JANUARY 2015 theactuary.com
Pensions
The magazine of the actuarial profession
Can actuaries secure stability for pension trustees?
ERM
Behavioural risk and the regulatory environment
Soft skills
How to release your inner extrovert
Culture
What’s coming up in 2015? The Actuary
UNDER MY
UMBRELLA Standing up for professionalism in a changing world
January 2015
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JANUARY 2015
Contents
24
20
“Whatever the motivations of the ‘big four’ for placing that advertisement, this politicisation of business is dangerous”
12 UP FRONT 9 SIAS events
FEATURES 12 ERM: Code of Conduct Graham Woolford looks at behavioural
10 IFoA news
issues, and how they can affect the way boards respond to the regulatory
OPINION
environment
5 Editorial
17
14 Pensions: Missing a trick? Steven Draper asks whether actuaries
Kelvin Chamunorwa seeks reader’s
should be considering default risk in a
views on social convention at this time
bond match when evaluating
of year
retirement benefit obligations
7 President’s comment Nick Salter is stirred and swayed by
17 Soft skills: Body talk – make it
the sheer enthusiasm of young actuaries at the start of their careers
work for you
Kieran Hearty takes a lighthearted look at how even number-crunchers
AT THE BACK
can release their inner extrovert
20 Pensions: Balancing act
26 Arts
MORE CONTENT ONLINE Additional content can be found at www.theactuary.com
COVER: OLIVIER BURSTON / IKON
Jonathan Wicks and Lynda Whitney
Anastasia Aboim casts an eager eye
explore whether actuaries can create
over the arts and cultural world in 2015
stability for trustees
WRITING FOR THE ACTUARY If you would like to contribute an article, contact: features@theactuary.com For a schedule of themes, see page 23
January 2015 • THE ACTUARY www.theactuary.com
3
Opinion Editorial editor@theactuary.com
theactuary.com
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Internet The Actuary: www.theactuary.com Staple Inn Actuarial Society: www.sias.org.uk Institute and Faculty of Actuaries: www.actuaries.org.uk Managing editor Sharon Maguire +44 (0)20 7880 6246 sharon.maguire@redactive.co.uk Editor Kelvin Chamunorwa editor@theactuary.com Features editors Contact: features@theactuary.com Jeremy Lee, pensions, investment, ERM, banking
New beginnings
Kelvin Chamunorwa seeks readers’ views on current issues and social convention at this time of year
Richard Purcell, life, health and care Richard Schneider, life, Solvency II, mortality/longevity, modelling and software Helen Lau, GI, reinsurance, environment, careers Gemma Gregson, pensions, GI People/society news editor Yvonne Wan social@theactuary.com Student page editor Jessica Elkin student@theactuary.com Arts page arts@theactuary.com Profession news editor Alison Jiggins +44 (0)20 7632 2172 alison.jiggins@actuaries.org.uk SIAS representative Mark Gorman Editorial advisory panel Peter Tompkins (chairman), Naomi Burger, David Campbell, Matthew Edwards, Martin Lunnon, Sherdin Omar, Richard Purcell, Nick Silver, Andrew Smith
Circulation 25,331 (July 2013 to June 2014)
Subscriptions For subscriptions from outside the actuarial profession, UK: £90 per annum/£8.50 per copy. Europe: £110 per annum, rest of the world: £130 per annum. Contact: Alison Jiggins, The Institute and Faculty of Actuaries, Staple Inn, High Holborn, London WC1V 7QT. T +44 (0)20 7632 2100 E alison.jiggins@actuaries.org.uk Students on actuarial science courses may join and they will receive The Actuary as part of their membership. Apply to: Membership Department, The Institute and Faculty of Actuaries, Maclaurin House, 18 Dublin Street, Edinburgh EH1 3PP. T +44 (0)131 240 1325 E membership@actuaries.org.uk Changes of address should inform the membership department as above. For delivery queries, contact: Rachel Young E rachel.young@redactive.co.uk Published by the Staple Inn Actuarial Society The editor, The Institute and Faculty of Actuaries and Staple Inn Actuarial Society are not responsible for the opinions put forward in The Actuary. No part of this publication may be reproduced, stored or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without prior written permission of the copyright owners. While every effort is made to ensure the accuracy of the content, the publisher and its contributors accept no responsibility for any material contained herein. Important information for contributors to The Actuary By submitting content for publication you confirm that: (a) You (and/or other named contributors) are the sole author(s) of the content submitted; (b) The content you submit is original and has not previously been published (unless you specifically advise us to the contrary); (c) You haven’t previously licensed the use of the content you submit; (d) So far as you are aware, the content submitted will not infringe any third-party rights, be defamatory or in any way illegal.
When is it appropriate to stop wishing others a happy new year? Recently faced with that dilemma myself, I did some limited research and settled on 6 January – the year was in full swing by then. To my dismay, the first response to an email I sent after that self-imposed moratorium began with those three little words I had avoided. When I then reciprocated the pleasantry, it had lost its sincerity somewhat. I can understand why some advocate a bipartisan approach to sign a deadline into law. On a more pertinent political note, in our cover feature this month, Lee Faulkner unfolds the issues behind the recent pro-democracy protests in Hong Kong. He points to some of the political pressures faced by professionals during the so-called umbrella revolution and offers his opinion on possible scenarios under which professionalism could be tested in future (see p24). With many actuaries currently in the midst of year-end accounting, Steven Draper considers default risk and allowing for this when deriving a discount rate for a corporate bond-match. Although it is not standard practice, Draper sets out why he is a proponent of taking this approach to value retirement benefit obligations under US GAAP. He also offers possible solutions to minimise losses from defaults and downgrades (see p14). Recent news from the euro area will also have a marked impact on global markets, and thus our longterm assumptions. As central banks in the UK and the US wind down their quantitative easing programmes, the European Central Bank could shortly begin its own in an effort to stoke economic recovery. Current low oil prices could be positive overall – Brent crude is at a five-year low and there are no signs of a reduction in supply, a fundamental shift with lasting effects. We are certainly set for an interesting year as we grapple with these issues and help others understand and manage the risks they pose. I am interested to hear your thoughts. Also, an answer to my opening question is welcome – it just might solve my own social woes. I wish you a happy new year!
“I can understand why some advocate a bipartisan approach to sign a deadline into law”
Kelvin Chamunorwa Editor
© SIAS January 2015 All rights reserved ISSN 0960-457X
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January 2015 • THE ACTUARY 5 www.theactuary.com
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Opinion President’s comment
Nick Salter is the president of the Institute and Faculty of Actuaries
NICK SALTER
Moving body and mind A night of cèilidh dancing and whisky tasting was a great way to welcome our newly and nearly qualifieds to the Momentum Conference in Edinburgh last month – I even managed to get in some dancing myself. For the uninitiated, cèilidh is a traditional Scottish dance and so (along with the whisky) gave us all an excellent taste of Scottish culture. Having had the pleasure of sitting in on a number of sessions at the conference, a couple of things strike me about Momentum: the first is that it’s not a practice-specific conference and actuaries intermingle, bringing their different perspectives to the discussions. Perhaps because it’s not a practice-specific conference, there is an emphasis on softer skills, which is where we need to focus to ensure that the future holds the best for us. Moving from tradition to the changes of the future was very much on my mind during the conference this year. Earlier in the day, I had the pleasure of giving the first plenary talk, along with Chris Matthews, on diversity and the changing role of the actuary. Chris’s background is in communications, and so between the two of us we were able to cover the combination of both traditional technical skills, as well as the softer skills that are so crucial for actuaries entering the profession now.
