once the initial emergency receded. Perhaps partly as a result of these criticisms, there has been no new QE since July 2012.

Alternatives have increasingly been tossed around between economists and other commentators. One of which is the notion of helicopter money. Drop it from the skies, cut out the banks, and the effects will be more immediate, its supporters say.

If the target of QE is investors, and the aim of the policy is to make them invest in corporate bonds and shares rather than gilts, in order to encourage companies to raise more money in the markets to fund expansion, could the paper profit of £1.7 billion (compared to the £375 billion of QE so far) be a micro-experiment in a different type of QE?

There is other evidence to support this. At the end of 2011, Spencer Dale, the Bank’s chief economist, gave a speech about flaws in the QE approach:

I have considerable sympathy for the argument that the MPC’s asset purchase programme provides relatively limited direct support to SMEs (ie small and medium sized businesses). It will provide indirect support by stimulating spending and activity in our economy. But most SMEs are heavily dependent on bank credit and so not able to benefit directly from the increased demand for corporate debt and equity triggered by our asset purchases. But therein lies the problem. The majority of SMEs do not issue marketable securities that the MPC could purchase…..Instead, we need to find ways to incentivise the banks to lend more to SMEs.

So would a few hundred pounds each help SMEs? Well, some of the owners will have applied for shares and benefitted directly, as they are likely to be in the more financially aware section of the public. This may also explain the decision to set a minimum stake of £750 in the Royal Mail offer. Others may benefit from any increase in consumer spending that results from people spending their winnings. The longer term stimulus effect the Bank is trying to produce will depend more on the actions of the institutional investors who bought 70% of the offering.

One of the other criticisms of QE is the impact on interest rates, although the size of the impact is difficult to determine and those who complain about the implications on annuity rates, for instance, tend to ignore the stoking up of asset prices it is also likely to have achieved. However Charlie Bean, one of the Bank’s deputy governors, gave some support to this criticism in May 2012:

A long period of abnormal monetary policy strains social support for a central bank’s actions. Changes in policy always have distributional consequences, shifting income from savers to borrowers or vice versa. That is an unavoidable by-product, rather than the aim, of policy. Society usually accepts such consequences because they are transitory, and what one loses on the swings today, one may gain on the roundabouts tomorrow. But the sustained period of very low interest rates has, quite reasonably, prompted complaints from savers who feel they are bearing an unfair burden.

So any vehicle for putting money in people’s hands without affecting interest rates would, we assume, at least get a fair hearing at the Bank.

When QE appears to have run out of steam, and the “Help to Buy” home ownership schemes are causing increasing unease about the property bubble they seem almost certain to create, should we expect to see further privatisations on the Royal Mail model if the recovery stalls? It wouldn’t surprise me in the least.

PhoenixMention the Phoenix Four in Birmingham and you are likely to get a strong reaction. Most people knew someone who worked at MG Rover’s Longbridge plant, and many local families supplied workers for generation after generation. A huge rally brought tens of thousands onto the streets in 2000 when BMW put MG Rover up for sale, protesting against what had appeared at the time to be the most likely outcome of Alchemy Partners buying it and turning it into a low volume car manufacturer with only 2,000-3,000 of the 6,500 jobs there remaining. So there was jubilation when the ‘Phoenix Four’ group of businessmen (John Towers, John Edwards, Peter Beale and Nick Stephenson) stepped in to take the business off BMW’s hands for £10 with a further £500 million accompanying the business from BMW to sweeten the deal. By 2005 all the jobs had been lost.

A Government inquiry into Phoenix Venture Holdings (PVH – the Four’s company) reported in 2009 that The Four had managed to extract £42 million in salaries and pensions by this time. The inquiry spent 4 years and £16 million getting to grips with the convoluted machinations by which this was achieved. No criminal charges resulted. The Four were not even disqualified from being company directors. Instead, in 2011, they belatedly agreed voluntarily not to serve as directors for 3 (Edwards), 5 (Towers and Stephenson) and 6 (Beale) years respectively.

In January last year, the Executive Counsel to the Financial Reporting Council (FRC) finally turned to the advice The Four had been receiving during the whole saga, from Deloitte and specifically their head of UK corporate practice Maghsoud Einollahi, alleging that their conduct fell short of the standards reasonably expected of them in relation to Project Platinum (the project to put a deal together) and Project Aircraft (the specific deal to transfer MG Rover Group’s (MGRG’s) accumulated tax losses to a subsidiary of PVH). The tribunal ruled on these allegations last month. It makes entertaining reading unless you happen to be a former MG Rover employee.

