Economic Applications to Actuarial Work: Personal Pensions and Future Rates of Return

ABSTRACTThis paper considers certain applications of economics to actuarial work, concentrating on three issues of public interest. The background to the first two issues is the Government's encouragement of personal pensions particularly through stakeholder pensions. The paper shows how the use of an economics model enables investigations to be made, firstly on the demand for personal pensions by different income groups and secondly on the likely inequality of benefits between generations due to variations in the rates of return. The conclusion on the first issue is that personal pensions are of little benefit to low-earners, i.e. those the Government most wants to benefit, and recommends a way of rectifying this; the main conclusion on the second issue is that households will take action to mitigate much of the inequality. The third issue, that of estimating future rates of return, is one of key financial importance. The paper reviews relevant economic papers in this area and considers how the actuarial profession may improve communication with the economics discipline and with its members.

Transparent With-Profits — Freedom with Publicity

ABSTRACTWith-profits business has flourished for over a century as a means of providing access to equity-type investment whilst smoothing the volatility risk. Today's world demands greater transparency, and with-profits has come under increasing criticism in this regard. The Working Party concludes that it remains good value as an investment vehicle and suggests how its transparency can be significantly improved.The paper first analyses the characteristics of with-profits, which it notes has been permitted for stakeholder pensions. It then analyses the various criticisms of with-profits and considers how they can be rebutted without destroying its essential nature, pre-supposing the implementation of the Association of British Insurers' (ABI) Raising Standards scheme.The paper concludes that greater transparency is both necessary for rebuttal and also achievable without destroying the with-profits concept, to this end proposing a model for the internal analysis of identified classes of with-profits business and the inclusion of specified additional information in the statutory returns to the regulators. It also proposes that policyholders be given slightly more information than is specified under Raising Standards. Finally the paper analyses the implications for the life assurance industry, which it considers acceptable.