The art of communication
A number of employers, both actuaries and non-actuaries, were interviewed on film for our presentation, and hearing from them directly was inspiring. It was reassuring to hear that actuaries will continue to be a core asset to their organisations – Dominic Barton, managing director of McKinsey, said that “Actuaries are brilliant”. The main theme, however, is that roles are changing. Here is a sample of what they said: “The modern world is more than being technical experts; we have to be seen as able to offer people advice and insight rather than just numbers.” “It’s not good enough to know the answer, if you can’t explain it to people in a way that they understand … then you’re not really helping them as much as you could.” The biggest thing that struck me from these interviews was the number of employers who stressed the importance of actuaries being able to communicate their work so that those
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THE ACTUARY • January 2014 www.theactuary.com
Nick Salter is stirred and swayed by the sheer enthusiasm of young actuaries at the start of their careers without the technical background, skills or training can make use of our expertise. Of course we need to have our core actuarial skills, but they need to be packaged in a wider context with communication as the wrapper. We need to be able to speak the language of business, not just the language of actuaries. This is fundamental to ensuring that actuaries remain relevant in this fast-changing world. We also held a lunch event to “meet the president”, which was enormously helpful to me to get feedback from people on their career journey and whose futures will be affected by the changes that are in train. One comment made was that traditional actuarial employers place less emphasis on the communication exam than the technical exams, which seemed out of kilter with what we were hearing in the presentations. I came away from the conference impressed with the sheer enthusiasm shown by the new members coming into the profession, and how bright we both think the future looks. I know the profession looks very different from when I entered it all those years ago, and it will be interesting to see what changes these actuaries will witness over the course of their careers. I
envisage many moving into less traditional actuarial areas as the need for our skills in new areas becomes better understood. Interestingly, the latest snapshot produced by the IFoA showed there are more students than fellows working in non-traditional fields, such as risk management, education, public service, and other financial and non-financial roles outside established practice areas, which shows how these new areas are growing. My impression from Momentum is that the future is really positive – partly because we have a great demand for actuarial skills in all sorts of areas and partly because we have such gifted people coming into the profession. There is a great future ahead for those entering the profession now. I see all of this as really good news. My final insight from the conference is that, in terms of soft skills training, I may need to look into upping my dancing skills with some CPD – does this stand for Can’t Properly Dance?
“We need to be able to speak the language of business, not just the language of actuaries”
Videos of the plenary sessions from the Momentum Conference will be available online shortly. Unfortunately, there are no videos of Nick Salter’s cèilidh dancing
PROGRAMME PRIZE
Programme presentation
SIAS is pleased to announce that Extending the Critical Path presented in December 2013 has won SIAS’ best programme presentation prize. Peter Banthorpe received the prize which the working party has kindly donated to Cancer Research UK.
TUESDAY 20 JANUARY
NAPF Longevity model: to the future... and beyond Matt Fletcher and Steven Baxter, Club Vita Staple Inn Hall, High Holborn, London WC1V 7QJ 5.30pm start
AGENDA
•
Longevity trend analysis for a population of UK defined benefit (DB) pensioners
•
Analysis splitting pensioners into groups with different levels of improvement
•
Proposing and illustrating a range of longevity improvement scenarios that differ materially from typical assumptions
This research provides for the first time credible data on the longevity trend experience of DB pensioners that can be reflected in your valuation assumptions. Information on how longevity has changed for groups of DB pensioners in the recent past can be used to help inform views on how their life expectancies might develop in the future. We also consider some interesting ‘what if’ questions around how longevity might change in the future and provide an approach to help pension schemes better recognise and illustrate uncertainty. Refreshments will be served from 5.30pm and the lecture will start promptly at 6.00pm. There is no need to register in advance for this meeting and non-members are welcome. There will also be live tweeting available via #SIASJan15 during the talk – please do get involved with any comments and questions for the speakers.
THURSDAY 29 JANUARY
SIAS Pub quiz Yager Bar, 2-3 Old Change Court, St Peter’s Hill, London, EC4M 8EN
SOCIAL
The SIAS Pub quiz is back in 2015 to help you get over those Christmas blues. Teams must be of between four and six people. Ticket prices include: refreshments and prizes for the winning teams. •
Member tickets: £10
•
Non-member tickets: £15
6.00pm start Closest Tube: St Paul’s
THURSDAY 19 FEBRUARY
SIAS Salsa night Bar Salsa, 96 Charing Cross Rd, London WC2H 0JG 6.30pm Closest tube: Tottenham Court Road
MORE EVENTS ONLINE For details of events, visit www.sias.org.uk
Visit: www.sias.org.uk for application forms. Please note that tickets are limited so get your applications in early.
SOCIAL
Come and show us your moves at the SIAS Salsa Night. Ticket prices include a 45-minute salsa class followed by a South-American inspired meal. Member tickets £8 Non-member tickets £12 Tickets will be released on 17 January. Visit: www.sias.org.uk for further details
SIAS IS ON TWITTER! Follow us on @SIAScommittee for latest news on meetings, socials and more!
SIAS IS ON FACEBOOK! Check out the SIAS Facebook page for photos from the latest social events
January 2015 • THE ACTUARY www.theactuary.com
7
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Upfront
News IFoA
NOISSEFORP LAIRAUTCA EHT MORF SETADPU SWEN
Opinion CEO’s comment
What do you think of pre-paid funeral APS?