One of the issues was that Deloitte had muddied the waters about who they were representing (MGRG or PVH) in order to mask a massive conflict of interest. As the tribunal states:

If the identity of the client is not known it is not possible to identify and consider whether there is any conflict existing or potential. That is the real importance of identifying the client. Here the client was known to the Respondents (ie Deloitte and Einollahi) a substantial time before the final existence of a letter of engagement and nothing was done about it.

The Phoenix Four were always the client. Deloitte were at all times acting on their behalf. We know too that the Respondents were represented at an MG Rover Group Limited Board Meeting and made a presentation to the Board thus suggesting that they were acting for MG Rover and not the Phoenix Four.

But my favourite bit is the extract of Einollahi’s testimony on who his client was:

Q: (reading his previous testimony) “…you did not think you had a client…”
A: (Pause) I think that is fair, that I didn’t believe I contractually had a client.
Q: Exactly
A: But
Q: And the problem is the one that I have alluded to already, that you would be holding yourself out to third parties as acting for, in this case, the group (ie MG Rover)
A: (Nods)

Following this Pinteresque dialogue, the tribunal moved on to Deloitte’s fee of £7.5 million. Part of the defence case had been that £7.5 million was not a very large fee within the context of Deloitte’s annual fee income, that contingency fees (ie which were paid only if a given result was achieved) were common and that clients were not prepared to accept different arrangements. The tribunal was not impressed:

It seems to us that Mr Einollahi would charge a contingency fee of a size he thought that he would be paid by the client without considering whether it was appropriate or not. Again when he gave evidence he was cross-examined and we refer to one question and answer.
Q: …you did not like to negotiate fees downward?
A: I didn’t – I didn’t act for people who wanted to negotiate my fees downward. I didn’t need to.

The tribunal concluded:

He wanted that fee of £7.5 million and realised that his best prospects of achieving that fee were by a deal between the Phoenix Four and HBOS rather than between MGRG and First National Finance or MGRG and HBOS

Project Aircraft, the scheme involving moving around MG Rover tax losses, had been attempted before under the title Project Salt/Slag and rejected by the Inland Revenue. Aircraft succeeded where Slag failed largely because the Revenue believed this time that MG Rover would benefit from the profits generated by the scheme.

Mr Towers said “frankly, for us, what mattered was there was a possibility here of creating cash, additional cash for the group and most particularly, for the cash-consuming part of the group which was the car company”. Mr Beale’s evidence was to the effect that MGRG benefited from the transaction because “it gave the group additional cash reserves which it could lend to MG Rover as and when required”. The Inspectors (from the Government inquiry) said at Chapter XI paragraph 17 “in practice, much of the money which the group generated from Project Aircraft was used to fund a payment to the Guernsey Trust”. (The beneficiaries of which included Messrs Beale, Edwards, Stephenson and Towers.) The Inspectors continued “immediately before Barclays Bank made its £121 million loan (which also paid off a previous loan and some other creditors), PVH had credit balances on its bank accounts totalling £2,184,083. The loan increased the credit balances to £14,736,629, enabling the company on 26 June 2002, without having received any money from any outside source in the interim, to pay £7,905,125 to the Guernsey trust (as well as paying £2,261,875 to Deloitte in respect of fees for Project Aircraft). No payment was made by PVH to MGRG at this stage, or in fact at any time before November 2003.

The tribunal continued:

Mr Einollahi undoubtedly played a significant part in Project Aircraft. He must have been aware, and admits that he was so aware, that the Phoenix Four were on holiday in Portugal in 2001 and while on holiday agreed between themselves to pay themselves very substantial bonuses. They in fact paid themselves collectively about £7 million after the conclusion of the Project Aircraft transaction. These sums came essentially from assets of MGRG and were used to make these very substantial payments to the Phoenix Four. They received the whole of the proceeds and MGRG received none.

In conclusion, the tribunal said:

They (ie Deloitte and Einollahi) placed their own interests ahead of that of the public and compromised their own objectivity. This was a flagrant disregard of the professional standards expected and required and was in each individual case, and of its own, serious misconduct.

The Executive Counsel, who had made the complaints, asked for a severe reprimand and a fine of between £15 million and £20 million. They also requested that Einollahi be excluded from membership of the Institute of Chartered Accountants in England and wales (ICAEW) for 6 months and fined an amount based on an assessment of his financial resources. Deloitte suggested instead that the fine should only be £1 million and Einollahi should not be fined at all.

At this point, in my view, the tribunal lost its way a little. They decided on a severe reprimand and a fine of £14 million for Deloitte. This was calculated as follows:

We have assessed the financial gain from the fees attributable to both Project Platinum and Project Aircraft with a deduction for the total amount of recorded costs against these projects. We have added interest at 1% over base rate to deny Deloitte any financial gain from the misconduct.

