THE SOCIETY OF ACTUARIES IN IRELAND...The new President of the Society of Actuaries in Ireland,...

THE SOCIETY OF ACTUARIES IN IRELAND

Correction to December 2009 Newsletter (attached) The Society’s Second Study of Annuitant Mortality We regret that Table 4 of the above report is not correct. We apologise for any inconvenience this may

have caused. The correct Table 4 is as follows:

Age Range Males Females All

- 60 69% 100% 78%

60 - 70 80% 104% 84%

70 + 84% 86% 85%

Overall 83% 87% 84%

This information, and that in the Newsletter report, is presented purely for public interest. The data and

results have not been subject to the scrutiny necessary were they to be used for commercial decisions and

the Aggregated Data Method used means that mistakes made by contributing offices cannot be identified.

The Society makes no warranty as to the accuracy of the results and owes no duty of care to any party in

respect of them.

The new President of the Society ofActuaries in Ireland, Kevin Murphy,delivered his President’s Address to a wellattended Society meeting on the 15th ofSeptember 2009.

Kevin’s Address was structured into threemain sections:

1. How the Society might respond to theeconomic and financial crisisexperienced in recent years;

2. Updating on key development areasbeing worked on in the Society’sStrategic Plan;

3. Key additional priorities Kevin wishesto advance during his Presidency.

Responding to the CrisisIn this section of his address, Kevinpointed out that over the long term theSociety will not be judged on the qualityof its inputs (for example, the skills wehave and the models we use), but ratheron the quality of its outputs – and inparticular whether we enhance the longterm financial position of the individualsand institutions we work for.

Actuaries are well regarded for their strongforecasting abilities, but it is important notto overstate the reliability of forecasts,especially when the forecast is over a verylong term or where underlying variablesare subject to systemic change.

The area of pensions investment risk is ofgreat concern, with many DB and DCschemes currently taking too much risk.Kevin pointed out that we need to takeresponsibility for dealing with this issue,and suggested a number of stages here,firstly, develop ways of measuring riskeffectively, secondly, agree a standardreflecting the maximum level of risk thatshould be taken and thirdly, agree atimescale for adjustment to that standardwith the Regulator.

Kevin’s view is that, since evidence showsthat consumers have great difficultyunderstanding financial and investmentissues, we can learn from thepharmaceutical industry which operateson the basis that responsibility forensuring products are used safely restswith the manufacturers and advisors,rather than the consumers.

Kevin Murphy’s Presidential Address . . . . . . . . .Pages 1 - 2

New Qualifiers’ Reception . . . . . . . .

Profile on Kevin Murphy, SAI President . . . . . . . . . . . . . . . . . .Page 3

Life Assurance Valuation Principles: Now and Tomorrow . . . . . . . . .Pages 4 - 5

InDCent Exposure – Making DCSafer for Members . . . . . . . . . .Pages 6 - 7

Climate Change . . . . . . . . . . . .Pages 8 - 9

Actuarial Economic Forecasting . . . . . . . . . . . . . .Pages 10 - 11

Annuitant Mortality Study . .Pages 12 - 13

Pension Risk . . . . . . . . . . . . . . . . . .Page 14

Student Pool Competition . . . . . . .Page 15

Faculty v. Society Golf . . . . . . . . . .Page 15

Back Page . . . . . . . . . . . . . . . . . . . .Page 16

Contents

Decemberr Newsletter 2009 · 1 · SAI

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The Society of Actuaries in IrelandThe Society of Actuaries in Ireland

Kevin Murphy’s Presidential Address to theSociety of Actuaries in Ireland

Kevin Murphy, President of the Society of Actuaries in Ireland

continued...

Update on Strategic PlanCouncil drafted a three year Strategic Planin 2008, and considerable progress wasmade on many of the key areas targetedin the Plan during 2008/09, including theestablishing of a number of newcommittees to tackle key developmentareas, including:

• Solvency II, supporting members inpreparing for Solvency II;

• New Opportunities for Actuaries;

• CPD, keeping the need for ongoingmember education in focus;

• Demography, to develop new Irishmortality tables.

Considerable work has also been done onthe Standards agenda, with the followinghigh-level goals:

• Set up a counterforce to ensure ourStandards can be clearly seen not to besubject to commercial capture;

• Ensure Standards are complied with;

• Ensure a strong disciplinary process isin place to support full compliancewith Standards.

Principal New PrioritiesIn the final section of his Address, Kevindrew the audience’s attention to a numberof key new priorities for the Society duringhis presidency:

• All main committees of the Societyshould engage fully and openly withdealing with the implications of thefinancial and economic crises across allour business areas;

• Keep our skills up to date – perhapssupported by a new Society staffmember working full-time oneducation matters;

• Update our Ethical Standards, perhapsby moving from the current rules -based PCS to a more principles - basedapproach as recently adopted by someother professions;

• Become risk managers – actuaries havean opportunity to embrace theopportunity that will arise from a muchgreater focus on risk management(both in the financial services businessand beyond) that will arise followingthe turmoil of recent years and withthe introduction of the new Solvency IIregime.

ConclusionKevin concluded by acknowledging theeconomic challenges facing Ireland andreiterating his confidence that theactuarial profession can rise to thechallenge of serving its customers well in amore challenging world. He spoke of thepride and enthusiasm he feels aboutserving as President for the next twoyears, and thanked members forhonouring him by asking him to take onthe position.

Kevin Murphy’s Presidential Address to the Society of Actuaries in Ireland continued...

December Newsletter 2009 · 2 · SAI

L to R: Sheena Frost, Fiona Doherty, Zora Law, Sarah Parks, Cathriona Callan, Carmel McElvaney, Geraldine Ahern2nd Row: Vincent Kelly, James Bradley, Mairead Kenny, Ann Hayes, Kevin Murphy (President), Donna McEneaney, Caroline Lynch, GerardConlon, Linda CollierBack Row: Elena McElroy De La Rosa, Padraig Flanagan, Denise Collins, Karl Donner, Emmet Leahy, Ben Deans, Paul O’Shanahan, FergusCollis and Conor Gaffney.

New Qualifiers’ ReceptionThe President, Kevin Murphy, hosted a reception for new qualifiers in Dublin Castle on 22nd October. This occasion afforded theopportunity for the President, members of Council and representatives from UCD and DCU to congratulate the new qualifiers and tomeet their families and friends.

Where are you from?I am originally from Cork. I went to thelocal national school and then on toChristian Brothers College which is in thecentre of Cork city. From there I went onto study science in UCC. My final degreewas in Maths and Statistics.

What attracted you to the actuarial profession?When I chose my degree I was interestedin science and in particular maths so thatreflected my choice of degree. AfterUniversity it was a choice to become anacademic or to work. Having decided towork I looked at the possible optionswhich were to become an Actuary, anAccountant, or join the CSO - a popularoption for people with a statistics degreefrom Cork. I finally opted for the ActuarialProfession as it offered a mixture ofcontinuing a mathematical centredprofession and yet applying its ideas to thereal world.

What is your career history?I joined Irish Life in 1972 and qualified in1976.

In Irish Life I had done the usual range ofactuarial jobs. I did pension schemeactuary work in the pension area, productdevelopment and marketing work andthen gradually my career blossomed into aGeneral Manager role.

I headed up the Retail part of Irish Life andat that stage it was quite a buoyantmarket with rapid growth in unit linkedbusiness and managing as we do todaythe ups and downs of the Stock Market.