Derek Cribb rings in the new year with some changes to the IFoA’s qualification structure
Education refresh to kick off 2015 Derek Cribb is the chief executive of the Institute and Faculty of Actuaries
A very happy new year to all our
members. At the IFoA, we are starting the new year with some exciting changes to our qualification offering. Fellowship remains our flagship credential, being the gold standard in actuarial qualifications. We now also have the Certified Actuarial Analyst, which is uniquely placed as the only technical financial qualification based on actuarial techniques. This has led us to consider the relevance of our Associate level, and what we can do to make it more attractive as a destination qualification both in and outside the UK. At present, of the 15 examinations needed to be a Fellow, 12 are required for the Associate level. We are rebalancing the requirements by moving two subjects, CA2 (model documentation, analysis and reporting) and CA3 (communications), from Associate to Fellowship with effect from 1 July 2015. While still a premium qualification, this move is more consistent with the approach that the International Actuarial Association (IAA) is recommending as the global standard for qualified actuaries. With a broad actuarial skill set, we see great opportunities for actuaries qualified as Associates not just in traditional areas but also in applying those skills more widely within businesses, particularly across the financial services sector. To demonstrate the high standards expected of Associates, we will introduce a requirement to undertake a work-based project covering communication skills and model documentation. The existing requirements for one year of work-based skills and passes in our relevant professionalism tests will remain. This approach will ensure that the standard of the Associate qualification is maintained when benchmarked against the offerings of other actuarial qualifying bodies. The work-based project approach will also act as a trial. If successful, this approach may later be used more widely as part of the qualification process. Council will be refreshing the IFoA’s strategy in 2015/16, and this work will feed into the review of education. We will also be looking at our education provision for qualified members at all stages of their careers. If you have any thoughts on this, we would be delighted to hear from you. To get involved with our education strategy review, please email Trevor Watkins, director of education, at trevor.watkins@actuaries.org.uk
DEREK CRIBB
THE ACTUARY • January 2015
The IFoA has launched a consultation on the proposed introduction of a mandatory Actuarial Profession Standard (APS) and supporting guides in relation to the ethical standards that members should apply. The proposed APS is intended to set out the requirements for actuaries carrying out valuations of pre-paid funeral plan trusts. The consultation package also includes a guide for actuaries working on such plans, plus a guide for actuaries to offer to trustees, which sets out the professional obligations falling on actuaries. The measures are intended to ensure that actuaries working in this specialist area are: l sufficiently experienced for this task; l aware of their particular responsibilities, not least to planholders; and l are adequately supported and assisted by the IFoA in undertaking their work. The consultation paper sets out the current regulatory regime, the rationale for the IFoA’s proposals and an explanation of the new consultation package. The consultation closes on 13 February, and we invite you to respond. Download the consultation package at: bit.ly/1w58Gb8
New Year’s resolution? Volunteer for the IFoA! Each member of the IFoA benefits from the time, effort and commitment given by their peers who volunteer and who, with the executive staff, support, run, regulate and enhance our membership body and your profession. A Directory of Opportunities (bit.ly/1z18RDl) has been added to the IFoA website. This illustrates the wide range of ways our members provide support. It helps members identify volunteer roles/tasks that would best suit their circumstances and match their skills and experience. All volunteer roles/tasks that are open to all members are on our website (bit.ly/1oaKuJZ). Members can sign up for the RSS feed on this webpage and receive automatic updates. For more information, email debbie.atkins@ actuaries.org.uk
January 2015 • THE ACTUARY 9 www.theactuary.com
NEWS UPDATES FROM THE IFOA
EVENTS AND CONFERENCES communication Masterclasses, designed to assist you in developing your current skills. Do you enjoying public speaking? Are you a Masterclasses: confident presenter? Take the pain Developing your skillset out of presenting and learn practical techniques and insights for Public Speaking/Presenting becoming a confident speaker. 13 January 2015, London Learn how to leverage common 09.00-12.45 Masterclasses have been designed beliefs and values, prepare the “what” and the “how”, and develop to assist you in building upon the the tools needed for motivating and essential skillset necessary for today’s work environment. The inspiring those around you. Build significance and value of having relationships, overcome advanced communication skills has presentation nerves and motivate been supported by IFoA research others around you in a positive and from the top 11 employers. As a result of this research and feedback, influential way. View our tailored Masterclass programme or book the IFoA has worked with development coaches and mentors your place for the upcoming to create a series of bespoke sessions at bit.ly/1uM9qjs
Professional skills training: what do you need to do? In light of the results of our recent monitoring of the professional skills training (PST) requirements, we thought it might be useful to remind you of what your requirements are. PST is designed to help you maintain and enhance your professional skills and has been developed to be relevant to members throughout their professional careers. There are three stages of training that you may be required to complete, depending on your continuing professional development (CPD) category and your level of experience. l Stage 1 – online professional awareness test: bit.ly/1GjSSmh l Stage 2 – professional skills course: bit.ly/12CIJSX l Stage 3 – professional skills for experienced members: bit.ly/1wGw77S You may find this flowchart (bit.ly/1BDFhGu) helpful in working out what your own requirements are. If you are still unsure about what this means for you, contact the membership team at cpd_feedback@actuaries.org.uk Full detail of the PST requirements are set out in the CPD Scheme 2014/2015 (bit. ly/1vYZYJR), which incorporates information previously contained in the now superseded Professional Skills Training Handbook.
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THE ACTUARY • January 2015 www.theactuary.com
Pricing and Product Development Workshop 12 February, Staple Inn, London The Life and Health and Care CPD committee is offering a new continuing professional development event, which will include the opportunity to: l hear industry speakers on the challenges of the protection market; l improve understanding of the market and today’s consumer; l learn lessons from the past; and l ask questions and possibly find solutions to current issues. This event would be suitable for practitioners in protection from both life and health practice areas and actuaries working in product development, management and marketing. See details at: bit.ly/1vTYAIF
2015
CONFERENCES Health and Care Conference 6-8 May, Southampton Take advantage of the early bird booking fee online: bit.ly/1qWE5du
Risk and Investment Conference 2015 3-5 June, Celtic Manor, Newport Call for speakers: if you have any thoughts for speakers or topics, then please submit your proposal by 9 January 2015: bit.ly/1yZaCmd
Pensions Conference 2015 24-26 June, Glasgow Call for speakers: if you have any thoughts for speakers or topics, please submit your proposal by 9 January 2015: bit.ly/1yZaCmd
IFoA sponsorship supports budding actuaries Two events held at the end of 2014 saw the IFoA support Scotland’s brightest maths students. The following two events encourage students to use their maths skills and to think about the career opportunities maths can offer. The Enterprising Maths Challenge, held on 18 November, saw 248 third- and fourth-year students descend upon Glasgow Science Centre. The day consisted of four rounds offering students the opportunity to put their problem-solving and teamwork skills to the test. Representing the IFoA at the event was Kenny Tindall, who presented awards to the winning school, The High School of Glasgow (pictured
below), and Melville College and Dollar Academy in second and third place. The Highlands Maths weekend took place at Lagganlia Outdoor Centre on 7-9 November. The event was attended by S6 students studying advanced maths from across the Highlands, offering pupils a weekend to learn how to apply advanced mathematics to real-life problems and how mathematics can open up job opportunities. Gavin Reid, Scottish Board member, delivered an interactive workshop on the diverse roles of an actuary and gave the students practice in carrying out some actuarial calculations.
News IFoA
New longevity basis risk methodology A research project jointly commissioned by the IFoA and Life and Longevity Markets Association (LLMA) has unveiled a novel, readily applicable methodology allowing insurers and pension schemes to assess longevity basis risk. This groundbreaking work, carried out by a research team from Hymans Robertson and Cass Business School, will enable the use of simpler, more standardised and easier to execute index-based longevity solutions. There are also broader applications for insurers and pension funds in managing their capital requirements relating to longevity risk. Index-based longevity swaps allow pension schemes and insurers to offset the risk of increased liabilities resulting from members living longer than expected. Until now, it has been difficult to assess how well an index-based longevity swap can reduce longevity risk for a particular pension scheme or insurance book. The methodology developed in this research advances thinking on how this is assessed.