This raises an interesting question about what calculations other firms might make in the future about the chances of ending up in a tribunal like this and the likely consequences against the rewards of the deals themselves. If worst case scenario is that they won’t make a profit, I remain unconvinced that this will prove much of a deterrent.

They added:

We have borne very much in mind that Deloitte is not insured against the imposition of a fine and has undertaken to indemnify Mr Einollahi against any fine imposed upon him.

It is heartwarming to see them looking after their errant employee in this way, but their insurance arrangements should be of no interest to anyone.

Einollahi himself was excluded for 3 years rather than the 6 months requested by the Counsel, but only because he was not prepared to voluntarily relinquish his practising certificate. He also refused to cooperate with the assessment of his financial resources, leading to the tribunal to put a bit of a finger in the air and opt for a fine of £250,000.

So what now? The tribunal made much of the public interest in the hearings:

It was particularly important in the case of both Project Platinum and Project Aircraft that the public interest be considered because of the concern of inter alia the Government, employees, other employers, particularly in the West Midlands, creditors and the general public about the continuation of large scale car manufacturing in the West Midlands.

The importance of considering the public interest is further emphasised because both the Projects resulted in very large sums of money that might have been utilised for the benefit of the MG Rover Group in the running of its business instead, being used for the benefit of individuals, including the Phoenix Four.

But what is the public interest? My assumption would have been that it must primarily be about the portion of the general public which was most damaged by all this, namely the MG Rover workers who lost their jobs and their communities. The local MP, Richard Burden, agrees. The Trust Fund for former MG Rover workers, which John Towers had at one point said would have over £50 million in it, was finally wound up earlier this year when the £23,000 actually available was donated by the workers to a local hospice.

The £14.25 million awarded in fines would normally go to the Consultative Committee of Accounting Bodies (CCAB), an umbrella group for several professional bodies, which pays the costs of FRC disciplinary cases. However in this case the costs of the proceedings of just under £4 million have already been charged to Deloitte on top. Is the case for meeting the costs of future disciplined accountants really greater than the public interest in making some contribution to the communities that the FRC’s members have facilitated into the ground?

There will be some time to make this decision in. Depressingly, Deloitte and Einollahi filed formal notice on 1 October that they are appealing the decision, as indeed they have contested everything that wasn’t nailed down throughout the process. Their joint statement read as follows:

“We recognise the general desire to move on from this case but do not agree with the main conclusions of the tribunal which we feel could create significant uncertainty for individual members and member firms of the ICAEW.”

After all, if it ever became accepted that consultants had any responsibility to the most vulnerable people affected by their less-than-professional manoeuvrings, where might it end? There is no time limit on the tribunal member hearing the appeal to make a decision on whether an appeal can go forward.

Enough is enough. Deloitte should do the right thing and drop their appeal now.

This was a letter sent to The Actuary on 12 September, but which they chose to publish neither in the magazine nor on the website.

Dear Sir

In response to the interview with Philip Booth in the September issue, I would just like to point out that the banks did not know during the 2007 financial crisis that they would be bailed out. The day before Alistair Darling announced a £500 billion rescue package in October 2008, shares in RBS fell by almost 40 per cent to a 15-year low, HBOS fell by over 40 per cent, Lloyds TSB dropped by 13 per cent and Barclays by 9 per cent precisely because a bailout was not assumed.

As regards how prudently financial institutions behaved before the changes in insurance regulation in the 1970s and 1980s, I would prefer to listen to the views of someone who was actually there. Frank Redington, in his submission to the Institute of Actuaries in 1981 entitled The Flock and the Sheep and Other Essays, says:

“We have no means now of telling how the profession would have emerged from what would have been the only real test of its collective character which it has had to endure in the last 100 years. When the curtain fell in 1939 the profession was not cutting a very brave figure. Valuation bases were too weak, the rate of bonus was some £5 too high and new business was being sold on prospects which were not achieved until 18 years later. A few reputable offices had their backs to the wall.

“The outcome, if the war had not interrupted the story, would probably have taught us a valuable lesson. As it is we have to conclude regretfully that the profession had not – and, I am sure, has not – learned how to live with its salemen’s promises. To put it another way, we are driving a powerful car but have not yet proved our ability to handle the brakes.”

Regulation was inevitable. The problem which remains is that financial institutions in many cases are too complicated in their current form to regulate effectively. As Robert Reich, former US Secretary of Labor, puts it when arguing for the need to split Wall Street banks, they are “too big to fail, too big to jail, too big to curtail”!