The most significant career change in mylife occurred in 1992 when I was asked tohead up Irish Life Investment Managers.This was a whole new world for me and itwas quite a big challenge for me to getmy head around running a fundmanagement company.

However we did find a clear strategy andwe focussed on a new active process and anew indexation process which ultimatelysignificantly repositioned ILIM to be thebusiness it is today.

Subsequently I also managed Irish LifeCorporate Business which was a businessarm of Irish Life which needed to berestructured. We devised a strategy basedon significant improvement in customerservice and a high level of staffengagement. That has been the drivingforce behind this business ‘til today.The next change in my career was in 2005when I became Chief Executive of Irish Life

and led Irish Life through a very buoyantperiod in the Irish economy and thenrecently the subsequent downturn.

As everybody is aware, in quite unusualcircumstances in June of this year Ibecame the Group Chief Executive of IrishLife & Permanent. I became the Presidentof the Society on a Monday and GroupCEO the following Wednesday. I amunlikely to have such an exciting week asthis again in my career but it certainly wasa fantastic week for me.

When did you first get involvedwith the Society?I have a long association with the Society.I was the Secretary of the Society in thelate ‘70s when it was quite a small group.We did quite a lot of work toprofessionalise the Society. However mymain claim to fame is the purchase of thefamous chain of office that hangs aroundeach President’s neck. As I explained inmy President’s speech it took us quite awhile to agree the content for the chain.We had collected the money and with therapid rise in the price of goldunfortunately the weight of the chain fellweek by week as we continued to debatethe precise emblem of the Society. Myonly paper to the Society has been onInvestment Risk which I presented in 2005which captures my own personal interestin this area.

What are the main challengesfacing the Society and the profession at the moment?The big challenge for the profession iscoping with the current crisis. Obviouslyeverybody is asking pretty fundamentalquestions of many of the players infinancial services including ourselves.Within the pension business we have thedifficult environment which many definedbenefit schemes find themselves in and inthe future we have to be careful that wedon’t repeat the same mistakes again inthe world of defined contribution which isthe emerging new world. The lifeassurance industry has many unhappycustomers given the investmentexperience they have just gone through.So there is a significant change agendathat needs to be tackled.

What are you top priorities foryour presidency?Firstly we have to deal with the knock oneffects of the current crisis. These will have implications mainly in the pensionand life assurance business; particularly inthe area of investment risk.

The other major priority is the whole areaof Solvency II. This is about a challengeand an opportunity. The challenge is tomove to a whole new regulatoryenvironment and the opportunity I feel isfor actuaries to widen the scope of theircontribution to the organisations theywork with by the advent of a new riskmanager position. My view is riskmanagement is a significant growth areafor all financial services and Solvency II willbe the catalyst for us to widen our skillbase to be leaders in this development.

What do you do outside yourbusiness time?I have a range of interests here.

I am an enthusiastic but poor golfer andbattle around Old Conna every Sundaymorning.

I am very interested in sports and I attendmany major sporting events. I recentlyattended the Olympics in Beijing whichwas a fantastic and interesting place andthe quality of sport was unsurpassed.

I also like playing cards where I havedeveloped occasionally lucrative skills inthe areas of poker and bridge.

And in summaryIn summary, Ireland is in a difficultposition at the moment. But we asactuaries have a strong history of lookingafter our clients with integrity,professionalism, and objectivity.Tomorrow is going to be even moredemanding for those qualities but I amconfident we will rise to the challenges ofthis world.

I am really delighted to have been chosenby you to be the President of the Societyof Actuaries. I look forward to thechallenge of leading the profession for thenext two years and I do thank you for thehonour of asking me to do it.


Profile on Kevin Murphy

IntroductionOn Tuesday 6th of October, Tony Jefferypresented, to a well attended eveningmeeting in the Alexander Hotel, on howlife office valuation methods have changedover the years. The main aim of thepresentation was to outline the role of thelife office actuary under Solvency II and toemphasise the importance of Pillar 2 andPillar 3. The views expressed in thepresentation were Tony’s own personalopinions rather than being those of hisemployer or any previous employer.

Part A: A Review of thePrinciples of Life OfficeValuationsTony opened by introducing theprinciples of Life Office Valuations whichwere laid down by Skerman in 1966,namely:

1. That liabilities should be valued by anet - premium method or on someother basis producing strongerreserves.

2. That appropriate zillmerized reserveswould be acceptable in order to allowfor initial expenses.

3. Adequate margins over the currentrate of expenses should be kept in thevaluation of the liabilities in order toprovide for future renewal expenses.

4. Appropriate recognized tables ofmortality should be employed.

5. That valuation of the liabilities shouldbe at rates of interest lower thanimplicit in the valuation of the assets,with due regard to the incidence oftaxation.

In the above, assets are only mentionedonce and there is no account taken ofcredit, market or operational risk. What isbeing described is a method rather thansetting principles for solvency.

He went on to outline what he believesare the appropriate principles to take intoaccount:

1. Basic Principle: A company needs toensure that it has enough reserves tomeet its liabilities as and when they falldue.

2. Timing Principle: The reserves set upmust be sufficient to pay for allliabilities that have already beenincurred.

3. Prudence Principle: The chance thatthe reserves are adequate to meet theliabilities should be reasonably high.

4. Public Perception Principle: Risksshould be assessed on the basis of how

the public would perceive them, inretrospect, should the office fail.

5. Publicity Principle: If an approachcannot withstand exposure to thepublic view, then it is not valid.

6. Stability Principle: If a method leadsto the financial system being unstableor pro-cyclical, then it is dangerous.

In the next part, Tony described variousvaluation methods that have been used orare currently being used by life offices. Thefirst of these is the net premium valuationmethod which involves calculating apresent value for the contractual liabilitiesof a contract and deducting the value offuture premiums. Both contractualliabilities and future premiums in thiscalculation allow only for mortality andinterest. Prudence is allowed for by usinglower interest rates than are earned andfrom the gap between the office and thenet premium. However, this method is notcommonly used nowadays.

The second methodology that Tonydescribed was the Solvency II modelwhere the company starts with theeconomic best estimate of the liabilities towhich is added the market value of risk.This is then projected forward one year inorder to see what the chances of thevarious risk factors occurring are. Thetarget capital requirement under SolvencyII is referred to as the Solvency CapitalRequirement (SCR). It is to be calculatedby means of a standard formula orthrough the use of an internal model. The basic principle of the SCR is that wemeet contractual liabilities with 99.5%confidence over a one year time horizon.The risks considered include market risk,credit risk, insurance risk and operationalrisk.

The next methodology that was describedwas Solvency I. In practice, what we dounder Solvency I is far more complex thanthe pure Valuation Balance Sheet concept.Cash reserves are based on a lifetimedeterministic projection. New businessprofitability is calculated using profit tests.Mismatching is calculated using stresstests. The cost of guarantees is calculatedusing stochastic projections. The FCR isbased on scenario projections with newbusiness. This has to be carried out everythree years.

Part B: Welcome to the BlackParadeIn this section, Tony outlined some ofthe reasons for the recent financialcrashes and the issues with Solvency II.The “Black Parade”, which is the title of

the third CD of the leading EMO bandMy Chemical Romance (“MinimumCapital Requirement”), is used as ametaphor for the never - ending andmore frequent financial crashes andcollapses that have been seen in ourfinancial markets in recent years.