The framework has been designed to be applicable to both large schemes (which can use their own data in their models) and smaller schemes (by capturing demographic differences such as socio-economic class and deprivation). While the cost and complexity of longevity swaps means they have often been the preserve of large schemes, this research could make longevity swaps more accessible to smaller schemes and insurers in managing longevity risk. The development has the potential to transform the longevity swap market, which is worth £10bn per annum, opening it up to those for whom the current bespoke solutions have not proved appropriate. It is predicted that this work could provide the catalyst for growth in the still nascent market. IFoA president Nick Salter said: “We are delighted with the outcome of this research.” The research paper can be read in full on the IFoA website at bit.ly/1yw1yop
Middle Eastern promise for GAS launch The IFoA Gulf Actuarial Society (GAS) was launched in Dubai on 23 November 2014. GAS aims to bring together IFoA members based in the region and to provide networking and continuing professional development opportunities for all actuaries in the area. Thirty five participants from the six Gulf states of Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates attended the inaugural event, which was hosted by IFoA chief executive Derek Cribb and Catherine Love Soper, one of the founding members of the new society. To find out more about GAS, please visit bit.ly/13tVm3L
Could year-long CAA exemptions window help your career? The IFoA opened an exemptions window in November 2014 to allow those students who have relevant passes in the Fellowship exams to gain exemptions from modules on the Certified Actuarial Analyst (CAA) pathway. This is in recognition of the fact that the career aspirations of some students on the Fellowship pathway may be better served by the IFoA’s new CAA qualification. Exemptions from the CAA modules for students with passes in the Fellowship examinations will be granted as indicated online (bit.ly/1wggiWz). The option to gain exemptions from individual Actuarial Analyst modules will be available until 29 January 2016. These exemptions are free of charge for IFoA members. If you would like a presentation on the CAA qualification and its benefits, or if you have any questions, or would like further information on the CAA, then please email us at caa@actuaries.org.uk
IFoA Asia Conference 2015 13-15 May 2015, Beijing
Call for Speakers Would you like to be part of the first IFoA’s Asia Conference? This is your chance to help shape the programme and share your knowledge with actuaries in Asia. The Conference is suitable for actuaries and non-actuaries and we shall also have an afternoon session on Friday 15 May specifically for University students studying actuarial science. If you wish to present at the Conference, we want to hear from you. The committee are looking for dynamic and entertaining speakers with thought-provoking discussion and debate to cover all practice areas, suitable for an audience based in Asia.
The main topic areas are: • Life insurance and healthcare • General insurance • Pensions • Risk • Investment • Personal Development/Business skills such as communication, networking training etc • Plenary topics • University student level topics across all practice areas.
Find out more and submit your proposal: www.surveymonkey.com/s/IFoAAsia2015Callforspeakers Closing date for submissions: Friday 16 January 2015
www.actuaries.org.uk
January 2015 • THE ACTUARY 11 www.theactuary.com
ERM Regulation features@theactuary.com
CODE OF CONDUCT
Globally, increasing levels of corporate governance legislation are forcing companies to develop enterprise risk frameworks. But behavioural issues can affect the way in which boards respond to the regulatory environment, as Graham Woolford explains
GETTY
DR GRAHAM WOOLFORD
MSc, DBA, FASSA, FIA is the chairman of Unihealth, a pan–African provider of employee benefits and health insurance
South African companies are faced with many complex issues when founding an enterprise risk management (ERM) framework. Specific challenges include relatively high real interest rates, volatile exchange rates, low levels of economic growth, political uncertainty, inflexible labour legislation, creeping corruption, threats of nationalisation, and high unemployment and crime rates. From a regulatory standpoint, both the King III report on corporate governance (‘comply or explain’ vs the Sarbanes–Oxley Act 2002 ‘comply or else’) and broad-based black economic empowerment (BBBEE) affect risk management for South African companies. The former is a compulsory though relatively flexible corporate governance framework, which prescribes specific guidelines. The latter is designed to redress the political and social iniquities of the past by requiring companies to engage in a range of imposed measures to broaden the participation of previously disenfranchised racial groups in the economy. Despite the well-intended regulations, the effects of these in terms of cost, risks and benefits are unclear, partly because the risk management culture is still in its infancy, particularly in the non-financial sector. Boards themselves, as cognitive entities made up of individuals, surprisingly exhibit strong behavioural biases. Companies and regulators should therefore be aware of risk behaviour when dealing with risk management decisions. The following examples highlight some specific behavioural issues facing South African boards.
Dominant leadership
For many companies, the presence of a strong individual on the board, notably the chief executive, often mutes other voices and opinions. Unless there are equally strong and knowledgeable non-executive directors present, decisions may follow the views of the chief executive or other dominant factions. By contrast, a strong diversified board may arrive at watered-down, sub-optimal decisions. The trend towards appointing more non-executive directors – often politically expedient appointments and not intimately familiar with the company – may present longer-term risks. Non-executive directors should have extensive industry experience.
Cognitive champions
On the boards of most companies, there are few ‘cognitive champions’ with the experience, knowledge and intellect to really understand the panoply of risks facing the organisation. These board members tend to be those with executive and operational responsibilities, or have worked
in the industry for a considerable period. In spite of this, in non-financial South African companies, formal risk assessment processes are often relegated to managers ill-equipped to appreciate the overall economic, political and commercial risks facing the company.
Blind followers
Many companies blindly follow the prescriptive processes of risk scorecards and matrices laid out in the corporate governance framework, mainly at the behest of their auditors. There appears to be insufficient time and effort devoted to really understanding the frequency and financial impact of the various risks facing the business. Even less time is spent in trying to come to terms with more sophisticated risk management techniques, such as the degree of dependency between risks. Even if time is spent on this, the answers are, at most, educated guesses, without any scientific basis, and are highly unlikely to find their way into any form of risk mitigation programme. Lack of understanding of risk management is a major problem in small to medium-sized South African companies.
Source dependence
A behavioural bias referred to as ‘source dependence’ has been identified, whereby boards will tend to react to risks according to their source and irrespective of their impact. Thus high-impact risks from one source may be taken less seriously than low-impact risks from a different source. This may be partly attributed to familiarity with the risk source. For example, boards may be more comfortable discussing financial risks than, say, technological risks with which they would be less familiar but which could have more serious consequences. The demise of Polaroid is a case study of note.
Moral hazard
Even a modest risk management framework introduces a form of moral hazard, as companies may believe that a slavish devotion to prescription and the mechanical recording of observable elements of risk provide protection. There is a risk of over-prescribing risk management processes, which may also not be appropriate for every company.
Reality drift
There is evidence that some companies are prone to ‘reality drift’, a phenomenon whereby leaders gradually lose touch with key aspects of the business through a combination of cognitive bias and an inaccurate or inadequate flow of information up and down the chains of command. This risk seems to increase with the
size of the organisation and may contribute to the discussion of why many leaders of highly regulated companies continue to make errors of judgment and overlook areas of major risk to the business. Faced with highly complex problems, they may also resort to altering their perception of reality in order to develop responses to risks that are perceived to be soluble with greater certainty and confidence.