Yours faithfully
Nick Foster

There are many reasons why it is much harder for a small actuarial consulting firm to do business than a large one. Large firms can obviously afford to put people on the committees which design actuarial regulation, whereas small practitioners tend not to be able to spare the billing time lost. This has resulted in many recent developments, in regulation in particular, disproportionately favouring larger firms.

The Technical Actuarial Standards (TAS), whatever your opinion of them and I am generally in favour, have spawned TAS committees in larger firms and, in all firms, has required a redesign of most advice given by pensions actuaries. This has been bad enough for large firms, but much more difficult for firms with one or two actuaries. Large firms can devote resources to producing the personality-free template documents we see springing up all over the place and have a ready source of peer advice to help apply the TASs to new documents as they become necessary. The “tick list” approach of GN9, GN11, GN16, GN19 and the rest, so heavily criticised by the now defunct Board for Actuarial Standards (BAS) when introducing the TASs, did at least make compliance relatively straightforward for small firms, allowing them to concentrate on the far more important and personal task of tailoring advice to the specific needs of their clients.

The new guidance for actuaries on conflicts of interest is similarly slanted. The suggestions are almost all big company solutions, from separation of teams to information barriers to setting up conflicts committees, designed to protect the income of firms with multiple offices from the loss of the ability to provide advice to connected parties. The one man business is pretty much left with “ceasing to act” as a strategy, leaving the field even clearer for the bigger firms.

I have been vaguely aware of this for some time, but since I left a medium-sized consultancy last year and started providing peer review services to small firms, it has been harder to ignore. I do not expect to continue as a sole trader over the long term, but I fear for those who do.

And the latest example that has struck me is the recent behaviour of the Continuous Mortality Investigation (CMI). This is an organisation with a proud tradition of providing analysis and resources on all aspects of mortality, longevity and morbidity to the Actuarial Profession. Anyone could access their materials for free, unlike Hymans Robertson’s Club Vita or the postcode analyses provided by companies like Longevitas. It was public data, available and accessible to public, academics, journalists and actuaries alike, working in the public interest.

No more. A fee structure has been put in place with effect from 1 April this year. Large consultancies will pay what, for them, is a flea bite of a fee. But I imagine some of the small firms will think twice about the relative costs of being locked out or the fee for continued access. And to demonstrate just how unfair it is, I have graphed the cost per qualified UK actuary below:

CMI fees.png

Apart from the fun to be had seeing how the formula impacts different consultancies (and speculating about some of the lobbying that might have been going on to achieve this) the graph shows us that the average cost starts at £250 for a firm with one actuary, but ends at around £30 per actuary for a firm the size of Towers Watson (mainly based on the number of UK actuaries listed in the latest actuarial directory – my apologies if any of these are out of date).

There are anomalies too. A firm with 20 actuaries pays £210 per actuary, whereas one with 21 pays £352 (the highest per actuary cost of all).

It is not as if these are avoidable costs. Funding and accounting cost mortality assumptions may not need to be updated every year but other routine work will. For instance, thanks to changes to the Statutory Money Purchase Illustrations (SMPI) technical memorandums since December 2011 (overseen by the Financial Reporting Council’s (FRC’s) actuarial council with, you guessed it, no one from a small actuarial firm on board), anyone without access to the CMI 2013 projections (which are the first to be pay-to-view) will be unable to provide SMPIs from 6 April next year.

This does not appear to me to be fair treatment of smaller actuarial firms, nor of their clients, who are also small firms. According to the Association of Consulting Actuaries’ (ACA’s) Second Report of the ACA Smaller Firms’ Pensions Survey, published earlier this year, small firms, which the larger consultancies increasingly are finding not cost-effective to service, represent a more and more important sector of the economy:

The small and medium-sized enterprises (SME) sector, here defined as businesses employing 250 or fewer employees, is the largest part of the UK private sector economy in terms of employment. These smaller firms employ over half of the UK’s private sector employees (59.1%) and generate just short of a half (48.8%) of all private sector turnover, amounting to some £1,500 billion per year. They make up over 99% of all UK private sector enterprises. The number of these SMEs has increased by 39% since 2000, whereas there are only just over 6,500 UK private sector enterprises that now employ 250 or more employees compared to 7,200 a decade or so ago (a reduction of 10% over the period).

If the CMI does have to charge for its services, then I would propose a flat per actuary fee, set at a rate designed to generate the same level of income, as a much fairer approach. Assuming this aimed at raising between £250,000 and £300,000 from consultancies next year, I estimate this should result in a per actuary fee of around £100. In my view that would be replacing the mortality of fairness with fairness of mortality.