Under Solvency II, companies are requiredto have sufficient capital to cover a 1 in200 year event but is this conservativeenough? Tony felt that in the UK, therehas not been a significant failure of a life company since the 1970’s, eventhough Equitable did have their issues but nonetheless remained solvent. The problem is that the public havebecome less tolerant of any form of failureof life assurance companies in recent yearsand this has placed a significant amountof pressure on actuaries.

In Ireland, there are approximately 350insurance companies, including directcompanies and reinsurers. Assuming thechance of failure of 0.5% is independentfor each company in Ireland, then thenumber of companies failing (to meettheir SCR requirements) would be givenby a binomial distribution. This wouldresult in failures 5 years out of 6. However,companies’ chances of failure are, in fact,not independent of each other.

Other issues with Solvency II(Pillar 1)Firstly, we should consider whether thecalibrations being used are correct.Secondly, the calibrations are done on anindividual 1 in 200 for each risk factor andthen a correlation matrix is applied,resulting in the correlations being basedon very sketchy data. Stresses are notadditive. For example, the effect of lowerinterest rates and lower mortality on anannuity may be worse than the sum of thetwo effects taken individually.

The next issue is that the one yearapproach conceals problems that are moreclearly illustrated in a lifetime projection. Ifa 1 in 200 event was to occur, realisticallythe price of the company should be lowerthan it was before. However, due to thenatural swarming of companies together,there may be several companies in thesame position all looking for a buyerwhich would then push the price up.Another issue is whether it is correct thatcompanies should place a value on thechances of consumers staying with thecompany in the future.


Life Office Valuation Principles:

The Fish and the ShoalIn this section, Tony introduced a verygood picture of the behaviour of financialinstitutions in the industry using theconcept of the fish and the shoal. Withanimals and birds there is a naturaltendency for them to flock together fordefensive reasons together with being ableto watch out for predators. Financialinstitutions tend to exhibit similarbehaviour in the products that they sell,the price they charge, in their assessmentof risks and how they reserve for them.There are several reasons for this:

• Distribution channels expectcompanies to sell products that aresimilar to their competitors.

• If other companies are making money,shareholders expect the same fromtheir company.

• Company’s assumptions can be drivenby what the regulator sees asconservative.

• Safety in numbers for the individualcompany.

• It can be difficult to resist the call ofwhat other companies are doing.

However, this can lead to many problems.It is in the interest of the fish for the shoalto be close together. An example of this atthe moment is where the bank bail outsare being forced on the nationalgovernment. We can see that much of thecurrent financial turmoil is as a result ofthe shoal being close together and no onefinancial institution foresaw the incomingproblems. It is in the interest of the shoalfor the shoal to be widely dispersed sothat some financial institutions may beable to see the risk of incoming problems.The current situation that we have withour banks is that they were all in the sameboat which has exacerbated the problems.

There is a concern that life assurancecompanies may be subject tomanipulation with the existence of theshoal. Solvency II is being driven as amaximum harmonisation initiative in theEU and, therefore, if there is any chance ofmanipulation it could have adverseconsequences.

Part C: ORSA’s for CoursesSo far in the presentation, Tony presentedquite a grim picture of Solvency II.However, he has only been referring toPillar 1 of Solvency II. In this section, Tonycovered Pillar 2 and Pillar 3. Pillar 2 setsout requirements for the governance andrisk management of insurers, as well as forthe effective supervision of insurers. Pillar 3focuses on disclosure and transparency

requirements. They are basically trying toachieve the same thing but from adifferent viewpoint. There is much greaterscope for individual assessment andvariation under these Pillars than underPillar 1 and Tony has suggested some ofthese.

The non-use testIf a company wants to use an internalmodel instead of the SCR, they are obligedto demonstrate that it is used throughoutthe company and not just within theactuarial department, including that thebusiness is controlled and main risks areidentified/managed via the use of theinternal model. However, the concern inthe use of an internal model is that peopleaccept it as it is and fail to questionwhether the assumptions used in it are stillacceptable. Tony suggests that non-usetests should be employed as well as stresstests and scenario tests being appliedtogether with the use of past real events,for example, the performance of Japaneseequities in the past. The key message is touse things that you haven’t tried orquestioned before.

The Abuse testFor companies that may be open to abusefrom predators particularly forced trades,you should ensure that you are not thefirst company in the shoal in this position.You could hold higher capital than yourcompetitors to avoid this.

The use it or lose testIf your company is dependent onmanagement actions, you should ensurethat there are procedures in place to allowthese actions to take place before thesituation becomes too late.

The Losing Policyholder testThe company should check that it canremain solvent if it were to lose all of itspolicyholders and also have sufficientcapital to pay policyholders, their benefits.Capital provided by the future earnings ofpolicies is considered as Tier 3 capital andcannot be used to meet the MCR.

Tony concluded the presentation with asummary of the topics covered outlininghow the role of a life office actuary underSolvency II will be more than justcalculating SCR’s and emphasised theimportance of Pillar 2 and 3 over Pillar 1.

DiscussionThe presentation was followed by anumber of questions and comments fromvarious attendees. It was suggested that allthe pillars will not stop something fromhappening in the future but how will wedeal with the crisis the next time round?

Tony commented that we have seenthings happen in the past but we didn’tdo anything to stop these. We need toensure that we are not discussing theparameters used by an individualcompany outside of that company similarto the fish and the shoal effect.

Another issue raised was that it is difficultto set best estimate assumptions whenthere is a lack of data available and alsowhether Tony feels that there is too muchpublication in Solvency II? Tony respondedby stating that the lack of data issue isonly problematic for start up companies.He also emphasised the importance ofgood documentation and communicationof Solvency II is very important. It isimportant to keep our eyes wide open andSolvency II will help us.

Another attendee commented that underSolvency II, we have to tell the regulatorwhat we are doing whereas underSolvency I the regulator tells us what todo. Tony commented that, yes, this iscorrect but this will result in companiesstarting to question their internal modelseven more as it lays down the law forcompanies to manage their own risks.Another attendee commented that heliked the picture that Tony had presentedof the fish and the shoal. However, do younot have to be in the shoal to beprotected? Tony commented that it isnecessary to look out for any hidden risksand that there have been variousexamples of these in the past.

Finally, an attendee commented thatEuropean actuaries are trying continuouslyto emphasise to regulators the applicationof judgement. Regulators want moredetail and less dependency on judgement.The Actuarial Profession needs to come upwith an approach on the application ofjudgement. Tony agreed with the abovecomments stating that regulators alwayspush for prescription. Tony alsocommended the work of the EuropeanConsultative Committee.

Both the presentation and the paper areavailable on the Society’s website.

Geraldine Ahern

Now and Tomorrow


Eoghan Burns, Damian Fadden and DavidHarney gave a presentation to the Societyof Actuaries in Ireland on 20th October2009 on their joint paper entitled“InDCent Exposure – making DC safer formembers”. The authors investigated:

• how DC product providers mightmaximise customer satisfaction for aportfolio of customers with varying riskappetites

• how much risk a customer may take ifhe/she wants to achieve increasingpredictability approaching retirement

• practical issues to consider for definedcontribution investment strategies.

David Harney was the first to present. He questioned whether intermediateinformation matters to a customer on theroad to retirement. To address thisquestion, he firstly examined a simplebinomial model which illustrated that theexpected return from investment in a riskyasset was greater than the expected returnof an asset with risk free return. Davidgave a simple risk constraint to beconsidered in conjunction with this model;that the probability of positive return mustbe greater than 66%. Over the longerterm, the constraint was satisfied if oneinvested in risky assets but failed as theterm was shortened. However a numberof issues arise, namely:

• the rule is arbitrary which can be aproblem with more complex models

• the rule does not allow for all availableinformation

• the ‘term paradox’ is a big problem asthis means the investment term forrisky assets can never be more than thetime period for information updates.