What you don’t know
A risk framework is based on the identification of fundamental elements of risk. At any one time, there may be storm clouds gathering that are not yet within the board’s field of vision. A risk management framework, no matter how sophisticated, can’t deal with unknown risks.
Agency issues
Adherence to corporate governance implies increased legitimacy with regulators and stakeholders, and consequently less institutional pressure. But, at the same time, this requires management commitment, with obvious cost implications. Further, companies are constrained by corporate governance obligations that carry the force of law. As ‘agents’ of the stakeholders of the company, it can be assumed that companies ought to adopt risk-adverse strategies. However, some boards will want their managers to assume a more risk-tolerant approach, which often leads to increased complexity.
Advisory role of actuaries
Risk culture and behaviour clearly affect the overall ERM framework, and each country has its own set of challenges and regulatory framework, which affects how boards respond to their corporate governance requirements. Globally, there is a great deal of convergence relating to ERM practices. However, as already stated, blind adherence to mechanical processes to manage risk in line with regulatory prescription is a risk in itself. Large companies in particular ought to focus on the reliability and sufficiency of data flowing through the organisation, so that risk managers have accurate data to work with. The failure of many large companies can be attributed to the board being remote from reality at the coalface. Actuaries need to emphasise that, while regulators require companies to focus on capital adequacy as opposed to risk appetite, ERM should attempt to integrate the effects of multiple elements of risk and study them as systems of risk rather than as independent elements of risk. And, once again, senior executive members of the board must be directly responsible and involved in this process. a
January 2015 • THE ACTUARY 13 www.theactuary.com
Pensions Bond default risk features@theactuary.com
MISSING A
TRICK? Steven Draper asks whether actuaries should be considering default risk in a bond match when evaluating retirement benefit obligations
Retirement benefits are subject to a variety of risks that must be considered when planning for the future. As actuaries, we evaluate the likelihood of future events. That evaluation sets us apart from other financial professionals. We combine the present value calculation with the likelihood of payment to determine actuarial present value. But are we accounting for all the risks to retirement benefits? While this is not standard actuarial practice, it may be time to consider how uncertain bond cash flows are used to develop the discount rate assumption. A comparison with mortality is useful. Even though the chance of death for healthy young employees is very low, reasonable mortality is assumed rather than dismissed as immaterial. This is consistent with our actuarial standards that require a best estimate for each assumption. Since we take other risks into account, why don’t actuaries consider default risk in a bond match? Just as there is a chance that a retiree will not live to receive a retirement benefit 20 years from now, the bond purchased to fund that benefit may not pay its full face value. The
following table illustrates parallel risks on both sides of a retirement plan cash flow match. In this example, the chance of default is considered as part of the yield to maturity for the bond, so a default adjusted discount rate is used rather than the market yield of 5.21%. This is because the market price of a bond includes provision for the default risk. In other words, part of the market yield compensates the investor for defaults that are inevitable on a large portfolio. When using this approach, a gain will result when fewer than expected defaults occur between measurement dates. Losses result when more defaults than expected occur. US GAAP accounting requires actuaries to value an obligation based on high-quality bonds
14
IKON
TABLE 1 Asset/liability cash flow match Liability
Asset
Retiree payment due in 20 years
$1,200
20-year bond face value
$1,000
Probability of survival
80%
Probability of payment2
96%
Expected payment cash flow
$960
Expected bond cash flow
$960
Default adjusted discount rate
5.0% p.a.
Default adjusted discount rate
5.0% p.a.
Interest rate/discount factor
0.377
Interest rate/discount factor
0.377
Present value — pension payment
$362
Market value of bond
$362
1
Select zero coupon AA bond, $1,000 face value payable in 20 years and market value of $362 (yield of 5.21% p.a). 2 Probability estimate assumes 25% of a hypothetical 91 bps yield spread over AAA bonds is related to default risk. 1
that could be purchased to effectively settle the obligation. The Securities and Exchange Commission’s guidance is that bonds with one of the two highest ratings by a recognized ratings agency should be considered highquality. This keeps the risk of default low in the short term, but cash flows for actuarial valuations are projected decades into the future. Accordingly, shouldn’t we estimate the risk that these bonds may default or be downgraded? The adjustment may be small, but without it, an obligation based on matching projected cash flows to high-quality bonds will only effectively settle the obligation in a world with no risk of the bonds defaulting. Since actuaries specialise in assigning probability to contingent events based on past experience, we are uniquely qualified to study the historical rates of default or downgrade for bonds used to develop retirement discount curves.
Relevant literature
Relevant actuarial and accounting literature does not proscribe the use of a default assumption, but some references support this approach. 1. SOCIETY OF ACTUARIES RESOURCES. On its website, the Society of Actuaries (SOA) has republished an article dedicated to understanding and using bond yield curves. ‘Understanding the Corporate Bond Yield Curve’, by Holger Höfling, Rüdiger Kiesel and Gunther Löffler recommends accounting for default risk in valuing liabilities.
Since the SOA posted this article alongside the Citigroup pension discount curve (CPDC), some actuaries might incorrectly assume that the CPDC has been adjusted to reflect default risk. However, the SOA was not involved in making the CPDC, and the CPDC designers did not contribute to the article. Martin Bernstein, the Citigroup contact for the CPDC, confirmed that no adjustment has been made for default risk. Consequently, actuaries need to determine any appropriate adjustment for default risk. 2. ACCOUNTING LITERATURE. Accounting Standards Codification (ASC) 715 provides helpful definitions to describe the amount needed to effectively settle the obligation. The discount rate definition references the actuarial present value definition, which includes both
the time value of money and the probability of payment. The discount rate should not be used in isolation without considering probability of payment. Furthermore, ASC 715-35-44 states: The objective of selecting assumed discount rates using that method is to measure the single amount that, if invested at the measurement date in a portfolio of high-quality debt instruments, would provide the necessary future cash flows to pay the pension benefits when due. Unless the risk-free treasury curve is used, expected bond payments will fall short of face amounts in aggregate. The only way to have expected bond payments equal the projected benefit payments, on average, is to take expected default rates into account. Taking the risk of default into account by purchasing additional bonds to make up for the expected loss from defaults is analogous to using a lower discount when calculating the present value of the plan cash flows. The accounting literature references rates implicit in annuity contracts that could be used to effect settlement of the obligation, but it then points directly to high-quality bond yields, which allows plan sponsors to avoid incorporating the insurer risk/profit premium into their obligation. As a result, plan sponsors are effectively their own insurer and bear the risk that defaults may be higher or lower than expected.
3. AMERICAN ACADEMY OF ACTUARIES PRACTICE NOTES. Actuaries in other practice areas account for default risk in their projections. The public policy practice note, ‘Market Consistent Embedded Values’, specifies that default risk should be accounted for when matching asset cash flows to benefit payments.
