Our country and government face many challenges that are almost defined by their uncertainty and require specialist help in risk and finance.
Questions we need to address include how we pay for pensions in the future, and how we best help developing countries deal with the fallout from natural disasters exacerbated by climate change. What are the biggest financial risks facing the country in the next 30 years? How do we plan to decommission our ageing nuclear power stations?
More immediately, as a country we must also consider how our approach to these and other questions changes once we exit the European Union. Who does the Civil Service turn to for specialist help in these areas?
What is an actuary, and what do they do?
Put simply, actuaries help the government spend wisely and save money. Using statistical techniques and mathematical skills, they assess the probability of an event and its financial consequences.
Experts in the Government Actuary's Department (GAD) help public sector clients understand complex challenges around financial risk and uncertainty. This includes, for example, the longer-term implications of climate change, and developments in human longevity.
Actuaries ask, then analyse and advise on, the ‘what-if?’ questions around public sector pension schemes, insurance
and investment markets, and undertake financial modelling and quality assurance.
In 1919, the UK faced an uncertain future of a different kind following the conclusion of World War 1. To be fit for the new peacetime priorities, government had to be reorganised. It was in the landmark Haldane Report of the Machinery of Government Committee – which set the pattern for much of the modern form of government we are familiar with today – that the role of actuaries in government was formally recognised, leading to the founding of the Government Actuary’s Department.
The Government Actuary and a team of specialist actuarial professionals are still working hard in government today. Because actuaries deal in long-term issues, some of the areas we work in are the same now as they were 100 years ago. For example, we continue to advise on how to pay for Civil Service pensions and on the planning of National Insurance funds. Our mission to support effective decision-making and robust reporting within government has also broadened our work into new areas.
Finding the answers
Experts in GAD have been seeking to understand where our knowledge of financial risk and uncertainty, investments, insurance and mathematical modelling can help other government departments. We have found lots of answers to this in the past few years.
We work for departments in many areas across government, including:
• advising the government on the cost of pensions
• building the methodology to help investors decide what to pay for student loans
• modelling the risk to enable planning of financial help for people who need it most after natural disasters
• building understanding of the cost of helping passengers get home if their airline becomes insolvent
• advising on how to determine the amounts paid out in personal injury claims
Working across government
Experts at GAD provide specialist knowledge and advice on the liabilities held across government. This work was part of the recent balance sheet review work carried out by HM Treasury (HMT).
These liabilities are made up of a wide range of explicit or implicit promises and guarantees made. For example, a promise to pay pensions in the future, or to step in if losses on a contract get beyond a certain point. Having built up knowledge through the review of these liabilities, we saw the opportunity to work with other government departments to share best practice in managing liabilities and help lead co-operation and co-ordination of effort.
So, in February 2019, GAD and HMT held an event where the people responsible for taking on and managing financial liabilities in their departments could share their experiences. These included stories on liabilities from drought risk in developing countries, flood risk to academies, and local government risks. Cross-departmental groups collaborated to come up with new ideas and approaches.
Following this event, GAD and HMT continue to work with departments to look at how liabilities can be managed in line with best practice. This helps protect the government against unnecessary financial losses, as well as helping to compensate for the risks it takes on.
In 2017 the Prime Minister announced the creation of the Centre for Disaster Protection. Based in the City of London, it is funded by and is a close partner of the Department for International Development (DFID) and the World Bank’s crisis and disaster risk financial London hub. The centre works to find better ways to prevent disasters from devastating lives and economies, supporting countries to manage disaster risk.
GAD provides analytical capability to the centre, building on work we have done in the past few years in this area both for DFID and the World Bank. Our analytical expertise and understanding of risk have allowed us to help set up risk-financing programmes in developing countries. These programmes are designed to get the money quickly and efficiently to those hardest hit by drought, flood and other disasters.
In 2018, GAD provided analysis for the World Bank to help with their work to strengthen Kenya’s Hunger Safety Net Programme. The programme, supported by both the World Bank and DFID, provides ‘shock-responsive’ social protection, supporting chronically poor people in northern Kenya with regular unconditional cash transfers. In this case, being shock-responsive means that, in the event of weather-related shocks such as drought, the programme scales up to provide cash payments to those affected; for example, if their crops fail.
GAD’s analysis looked at how the shock response could be financed by assessing the amount of funding required and the likelihood of it being needed. This was used to inform and guide the policy dialogue between the World Bank and the Government of Kenya.
Helping regulators to help consumers
Economic regulators typically set price controls on the companies they regulate, to limit the maximum revenue the firms are permitted to earn. This is to protect consumers in industries where there is a monopoly or a low level of competition, such as utilities. As part of this process the regulator has to consider a company’s often significant pension commitments, to ensure that unnecessary pension costs are not passed on to consumers.
GAD provides actuarial support to economic regulators such as Ofgem, the Utility Regulator Northern Ireland, and the Civil Aviation Authority to help them do this. Our work provides the regulators with an informed view of the relevant pension arrangements, to help them work out the allowance to be made for pension costs when setting price control limits.
Little things to help every day
When procuring services, government professionals rely on central guidance on how to set up contracts, including managing the associated risks. GAD has been working with the Government Legal Department and the Cabinet Office to write new guidance to help in this area. The guidance will help make it easier to think about what insurance is (or isn’t) needed.
While this is a relatively small piece of work for us, it makes a real difference for others in government. We have spoken to procurement teams across government to ensure the guidance meets their needs. They have shown a keen interest, as this is a complex area where they often need help.
What about EU Exit?
At this point you might be asking, what about EU Exit? Will there be areas where GAD’s specialist advice can help with the uncertainty here?
We have begun to help in some areas, such as looking at how travel insurance and pension arrangements will be affected. We anticipate that, as the focus of government action moves from short-term planning to longer-term issues, we will have much more to contribute. The changing nature of our relationships with EU countries will affect how we take on and regulate risks to the country and government, and our goal is to be there to help when departments need us.
A new asset class
In December 2017, the government began the sale of student loans to private investors. This was the first sale of this type of loan and, as a result, created a new type of investment asset in the UK. The challenge for UK Government Investments (UKGI) was to put a value on this new asset, in a way that was transparent, accurate, and could be shared with interested investors. Doing this would allow UKGI to achieve best value for money for the sale.
UKGI chose GAD’s approach of offering both modelling accuracy and simplicity, ahead of competitors’ proposals. We built a new, statistically based computer model, taking into account the needs of UKGI and the other stakeholders.
We worked side-by-side with UKGI at their offices and have established a secondment programme, which continues to operate and provide financial modelling expertise. The model enabled the first sale of its type and continues to support further loan sales.
Actuaries and analysts in government
GAD’s actuaries and analysts are part of the Civil Service’s Analysis Function, alongside other analytical professions including economists, engineers, operational researchers, scientists, social researchers, statisticians and data scientists.
The Analysis Function is the go-to hub for best practice research and analysis services within government. Within that, the actuaries in government are concentrated in GAD to provide critical mass for advice, challenge and insight based on evidence to help client departments deliver improved outcomes.
We aren’t the only actuaries in the public sector, however, and we are seeking ways to collaborate on leadership and learning with other actuaries in the sector. These include actuaries in the Prudential Regulation Authority (part of the Bank of England), the Financial Conduct Authority, the Pension Protection Fund, and the Pensions Regulator.