David then presented a utility model todemonstrate customer satisfaction asutility theory overcomes some of thehurdles outlined above.

This model makes use of diminishingmarginal utility, that is, additionalcustomer satisfaction decreases asoutperformance increases. Conversely,added customer dissatisfaction increases asunderperformance increases. Davidillustrated that, whilst the percentageinvested in risky assets depends on yourutility decay factor, for the ‘average’customer the optimal exposure to riskyassets as determined by his model is a50/50 strategy between risky and risk freeassets.

David provided illustrations for a wideranging portfolio of customers with

different risk profiles. His results estimatedthe optimal investment in risky assets foreach category of customer and theirassociated expected utility if this optimalinvestment strategy is followed. Davidtook this a step further and introduced tothe illustration the outcomes for emotionalcustomers who expect money back. Inboth of these models, a 50% investmentin risky assets emerges as the optimalstrategy for the ‘average’ customer.

Moving from theoretical modelling tocustomer expectations, David emphasisedthe fact that nowadays customerexpectations from private DC pensionplans are too high. David stated that amuch more realistic expectation would bea tax free lump sum of 1.5 times salaryplus a pension of 25% of salary. The Statepension may be taken into account inaddition to the above. David alsoadvocated providing members withillustrations based on 0% real return so asnot to create an expectation in this regard.Using zero real returns also simplifiescommunication and removes some of thesubjectivity of different projectionsdepending on your fund choice.

David concluded with three points:

1. The case for life-styling is simple.People generally become more riskaverse as they approach retirement.

2. Projections should assume fundgrowth equals salary inflation

3. More realistic private pension provisionexpectations are needed.

Next to the presenters’ podium wasEoghan Burns. Eoghan set the scene bylooking at the journey that customersmake in respect of pension provision. For DC pensions the uncertainty isenormous. Lifestyling is often viewed asgiving away upside risk. However, there isthe obvious argument that predictability isneeded as retirement approaches and thecustomer’s risk appetite should determinehis/her investment strategy.

Eoghan presented a model for a 30 yearold individual demonstrating the chancesof missing a pension target of 40% ofsalary given different investment strategiesvarying from 100% in equities to 100% inrisk-free assets. Following a risk freeinvestment strategy results in a definitefailure. Adopting one of the three givenswitching strategies results in a higherchance of failing to meet the target thanremaining in the relevant initial fund mix.However, investing in 100% equities givesthe best mean and median results.

The second example presented was for a64 year old. Under this scenario the resultsillustrated the best strategy is investmentin 100% risk free assets. Therefore, we seethat the best strategy can vary significantlydepending on the age of the individual inquestion.

From this the importance of theintermediate information provided to DCmembers is evident. Ultimately,individuals have three possible decisions ateach review of their pension provisionarrangements:

1. Accept the changed outcome

2. Change contribution amounts

3. Ignore the information provided.

Eoghan noted the need for predictability.Contributions obviously lower disposableincome. In addition, variability ofoutcomes along the path to retirementmay reduce confidence in the pensionprovision and result in a reluctance toincrease funding.

Eoghan then illustrated another modelwhich included a series of reviews of anindividual’s funding position at ages 40,50, 55, 60 and annually thereafter for arange of investment strategies. The aimwas to assess the stability of the expected‘Pension Replacement Ratio’ (PRR) overtime. The proposed measure is that theprojected PRR is no worse than 10% lowerthan the PRR at the preceding review.

The model demonstrated that moststrategies have a low risk of substantialreduction in projected pension at age 40.This is due to the fact that a significantproportion of the projected pension isfunded from future contributions. At age50, 55 and 60, all strategies, apart fromthe risk free approach, result in significantchances of failure of up to 45%. Thechances of failure are considerablyreduced in the annual review from age 61to 65 for two strategies, namely, themanaged fund approach switching intorisk free assets over the ten years prior toretirement and the high equity approachwhich switches over 25 years. However, itis evident that having fixed contributionshas a substantially negative impact on theresults.

Consequently, Eoghan considered a similarmodel allowing for variable contributions.The fixed interest strategy gives the bestoutcome; however, the trade off is asignificant increase in cost. The outcomesimprove substantially for the switching


InDCent Exposure -

strategies. Eoghan concluded that, inorder to achieve an acceptable level ofpredictability, a switching period of 10years or more gives the most favourableresults. Eoghan noted that whilst it isimpossible to fully eliminate uncertainty,traditional strategies risk a significant levelof disappointment to the individualwithout the incorporation of life-styling.He also highlighted that effective targetingrequires contribution flexibility but suchflexibility is often not practical. Overall, heconcluded that modelling supports highequity holding at younger ages butequities should be reduced at least tenyears from retirement.

Damian Fadden introduced the concept ofdesigning customer friendly lifestylestrategies. He set out a number of stagesthat should be considered.

• Definition of risk – Damian believesthat we must redefine risk to be thevariability in benefits achievedcompared to those targeted. This willresult in extending the concept of riskto incorporate realistic target benefits,member engagement, member’s timehorizon, funding flexibility and otherbroader personal circumstances.

• Benefit Targeting – Damian reiteratedDavid’s suggestion of defining a morerational target benefit as a tax freelump sum of 1.5 times salary plus apension benefit of 25% of salary. He also advocated incorporating Statepension benefits into the benefittarget. He went on to suggest havinga priority order for benefits. Namely,tax free lump sum followed by anappropriate pension with the balanceused to fund either additional pensionbenefits or an ARF arrangement.

• The ‘Accumulation’ Fund – The panelfavour an approach which wouldinvolve reviewing the benefit targetand building more effective de-riskingprogrammes via prudent phased de-risking within a lifestyle approach.

• De-risking – With the aim of limitingthe downside to a 10% maximumexpected peak to trough fall andinclude some inflation protection, thetheory is to invest mostly in cash, fixedand inflation - linked bonds, with smallholdings in equities and alternativeassets. A further consideration iswhether to de-risk within the fund orset up a separate de-risking fund. The net impact in financial terms is thesame. However, the panel believe thelatter option provides psychologicaland presentational advantages as the

risk management element is moreapparent.

• Targeting phase – Damian suggested a gradual movement to appropriatebenefit matching funds with a cashfund backing the targeted lump sum,annuity matching (to the degreepossible) bond based investments forthe pension element and possibly aninvestment mix similar to the de-risking fund mix for the ARF element ofthe fund where appropriate. This canbe modified to reflect individualcircumstances.

• Stakeholders Roles – Damian also setout what he believes are the roles foreach of the stakeholders.

1. Providers:

- Provide more tailored and effective risk management services.