Practical implications
High-quality bond defaults are infrequent. Losses related to default risk occur most often when a bond is downgraded between valuations. If all other assumptions were met perfectly, the bond will still match the projected cash flows. However, assuming the market price included the probability of an impending downgrade, the bond will be likely to be replaced by a lower-yielding AA-rated bond, resulting in a liability loss. The SOA website explains that a similar event occurred in June 2012. The yield of the Citigroup Pension Liability Index (CPLI) dropped by 0.20% because bonds issued by five banks were downgraded and removed from the CPLI. What can actuaries do to balance the risk of gains and losses? One approach may be to select the highest-quality bonds among those in the AA rating class so that the risk of a downgrade to an A rating is offset by the risk of an upgrade to an AAA rating. This would minimise losses from downgrades or defaults, but may not completely eliminate them. Another idea would be to develop an assumption for the portion of the yield curve’s spread over the risk-free rate that is applicable to default risk and back it out. This leaves intact the portions of the spread attributable to other factors, such as the liquidity premium and the default risk premium. The consideration of bond default risk on retirement benefit obligations may offer a possible area for improvement in pension and retiree medical actuarial practice. Moving forward, those with deeper expertise may examine it further and propose solutions. a The views expressed are those of the author and not necessarily those of Ernst & Young LLP
STEVEN DRAPER FSA,
MAAA is a senior manager in the human capital practice of Ernst & Young LLP
January 2015 • THE ACTUARY www.theactuary.com
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Soft skills Non-verbal communication features@theactuary.com
BODY TALK: MAKE IT WORK FOR YOU Kieran Hearty takes a lighthearted look at how even number-crunchers can release their inner extrovert and boost their non-verbal communications How do you recognise an extroverted actuary? They look at your shoes instead of their own. Please excuse the opening humour. Actuaries are smart, and get labelled as introverts, but I have met some terrific people who just happened to be actuaries. I studied maths, have a degree in accountancy, and do Killer Sudoku against the clock for fun. My uncle (Alan Outten, RIP) was a top actuary in the UK, and nearly persuaded me to follow that path. I started off working in finance, but ended up getting involved in coaching, leadership development and speaking. My left and right brains comfortably co-exist. I am an extrovert who loves people, but, just like an actuary, I am logical and love numbers.
KIERAN HEARTY is the
author of How to Eat the Elephant in the Room. He is a consultant and leadership speaker with 30 years’ experience.
Introvert or not, the subject of body language is the most significant, yet overlooked, factor in effective communications. Is it possible? Can actuaries do anything to improve their body language? The answer is yes. There are no radical tips – all you may need to do is adapt or modify your body language. You will not be asked to transform. You are fine just as you are, however, with the right understanding and appreciation, you can enhance your body language with relative ease. It is self-fulfilling – if you believe you can do it, you will. A word of advice, please consider not just your needs but the needs of people who are different to you. They are the recipients of your newly acquired body language tips. Please accept that any modifications you make will be mostly subtle, not extravagant, in keeping with the real you. Please also consider that it is how you feel inside that drives what people see on the outside.
Tip 1: It’s 99.99% great to be you, but know who you are
How many actuaries does it take to change a light-bulb? Statistically, just one... Most actuaries are quite easy to spot. Some of us, if asked to study a personality report and say how accurate it is, will scan it and, with a flourish, write 80%. The stereotypical actuary will take longer, studying the report line by line, delivering a response of 79.63% after a calculator has been furtively replaced in a pocket. If you are a stereotypical actuary, you are being analysed as you read this: the pace at which you operate is measured, careful and thoughtful, not like the fast, sometimes reckless, pace of other people you see making hasty decisions that lack supporting data. Your focus is more about getting things done than building relationships at work, so you would not describe yourself as a ‘people person’. If you make a mistake, you will punish yourself. You cringe at the prospect of standing up and speaking to a large audience. You are self-contained and rarely expressive
18
THE ACTUARY • January 2015 www.theactuary.com
emotionally, being diplomatic in your interactions because of your need to take care to avoid making interpersonal mistakes. You may treat these tips as rules, but that’s OK.
Tip 2: Think of others – reduce the ‘wrong’ body language
Because you live for numbers, and accuracy is of vital importance, you probably hate making mistakes. If so, the body language you use when other people make a mistake tends to be negative. Could you somehow control it? Some of the most important body language is small and subtle, working well for the more analytical type of person. I write about a form of body language and behaviours that I call ‘quarkiness’. Inspired by quantum physics, it is about ephemeral micro-expressions (quarks), mostly negative (strange quarks), that we continuously bombard each other with. Strange quarks are hard to spot but generally a rolling of the eyes, facial tic or a frown, an intake of breath or a certain tone of voice gives them away. They are mostly unintentional and definitely covert, but they do betray our true feelings, which, if dictated by intolerance or disapproval, are damaging to relationships. Actuaries may disapprove of the behaviours of people who they see as carefree, not serious about work, self-promoting, or loose with facts when sharing opinions. A narrowing of the eyes, a pursing of the lips, a sour expression or small shaking of the head are common reactions to the frivolous work behaviours of others. The good news is that it’s normal and predictable; the bad news is that despite hardly noticing it, the recipients don’t like it. Reduce negative micro-messages and replace them with positive ones, such as the simple, non-expressive nod of acknowledgement, which requires no energy, yet is powerful if regularly used. Two or three nods are positively encouraging and not hard to do!
Tip 3: Be reflective – think of yourself as a mirror
Introverts can be expressive and demonstrative. Some of our finest actors are introverts, yet they are masters of body language. They find performing on stage to be physically and emotionally draining, yet they do it brilliantly. There are actuaries similar to you yet much more effective in their interactions with people. Talk to them. Ask them for advice. Think about how you could do what they do. It might be uncomfortable at first, but it gets easier with practice. Please reflect that it is not a lifestyle change you are seeking, just some tweaks here and there. You do not have to do it all of the time, and, if it helps,
think of it as a performance that has an ending, after which you can relax somewhere quiet. Mirroring is an effective way to build rapport with others. Simply emulate, in your own way, and subtly, their body language and gestures. If they move their hands about, do the same. If they cross their legs, copy them, subtly so they don’t think you are strange. If they look you in the eye, look back – taking note of their eye colour, which makes it easier.
Tip 4: Unleash the secret weapon – a smile
A smile can light up a room. A smile is efficient. It requires 43 muscles to frown, but only 17 to smile. It costs nothing, and involves simple upward pressure on both sides of your mouth. It is the most powerful piece of body language in your arsenal. Not only does it make people feel good, but it makes you feel good as well, releasing mood-enhancing endorphins. Even when there is no obvious requirement to do so, just smile. Think about your love of numbers, or somebody you love, then just smile. It feels good, so why not?
Tip 5: The POWER pose
This final body language tip can be done anywhere, and will help you feel more powerful, confident and expressive, at least for a while. Do you sit with a closed posture, hunched forward, arms folded, knees together? Instead, please lean back, spreading your arms as widely as possible along the arms of your chair, and then relax into an open and expansive pose for just five minutes. This can also be done standing, hands on hips, with legs wider than normal, looking confidently and purposefully at the world around you. Just five minutes in either of these open postures, once or twice a day, will make a difference. Do it just before an interview, and the job could be yours.
A few final quick tips
● Take a deep breath before you walk into a
room and check your facial expression. ● Go to the loo and perform a quick power pose while smiling in front of the mirror. ● Constantly check if your posture is closed (such as arms folded) and be more open. ● Get an office chair with arms (power pose). ● Stand up when you greet people (more open). ● Give everybody just two seconds of direct eye contact (stretch to five if you can). ● A smile is infectious, use liberally. And one final thought: most people admire your intellect and will be supportive if you tell them that you are working on your body language. In fact, they will admire you even more for it. a
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Risk. Reinsurance. Human Resources.
Pensions Financial stability
act Balancing features@theactuary.com
Jonathan Wicks and Lynda Whitney explore whether it is possible for actuaries to create stability for trustees without lumbering the sponsor with a financial burden
Defined benefit (DB) pension schemes have a history of giving their sponsors nasty surprises. Actuaries working in the field are expected to have answers to reduce those surprises – to bring much-wanted stability to pension schemes. In this article, we discuss the financial aspects of pensions stability, although noting that the operational aspects are also extremely important.
Setting a long-term goal
Some DB schemes aim to secure their benefits with an insurer (a ‘buyout’). Others have no intention of doing so and often want ‘selfsufficiency’. Although the phrase is not uniquely defined, it usually refers to a position where members have a high chance of their benefits being paid in full and the need for further contributions from the sponsor is modest. Being fully funded on a gilts basis, invested to match cashflows and adding the cost of hedging longevity risk plus a reserve for expenses can be more expensive than a buyout
with an insurer. Therefore, schemes typically are more pragmatic, targeting returns of perhaps gilts + 0.5% pa in the long term. From an actuarial perspective, it’s easy to realise that a gilts + 0.5% pa funding basis, together with an investment strategy targeting the same level of returns, does not have a sufficiently good chance of staying fully funded to satisfy the notion of self-sufficiency. The only way a scheme can have a high chance (say above 90%) of paying benefits without resorting to further contributions is to start from a higher funding position, ie to include an additional buffer at the outset. However, from the sponsor’s perspective, building up an additional buffer is likely to mean paying in contributions that will ultimately probably not be necessary. If this is the case, then the sponsor probably won’t get them back, or if it does then it will be hit with a penal tax rate. So how can actuaries help to create stability for trustees without this being inefficient for the sponsor?
“The only way a scheme can have a high chance of paying benefits without further contributions is to include a buffer at the outset” 20
THE ACTUARY • January 2015 www.theactuary.com
Learn from insurance reserving Chart 1 illustrates at a high level how an insurer selling a new policy might use reserves to give the required degree of security. Pension schemes don’t typically work in the same way as, once assets are put into the scheme, they can only be taken out in very restricted circumstances. However, if we can create a buffer that ensures funds are passed to the scheme if required but otherwise returned to the sponsor, then a similar structure can be created.
How big does the buffer need to be?
We can calculate the size of the buffer required for any desired level of certainty. For example, let us say that we want the probability of the scheme having a funding deficit at the end of any of the next 20 years to be less than 1%. Then, for a £100m scheme funding on a gilts + 0.5% pa basis, an additional buffer of £10m is required. It is interesting to observe in Table 1 that, in testing alternative investment strategies, the total funds required in the scheme are fairly constant for a given objective. In terms of the expected return of the strategy, there are many different potential investment portfolios to achieve the returns shown. For modelling purposes, we have assumed portfolios with the lowest volatility. Clearly, different chances of falling below 100% give rise to buffers of different sizes.
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January 2015 • THE ACTUARY 21 www.theactuary.com
Pensions Financial stability
JONATHAN WICKS and LYNDA WHITNEY are
partners at Aon Hewitt
features@theactuary.com
Chart 1 Insurers’ typical use of reserves to create security
What form can the buffer take?
Many alternative financing tools can perform the role of the buffer, including: charges over assets (sometimes wrapped in an asset-backed contribution vehicle), surety bonds (which leave the buffer with the sponsor but insure the risk that the sponsor cannot pay) and parent company guarantees (where the trustees are comfortable that the parent company has the scale to manage the buffer within the business). However, in our view, if the only problem you are trying to solve is that of a trapped surplus then the simplest solution is an escrow. The principle of an escrow is that assets are set aside by the sponsor and held by a third party on behalf of both the sponsor and the scheme. These assets are then released to the scheme or sponsor based on pre-determined triggers. This bridges the gap between trustees who prefer more cash in the scheme and sponsors who are concerned about trapped surplus. The escrow provides security for trustees and members, while avoiding the sponsor overpaying into the scheme. There are tax issues to deal with, and costs associated with it, but further modelling demonstrates that, with the right triggers, this can be an attractive solution for both sponsors and trustees.
Capital injected at outset
Insurer
Reserves
Premium Expected cost of benefits Xxxxx Expenses
Profit
Benefits Flow of cash in and out of reserves
Table 1 The level of assets needed for different target investment returns and liability discount rates so that the probability of having a deficit in 20 years is less than 1% Expected return of investment strategy*
Basic funding target
Additional funding buffer
Total funds required
Gilts+0% pa
£109m
£3m
£112m
Gilts+0.25% pa
£104m
£6m
£110m
Gilts+0.5% pa
£100m
£10m
£110m
Gilts+0.75% pa
£96m
£14m
£110m
Gilts+1.0% pa
£92m
£19m
£111m
Table 2 The probability of the ‘buffer’ being more cost-effective than cash into the scheme for different current funding levels Starting funding level on gilts+0.5% pa basis
80%
90%
100%
Sponsor is paying 20% tax
48%
70%
85%
Sponsor is not paying tax
91%
97%
99%
When should schemes start to consider a buffer?
The short answer is that schemes should be considering this sooner than they think! If the sponsor is paying corporation tax then it should be concerned about trapped surplus on a best estimate measure if its scheme is more than about 85% funded on a gilts + 0.5% pa funding basis (assuming returns of gilts + 0.5% pa are being targeted). Reductions in corporation tax have increased the attractiveness of holding the buffer outside the scheme. The tax charge of 35% for a refund of surplus was set when corporation tax, and hence tax relief on pensions, was 30%. From April 2015, corporation tax will hit a low of 20%, but the tax charge on surplus remains 35%. If the sponsor is not paying corporation tax,
22
THE ACTUARY • January 2015 www.theactuary.com
then, in the vast majority of scenarios, it would be better off putting its funds into a buffer outside the scheme. The Pensions Regulator estimates that approximately a quarter of sponsors have a tax position such that they cannot claim tax relief on some of the contributions paid. Table 2 shows a range of funding and tax positions.