- Identify poor investment choices within schemes

- Improve communication to improve members’ understanding

2. Trustees:

- Adopt considered position on default investment choice

- Offer a suitable but limited range of appropriate investment fund choices

- Manage risk surrounding members investment choices as they approach retirement

3. Advisors:

- Broaden investment conversation in relation to risk management

- Provide the advice and guidance that members want

4. Regulators:

- Extend ARF offering to DC funds

- Recommend a lifestyle strategy as appropriate default strategy

- Change projection basis so that investment return is set in line with salary growth only

5. Employers:

- Set up appropriate scheme with reasonable contributions

- Awareness of employees’ pension outcome

- Incentivise behavioural triggers

Provide financial education

6. DC Members:

- Must take ownership of pension savings

Damian concluded the presentation byrecapping on the main items addressed.He reiterated the belief that we mustassess the risk appetite of the consumer.As risk appetite generally decreases asretirement approaches, the case forpursuing lifestyling becomes apparent.Whilst modelling shows a case for equityinvestment it also emphasises the need forde-risking well before retirement.

In addition, Damian stressed theimportance of redefining individualsexpectations at retirement. These mustbecome more realistic. Furthermore,funding and investment issues must beconsidered together. We must respond tochanging variables and each individual’scircumstances.

Finally, Damian noted two possible actionsfor the Society. He believes that theSociety could lobby for regulatory changesto require the use of a lifestyling as adefault strategy. He also believes theSociety should consider changingprojection bases by setting assumed fundgrowth to be equal to assumed salaryinflation.

The presentation concluded and the floorwas opened up to questions. A livelydiscussion ensued.

The presenters were thanked for theircontribution. The paper setting out thepresenters’ research and conclusions isavailable on the Society’s website.

Laura Eyres


Making DC Safer for Members


Trevor Maynard is manager of emergingrisks at Lloyd’s of London. His roleinvolves monitoring risks like nano-technology, cyber terrorism, pandemicsand, of course, climate change. He hasauthored or edited most of Lloyd’s reportson climate change, represents Lloyd’s onthe managing board of Climate Wise andis also on the Finance Initiative ofthe United Nations Environment Program.He came to Dublin on 29th October todiscuss climate change: – risks, politics andopportunities.

A brief lesson…A pre-assumption of this meeting was that climate change is really happening so if you are a cynic, stop reading now! The meeting began with a briefexplanation of what climate change is.The greenhouse effect is the heating up ofthe earth due to the presence ofgreenhouse gases. These greenhousegases in the earth’s atmosphere act as ablanket above the earth, trapping the heatin. The main greenhouse gases in theearth's atmosphere are water vapor,carbon dioxide, methane, nitrous oxide,and ozone. An increase in greenhousegases leads to a thicker blanket and moreheat being trapped, thus increasing thetemperature of the earth.

As an actuary you might question thevalidity of the whole theory – a reasonablequestion might be whether there issufficient data to say with any certaintythat the earth is heating up. In fact,scientists have developed a way ofanalysing ice-cones in order to determinethe levels of carbon dioxide, oxygen andmethane in the atmosphere and also thetemperature at various points in history.This data goes back 420,000 years andanalysis of the data shows that carbondioxide and temperature are highlycorrelated. In the more recent past, theamount of carbon dioxide in theatmosphere has increased from 280 partsper million to 380 parts per million in 150years – that is an increase of 31% on pre-industrial levels!

Another tempting question might bewhether the effect is natural or man made.After all, it wasn’t too long ago that we had an ice age. Trevor addressed this issue by discussing the variousmodelling carried out on historical data. The modelling was three-fold. Scientists

tried to create a model of “naturallycaused” global warming, but the historicaldata did not support the back testing. A similar situation occurred when a“society caused” model was constructed.It was only when the two were combined,could an accurate model be constructed.Obviously there is large parameter andmodel risk associated with the modellingprocesses. However, the conclusions werethat, whilst it is acknowledged that thetemperature is variable, part of theincrease in temperature can be attributedto society.

Despite all of the recent publicitysurrounding the effects of carbon dioxide,it was noted that methane is still a bigunknown. It should not be ignored whentrying to tackle global warming - althoughit does occur less frequently in theatmosphere than carbon dioxide. Sulphurdioxide, which is produced in variousindustrial processes; actually reflects thesuns energy, thus counteracting the effectof greenhouse gases. So with decreasinglevels of this in the atmosphere, the effectsof carbon dioxide may become morepronounced in the future.

Global Impacts…A number of potential impacts werediscussed at the meeting, some obviousand some not so obvious. Whilst somemight seem like doomsday scenarios, itwas stressed that these are just that,scenarios and not predictions.

Water is considered one of our mostvaluable resources. In times of scarcity,actions to control water flow or suppliescan cause political unrest. For example,building a dam can be seen as an act ofaggression. Control of water suppliesmight also be used as a political tool, withobvious effects on the population as wellas food supplies to the world.

In the last sixty years, the population ofthe earth has increased threefold. Therehas been a 1,100% increase in the use offertilisers (produced using natural gas) anda 300% increase in the use of irrigation.Irrigated land produces 40% of the world’sfood, so a scarcity of water has a hugeimpact on the food supply for the planet.Continuation of the use of such highvolumes of fertilizers will also put a strainon natural gas resources, as well as addingto the levels of carbon dioxide in theatmosphere.

Existing oil wells will eventually dry up.Potential conflicts may arise betweennations regarding the ownership of newreserves. Recently, a Russian flag wasplaced on the Arctic seabed, muchdisputed by Canada. Much called forreductions in the use of oil by the west could result in the marginalisation of major oil producing nations. They subsequently may not be able tosupport their populations (leading toclimate refugees).

Changing climates have already drivenmany populations to move frominhabitable lands to more hospitableshores. This has obvious impacts on boththe countries that were abandoned andthose that act as hosts. The questionremains as to whether you close borders,risking political unrest or do you tackle theproblem and accept the cost to the moredeveloped world?

The migration towards cities in recentyears effectively concentrates the human exposure to climate issues. The movement of people away from more vulnerable areas towards cities also increases the usual social problemsassociated with large cities.

One product of climate change is geo-engineering –the deliberatemanipulation of the earth’s climate tocombat the effect of climate change. The impacts of this will take time toemerge. If this goes wrong, a blame gamemay ensue. If these risks are insurable,there maybe a knock-on effect for insurers.

Impacts on Actuaries…The impacts of climate change are farranging and not always obvious for theinsurance industry. The most obviousimpacts are those which impact propertydamage – wind, flood, subsidence andfire. Recent hurricane seasons in the UShave been longer than usual withchanging frequency and severity patternsas well as changing landfall locations.Flood tracks are also changing anddownpours becoming stronger.Subsidence problems are worsening inareas experiencing drier summers, whilstheaving is a problem with wetter winters.Fire seasons are longer, and are beingworsened by drier conditions.

Climate Change

Liability claims behaviour also haspotential to be impacted by future climatechange. Examples include professionalindemnity cover for professionals withinthe construction industry, environmentalliability or vehicle liability.

Longevity & mortality could be affectedalso. In some regions mortality willimprove as winters become less harsh,whilst there are obvious mortality impactsof large natural catastrophes. There areknock-on effects for pension schemes. On the other side of the balance sheet,asset prices are unlikely to include theimpact of future climate change events.Price shocks to equities and subsequentreductions to earnings forecasts are thelikely impact of a large climate event.Property prices would also be affected bysuch an event. Both currency and thebond markets could also be impacted byany political risk associated with climatechange.

More broadly than the insurance industry,perhaps the global business centres willmove towards countries and cities notadversely affected by climate change. The distribution of expected losses istherefore likely to become wider. Thereare obvious capital implications forinsurers as a result of this. With greaterrisk comes a greater requirement forreturn by shareholders. Coupled with thepotential impact on the asset side of thebalance sheet, there could potentially be athree-fold impact on financial statements. Obviously, society must think of ways tomitigate these risks, such as buildingsuitable flood defences & reducing carbondioxide emissions. However, the insuranceindustry can also play a part - an examplewould be encouraging high standards ofre-building in areas prone to floods orstorms – this would reduce damage in theevent of future activity. Another examplegiven was a house insurance policy withan “upgrade to green” option, alldamaged goods to be replaced by greenalternatives. The insurance industry hasformed “Climate Wise”, a collaboration ofworldwide insurance players with the mainaim of working together to respond to themyriad of risks and opportunities ofclimate change. They will attend andactively lobby on behalf of the insuranceindustry at the upcoming United NationsClimate Change Conference inCopenhagen in early December 2010.

Julia Moore


- Risks, Politics and Opportunities

On a rainy evening on the 11thNovember, Colm Fitzgerald presented asession entitled “Actuarial EconomicForecasting”.

The presenter is both a qualified actuaryand has an MA in Economics. The essenceof the presentation was that actuariesworking in the field of investments couldand should be contributing from theiractuarial training to better interpretationand forecasting of economic data.

Colm’s work has applications in the areasof economic forecasting (especially shortterm economic forecasting) and, inparticular, for financial market traders.Colm used the scenario of trying topredict the monthly US employmentreport, to illustrate the application of hiswork, with a brief comment onapplications to other economic variables.

Colm has been developing theseapplications over the last 5 years, both asa trader and as Head of QuantitativeTrading in Bank of Ireland Global Markets.

Application for long-term basis-settingshould also be possible, although this wasonly touched upon at the end of thepresentation and research has not beendone for that application as yet.

IntroductionColm opened by noting that releases ofkey economic data can move marketssubstantially. Having reliable expectationsand forecast of future movements cantherefore significantly aid a trader oranalyst – the holy grail of marketinvestors!!

Colm noted that his work, whichcomprises original research, has focussedon applying actuarial theory andtechniques to short-term economicforecasting. The model is currentlymarketed in the US (over the past 4months).

Illustration – forecasting themonthly US Employment ReportTo illustrate the principle of applyingactuarial techniques to economicforecasting, Colm used the example of theUS Employment Report. It was noted thatthis is the biggest “regular event risk” thatUS markets face each month as evidencedby the fact that US equity and bondmarkets move substantially on what isknown in the US as ‘Jobs Friday’ eachmonth. The output of the model designedto forecast the US Employment Reportoutput is called the Rosenblatt US PayrollsIndicator.

Colm’s proposition is that the currentapproach adopted by economists does nothave a track record for estimating the

monthly US Employment Reports and thatactuarial principles can be used toproduce a better estimate.

An illustration of the US (Non-Farm)Payroll employment data set since 1939demonstrates the significant spread andvolatility of this series, as shown in thechart below:

The difficulty increases further, becausethe aim is to forecast relative to theconsensus estimate. Markets generallymove significantly depending on whetherthe released data is stronger or weakerthan the consensus estimate.

Forecasting by economists todateColm gave an overview of some of thetypical approaches economists adopt toproduce monthly views about the USEmployment Report figures – ranging fromhighly subjective, to the rarely-usedeconometric approach. Essentially,economists do not have a good trackrecord for predicting the US EmploymentReport.

Colm used an example of a current payrollmodel and its approach of using data(going back to 2001 or so) for under 10variables, and then carrying out a numberof ordinary least squares regressions. A combined average from thoseregressions would then be used as theestimate. Some potential issues with anapproach of this kind include:

– 61 potential variables are available.

– Data is available for much longerperiods.

– No adjustment being made to the datato make them correspond to thesurvey period over which they are

supposed to be forecasting.– No adjustment being made for other

biases.

Actuarial principles – using theexample of an actuarial mortalityinvestigationColm then used an example of anactuarial mortality investigation toillustrate the actuarial principles which heis transferring to his economic forecastingmodel. Essentially, the example of a 31 year old male in ‘Actuaria’ was used toillustrate how actuaries typically calculatethe mortality rate using different data

sources. The underlying lesson was thatforecasts cannot be reliably produced fromhigh-level statistics and in order todevelop a better model, you need to fullyunderstand the inputs and, in particular,the sources of data and its constituentparts.

The actuarial techniques highlighted byColm in particular were the principle ofcorrespondence and the use of rateintervals, neither of which he states areused by other disciplines.

Moral of the story – in order to producereliable forecasts, you need to work outmore precisely the period to which source(indicator) data refers. Other factors whichalso need to be allowed for includeany biases (e.g. sampling biases),heterogeneity, adjusting for relevantfactors such as gender, nature ofemployment and so on. Finally the datawould need to be graduated.

Comparing the forecastingapproaches of the actuary andeconomist Returning to the US employmentexample, a number of possible problems

Actuarial Economic Forecasting


Statistics BackgroundMonthly Change in US (non-Farm) Payroll Employment

thou

sand

s

with economists’ estimates arise from theactuarial investigation example:

– weekly fluctuations in data not allowedfor, and can swamp more generaltrends;

– not all indicators are taken intoaccount;

– heterogeneous samples – notcomparing like with like;

– reliance on correlation coefficientsversus maximum likelihood estimates.

For dealing with weekly fluctuations hesuggested analysing each employmentindicator to see the period over whichdata is collected and period to which thedata refers. This was illustrated using themain employment indicators and theirincidence.

Colm then touched briefly on thetraditional use of correlation coefficientsbetween the outcome of the report andthe various indicators to estimate the USEmployment Report. He compared thiswith producing a maximum likelihoodestimate, stating that the former is apiecemeal approach and doesn’t allow forreconciliation of conflicting indicators. For example, some of the strongerindicators for a given month may beissued in week three of that month,whereas weaker indicators may be issuedin week one. To produce a reliableestimate, one should adjust for theincidence of the data releases.

In terms of other potential estimateproblems, Colm noted some of the mostcommon adjustments which would berequired – for seasonal influences, regionaladjustments, other sampling biases andgraduation. The purpose of theseadjustments would be to extract credibleand objective data from the subjectiveindicators.

ResultsThe results of the ADP indicator andColm’s model are shown in the followingtwo graphs. The ADP payroll data wasinitially perceived as a good indicatorwhen it became available a few years ago.However, Colm pointed out that the ADPsurvey would appear to have samplingbiases, and so is not a reliable indicator ofthe total market without adjustment toremove these biases.

The Paragon or Rosenblatt Indicator wasrun prospectively from 2006 (and back-tested to 2005 for marketing reasons).This suggested that the model has beenwrong only 5% of the time. Notably, themodel does not make any call 24% of thetime i.e. if it does not have enough data todiffer from the consensus.

Final commentsIn his final comments, Colm noted that his analysis can also be used to assess thecyclical positioning of the economy tobetter assess what is moving markets. As an example, one can consider the stageof the employment cycle in which themarket is.

Colm also highlighted that the analysisenables an assessment of the underlying‘vitality’ of the US economy, making thebroader comment that generally speaking,the more ‘vital’ the economy, the better itwill be able to withstand shocks. In fact,he commented that the vitality of aneconomy is probably the best predictor ofhow it will do over the next 6-9 months.Colm used the example of an oil priceshock, stating that the economic impactwould vary depending on whether, at thatpoint in time, the economy was essentially‘vital’ i.e. it would either be hit by theshock, but otherwise be in good shape or,if not essentially vital, would require a cutin interest rates.

Colm included an example slide where hehad provided a US Economic Outlook onJanuary 2008.

Colm sees the applications of this researchand analysis as potentially being used byCentral Banks, investment banks andtraders. Different models would beneeded depending on the period overwhich forecasts were desired. He alsohighlighted that insurance companies andpension funds could use this to improvetheir financial and economic assumptionsetting.

While the gauntlet was laid down to applythe estimation of long-term economicassumptions, little was actually said abouthow that would be done using the workcarried out so far (which has focussed onshort-term economic forecasts). Colmwould like to see the Society carrying outfurther research in this area using thetheory and techniques that he outlined.

It would also have been interesting to seemore of the actual modelling process.

Questions from the floor included whetherthis analysis could be applied to Ireland?The answer was that there is not enoughstatistical data to do this.

A question was asked about trends at thistime – are they more/less stable? Theywere generally acknowledged to be thelatter, and that economic movements aregetting bigger and bigger.

The slides presented are now available onthe Society’s website.

Grainne Newman


Average Estimate

Poor Estimate

Good Estimate

Good Estimate

Poor Estimate

Average Estimate

No Call

40%

46%

14%

5%

16%

24%

55%

ADP Performance Record - May 2006 to date

Paragon Payroll Indicator Performance - 2005 to date

BackgroundThe Society’s second study of AnnuitantMortality has now been completed. As with the first Annuitant Study and firstInsured Life Study, it has been completedusing the “Aggregated Data Method”.This method, developed by the Society,facilitates low cost mortality datainvestigations by pooling individual lifecompanies’ experience. Each companyprovides (on a confidential basis) theactual and expected claims using a pre-agreed common standard table for the expected. The Society then adds up all the expected and all the actual anddivides the latter by the former to give aclaims ratio.

As for the first study, the “expected” tableis the 2000 Series CMI table.

This second study was supported by 6companies, as was the first. Five of thesesix were in both studies, with onecompany changing between the last studyand this one.

The first study covered just 2006; thesecond study, however, covers both 2006 and 2007. In the first study, theexperience was based on annuity amountsat date of death and not on numbers oflives. It is generally expected that anAmounts basis will give a lower rate ofmortality than a Lives basis. In the secondstudy, information was obtained on bothlives and annuity amounts. The expectedtables were the Amounts version for bothAmounts and Lives experience.

For confidentiality purposes, the actualnumbers of deaths were not madeaccessible to the Life Committee. This necessarily places some constraints on being able to analyse the statisticalcredibility of the results.

The Society would like to express itsthanks to the participating companies fortheir assistance.

Overall ResultsThe results for both 2006 and 2007 in thissecond study are set out in Tables 1-4.

Comparisons between 2006 in the two studies The previous study (reported in theSociety's November 2007 Newsletter)included Table 5 in respect of 2006. At first sight, the overall results for the twostudies (i.e. Tables 1 and 5) look verysimilar, with the overall result being 81%.

However, subsequent to the first study, we were informed by some companiesthat there were inaccuracies in theirsubmissions. Correcting for this wouldgive a new table, Table 6.

The increase from 74% to 81% may bedue to two effects. Firstly, the change inparticipating offices may have changedthe experience. However, it is suspectedthat this is not the case. Secondly, it isnow generally accepted that, unless lifecompanies pursue an active program ofchecking continued existence, there canbe a considerable problem with IBNR. It is believed that, in recent years, lifecompanies have become more active inthis space and therefore there may havebeen some catch-up in death notification.

Comparisons between 2006 and2007 in the second studyIt is interesting that the experience for2007 (Table 3) appears to show heaviermortality than in 2006 (Table 1). Onewould expect that, on average, the laterexperience would show lighter mortality.There are two reasons why this might beso. Firstly, there is the general trend ofimproving mortality. Secondly, 2007would be less developed than 2006 and sothere could be a few deaths yet to bereported in respect of 2007.

Against that, it must be pointed out thatpure statistical fluctuation is going tohappen. This is more prone to happenwhen the experience is done on anAmounts basis because the distribution ofannuity amounts is likely to be skew(possibly showing Pareto distribution) anddeaths of one or two annuitants receivinglarge annuity payments may have adisproportionate effect. That this effectmay be occurring is borne out by the factthat on the Lives basis, the pattern isreversed; 2006 (Table 2) is heavier than2007 (Table 4).

In addition to this, there is the seasonalvariation of mortality from year to year.Some years have more adverse experiencedue to the climate or due to infectionsthat are prevalent.

In any case, one cannot tell from simplyone year whether this might be thebeginning of a new trend or justfluctuation.

Comments on shape ofexperienceIn respect of 2006 deaths, the experiencefor those below age 60 was much higherthan the standard table. In respect of2007 deaths (collated in the secondstudy), this was reversed. It is generallybelieved that early retirements mayinclude a proportion of annuitants whoare retiring due to ill-health. These peoplemay be expected to suffer excessmortality. Most companies contributing tothe study were unable to remove datareferring to ill-health early retirement fromtheir submission so the 2006 experience isscarcely surprising. Equally, the numbers ofcases involved are likely to be extremelylow and therefore the 2007 experience isnot remarkable either.

Other conclusionsIt is interesting that the 2007 experiencedoes not show any difference in totalbetween the Lives and Amounts basis. This may be fluctuations again. This willbe worth observing in future years.

Tony JefferyLife Committee

The Society’s Second Study of



Annuitant Mortality


- 60 172% 129% 157%

60 - 70 67% 53% 65%

70 + 82% 85% 83%

Overall 81% 83% 81%


- 60 120% 201% 143%

60 - 70 88% 93% 89%

70 + 90% 95% 92%

Overall 90% 96% 92%


- 60 19% 90% 42%

60 - 70 65% 126% 72%

70 + 86% 88% 87%

Overall 83% 91% 84%


- 60 19% 90% 42%

60 - 70 65% 126% 72%

70 + 86% 88% 87%

Overall 83% 91% 84%


- 60 222% 180% 208%

60 - 70 58% 53% 58%

70 + 83% 87% 84%

Overall 80% 86% 81%


- 60 155% 125% 145%

60 - 70 52% 49% 52%

70 + 76% 80% 77%

Overall 73% 78% 74%

Table 1: 2nd Study, 2006, Amounts

Table 2: 2nd Study, 2006, Lives

Table 3: 2nd Study, 2007, Amounts

Table 4: 2nd Study, 2007, Lives

Table 5: 1st Study, 2006, Amounts

Table 6: 1st Study, 2006, Amounts, Corrected for Errors

Ian Sykes and David O’Sullivan gave ajoint presentation to the Society ofActuaries on 17th of November entitled“Pension Risk”. The presentation wasbased on a paper published recently bythe Pension Risk Working Party which alsoincludes Ross Mitchell and Peter Byrne. It focused primarily on defined benefitpension schemes, although Ian mentionedthat another paper based on definedcontribution scheme risk may follow in thefuture.

The central message of the presentationwas that, in Ireland today, pension schemerisk management is inadequate and mustbe improved.

Enterprise Risk ManagementThe concept of Enterprise RiskManagement (ERM) was introduced as aframework by which pension scheme riskcan be identified, quantified and dealtwith. In the context of a pension scheme,ERM is defined as “a process effected bythe scheme’s interested parties (primarilythe sponsoring employer) designed toidentify potential events which may affectthe scheme, and manage risk to be withinits risk appetite, to provide reasonableassurance regarding the achievement ofthe scheme’s objectives”. Ian and Davidrecommended that all pension schemesshould adopt the ERM approach. With thehelp of some interesting graphs, theyshowed that for many large Irish quotedcompanies, the value of the pensionscheme deficit is far greater than themarket capitalisation of the company. This is why they argued that a pensionscheme along with its many risks shouldnot be managed by trustees as a stand -alone entity, but by the sponsoringemployer as an integral part of theirbusiness. The difficulties that this wouldpresent under the current trust based legalframework were duly noted.

The ERM ProcessThe process involved in putting ERM intoplace is very similar to the ActuarialControl Cycle which will be familiar toanybody who has studied for the lateractuarial examinations. The main steps areas follows:

• Set the objectives

For example, that the scheme will befully funded on the Minimum FundingStandard basis within 3 years.

• Construct a project plan

This sets out the actions and resourcesrequired to meet the objectives.

• Identify the main risks

A risk is defined as an event leading toproject failure.

• Assess the risks

Some risks will have a low probabilityof occurrence but a great financialimpact. Many risks are notindependent of one another.

• Mitigate the risks

Either avoid, reduce, transfer toanother party or accept.

• Monitor the process

New risks may emerge over time sothe ERM process needs to be keptunder regular review.

In conjunction with ERM, Ian and Davidstressed that communication with thesponsor and the members of the schememust be improved. For example, sponsorsshould be given a realistic expectation ofreturns on pension assets as well as a clearunderstanding of the impact of grantingsalary increases to active members.Beneficiaries should be told clearlywhether their defined benefit pension is apromise or an aspiration on behalf of thesponsoring employer.

The interaction between investment,funding and benefit policy was explained.Central to the ERM framework is therealisation that risk taking in any policy isdependent on it being consistent with thetolerance for risk of the ultimate sponsor.Before the discussion began, the speakerstouched on defined contribution schemerisks which are fundamentally differentfrom defined benefit scheme risks fromthe point of view of members andsponsoring employers. Many members ofdefined contribution schemes are illequipped to deal with the investment riskswhich they face. This needs to beaddressed as defined contributionschemes will grow in importance over thecoming years.

DiscussionFollowing the presentation there was alively discussion session. A wide range ofviews were expressed and the main areasof debate centred on:

• The importance of employer covenantabove all else

• Should actuaries be more proactive inassessing and dealing with the risks?

• What (if any) powers would thetrustees have under ERM?

• Would it not be better to drasticallyimprove communication with

members rather than introduce acomplicated ERM process?

• Why do most trustees currently controlthe investment strategy?

• Companies should be able toconcentrate on their core businesswithout having to deal with thesignificant risks involved in operating apension scheme

• Should actuaries be more familiar withthe business of their clients?

Many speakers from the large crowdpresent congratulated Ian and David on an excellent presentation. The presentation and the paper on whichthe presentation was based are availableon the Society’s website.

James O’Connor

Pension Risk


The 5th match between the Faculty andthe Society took place on 6th October inBruntsfield, Edinburgh.

There is a close affiliation between bothorganisations. Tom Ross, Past President ofthe Faculty, presented a beautiful Quaichfor this event back in 2003. Tom is also amember of the Society’s Committee onProfessional Conduct. David Kingston is aPast President of both the Faculty and theSociety. Harry Taylor, the Faculty’scaptain, is a member of both the Facultyand the Society. However, despite theseclose links between the two bodies, thereis keen competition for the Quaich oneach outing.

The Society prevailed in a very closelyfought contest. Four of the five gameswent up the 18th hole and the Societyheld its nerve to win two of the matchesand halve two of the matches. The results were as follows:

• Neil Guinan and Frank Downey halvedwith Andy Scott and Kenneth Ettles

• Jonathan Goold and Don Brownehalved with David Simpson andMaurice Paterson

• Steve Hardy and Kevin Begley lost 4 &3 to Mike Smith and Alistair Campbell

• Colm Fitzgerald and Peter Doyle wonby 1 hole over Russell Pugh and ChrisYoung

• Brian Morrissey and David Kingstonwon by 1 hole over Harry Taylor andBrian Duffin

The match against the Faculty was the lastevent for me as Captain of the SAI GolfSociety. I certainly enjoyed my year andthanks to all the golfers for theirparticipation in the events. I wish theincoming Captain, Peter Doyle, everysuccess as he plans the 2010 SAI golfingcalendar.

Brian Morrissey

The Student Society held their annual poolcompetition on the 3rd of November inthe Palace bar on Camden Street. Therewas a strong entry in the competition andafter introductions the contestants quicklygot down to the business of playing pool.The display of strategic play, skilled spin

shots and the occasional mis-cue made fora great night’s entertainment. Studentscaught up with old friends, recountingtales of work and study, and made manynew acquaintances as the music blastedout on the bar speakers.

The contestants were divided into groups,with each member playing the rest of thegroup once. Two players emerged fromeach group and were placed against thewinning members of other groups at thequarter-final stage. The quarter-finalwinners progressed to semi-finals, at theend of which Cathal Fehily and CiaranBelton became the final two.

The final was a “best of three” affair.Ciaran and Cathal won a frame each andso it went down to the last frame of thenight. Both played well in the final frame,each displaying the skills that got them tothe final. Defending champion, CiaranBelton, almost had the title sewn upwhen, having potted all of his balls, took ashot on the black. He struck the black andit rolled agonisingly close to his chosenpocket but would not fall in. Cathal dulytook his opportunity to clear his remainingball and took the title with a simple tapinto the corner pocket. A great game witha deserving champion.

Donal Murphy

Student Society’s Pool Competition


Pool Competition winner Cathal Fehily

Faculty of Actuaries vs Society of Actuaries Golf Match

Faculty’s teamHarry Taylor

(captain)

Alistair Campbell

Chris Young

Kenneth Ettles

Brian Duffin

Mike Smith

Russell Pugh

Andy Scott

David Simpson

Maurice Paterson

Ewan Smith non-competing

Tom Rossnon-competing

Society’s teamBrian Morrissey

(captain)

Colm Fitzgerald

Don Browne

Kevin Begley

Neil Guinan

Peter Doyle

David Kingston

Jonathan Goold

Frank Downey

Steve Hardy


On the MoveFellows

Eric Brown moved from Sun Life to Ernst & Young

Society of Actuaries in Ireland102 Pembroke Road, Dublin 4. Telephone: +353 1 660 3064 Fax: +353 1 660 3074 E-mail: [email protected] Web site: www.actuaries.ie

The Society’s Christmas Drinks followed by thetraditional Table Quiz took place in Dicey Reilly’s on 1st December. The President, Kevin Murphy, took theopportunity to wish all members a very HappyChristmas and Peaceful New Year.

28 teams participated in the table quiz and the winning team of Kate Tobin, Michael O’Sullivan,Stephen G Jones and James Deegan from ZurichInsurance had the privilege of choosing the charity towhom the Society will donate the proceeds which cameto €3,000. Focus Ireland was their chosen charity.

Once again, we had a superb quizmaster in KevinManning. The teams and indeed the Society is indebtedto Kevin for all his efforts in providing a mostcompetitive and entertaining event. Thanks also go toAlex Breeze for doing trojan work in speeding up themarking process this year.

SAI Christmas Drinks and Charity Table Quiz

Kevin Manning, Kate Tobin, Michael O’Sullivan, Stephen G Jones, James Deegan and Alex Breeze

The Newsletter team wish all itsreaders Seasons Greetings!

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