Pensions stability
Most actuaries working in pensions will have grown up with the concept that only assets in the pension scheme can be relied upon. As schemes approach the final ‘pensions stability’ stages of their existence, it is likely that this will not remain feasible. Security outside the pension scheme is likely to become the norm and actuaries should be ready to embrace this. a
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International Professionalism features@theactuary.com
THE
UMBRELLA REVOLUTION Lee Faulkner, an actuary who lives in Hong Kong, argues that the current demonstrations are not just about democracy but that professionalism is at stake too
GETTY
LEE FAULKNER is an
actuary who has lived in Hong Kong for the past three years. He currently runs his own internet radio business
The recent protests in Hong Kong, collectively known as Occupy Central and dubbed the Umbrella Revolution are hugely significant – not just for the fight for democracy in Hong Kong but also for a concept close to all actuaries’ hearts: professionalism. The roots of the protest go back 30 years to the signing of the Sino-British Joint Declaration on Hong Kong in December 1984. Britain had run Hong Kong as a colony from the 1840s but was required to return certain parts of Hong Kong’s territory, which it had leased from China in 1898, as the lease was due to expire on 30 June 1997. The then Chinese leader Deng Xiaoping coined the phrase and concept of ‘one country, two systems’ (OCTS). Under this programme, Hong Kong would return to Chinese sovereignty in 1997, but would keep its way of life for 50 years. This meant retaining its own laws and legal system, currency, borders, passports and government, with a guarantee to respect the freedoms it enjoyed and provide a path towards full democracy. Hong Kong would be a special administrative region (SAR) of China and have complete autonomy, except for defence and foreign affairs. The joint declaration led to the drafting of the Basic Law, often referred to as Hong Kong’s mini-constitution to emphasise Hong Kong’s status as a SAR rather than a separate state. For the same reason, Hong Kong’s head of government was to be called the chief executive rather than prime minister or president. Article 45 of the Basic Law stated that the “method for selecting the chief executive shall be specified in the light of the actual situation in the Hong Kong SAR and in accordance with the principle of gradual and orderly progress”. It then goes on to say that the “ultimate aim is the selection of the chief executive by universal suffrage upon nomination by a broadly representative nominating committee in accordance with democratic procedures”. No timetable was given for reaching the ultimate aim, nor were the nominating committee or democratic procedures or gradual and orderly progress defined in detail. This lack of definition is at the root of the protests. The Standing Committee of the National People’s Congress (SCNPC) of The People’s Republic of China decided in 2007 to allow selection of the chief executive by universal suffrage in 2017. It set the Hong Kong government the task of working out the details of the nominating committee and democratic procedures and to report back with proposals. From late 2013 to early 2014, the Hong Kong government carried out a consultation exercise asking the public and political parties to propose methods for achieving universal
suffrage for the selection of the chief executive in 2017. In June, Beijing issued a white paper on fully and accurately understanding and implementing the policy of OCTS. This caused much controversy as it stated that Beijing had “comprehensive jurisdiction over Hong Kong”, which was interpreted as backtracking on Hong Kong’s autonomy under OCTS. It also said that judges were “administrators that need to take national interest into account in their judgements”, which many considered as a frontal attack on Hong Kong’s rule of law. The Hong Kong SAR government presented its report on the consultation exercise to Beijing in July, but it was viewed by many as not representing the true feelings of the people. On 31 August, Beijing communicated its decisions about the method for selecting the chief executive in 2017, causing a storm of protest as
“Whatever the motivations of the ‘big four’ for placing that advertisement, this politicisation of business is dangerous” it allows only Beijing-friendly candidates to be nominated. This was the final nail in the coffin.
Ill-judged interventions
So, what is the effect of all this on business? And, more personally, why is it already affecting professionals and professionalism? The protests focused on Hong Kong’s constitutional development and have avoided being steered into an anti-capitalist-type movement such as Occupy Wall Street or the wider Occupy movement; Hong Kong is, after all, a business-friendly city with extraordinarily hard-working people. But there have been some ill-judged interventions from the business community that seem to want to depict the protests in that way. One newspaper advertisement by the ‘big four’ accounting firms (the Hong Kong entities of EY, KPMG, Deloitte and PwC) denounced Occupy Central before any protest had even started. This backfired badly as it was followed almost immediately by an advertisement paid for by employees of those firms rebuking their
employers along the lines of the #NotInMyName social media campaign. Whatever the motivations of the big four for placing the advert, this politicisation of business is dangerous – who knows what the effects of such highly political stances might be on their employees, on the firms’ ability to recruit, and on the other businesses they advise outside Greater China. Perhaps even more important for actuaries than the business consequences of events in Hong Kong is how the professions are being viewed and how professionalism in general can continue to be exercised in such a politicised environment. When Beijing issued its white paper in June, the then president of the Law Society of Hong Kong, Ambrose Lam, issued a statement on behalf of the Law Society supporting it. This was highly political and very controversial given that the paper was viewed by many in the legal profession as an attack on the rule of law, requiring judges to issue judgments that were in the interests of Beijing rather than according to the law itself. Members of the Law Society filed a motion of no confidence in Lam, requesting withdrawal of the statement and calling for his resignation. Many members of the Law Society were cajoled by employers with significant business interests in China to vote against this motion. Others were contacted by ‘security agents’ from China also urging them to vote against the motion. Despite this unprecedented political pressure, the motion was carried with close on a two-thirds majority. The politicisation of professionals, where they are subject to political pressure from governments and their proxies, could affect our own profession. What would we do if, for example, our profession published a report about demographic imbalances caused by China’s one-child policy, but the Chinese government accused us of political interference and asked us to withdraw it? What effect might this have on our profession seeking partnerships with universities in China? Granted this is all hypothetical, but it is not implausible. We rightly put professionalism at the top of our list of concerns. I wonder whether we have thought through what we would do in such a situation? As we seek to be more ‘international’, I believe we should think about the political pressures we could be put under. By comparison, the professionalism issues we face in the UK will seem like technical niceties. a The views in this article are the author’s own. We welcome your comments. Please email: editor@theactuary.com
January 2015 • THE ACTUARY 25 www.theactuary.com
Arts arts@theactuary.com
This year is a celebration of both the old and the new. Anastasia Aboim selects some of the cultural and sporting highlights coming up in 2015 in the UK. Sure, you’ll be waiting for the return of the Large Hadron Collider, the launch of the Apple Watch and commemorating the bicentenary of the Battle of Waterloo along with the rest of them, but, besides the obvious, here’s some of the events that will leave your 2015 calendar packed with things to do.
Shoes: Pleasure and Pain
The V&A has two must-see exhibitions for fashion fanatics, starting with Shoes: Pleasure and Pain. If you ever bent yourself backwards for the shoes of your dreams, it’s nothing compared to what some of the owners of the pieces on display would have endured. Spanning the bizarre, the shocking and the just plain impractical, this exhibition has brought shoes from across the globe, including ancient Egyptian sandals and hi-tech ones created by a 3D printer. More conventional creations include pieces owned by icons from Queen Victoria to Marilyn Monroe. A unique look into how footwear floats between necessity and obsession. No Crocs allowed! Exhibition opens 13 June 2015 – 31 January 2016
Alexander McQueen: Savage Beauty
In March, the V&A will bring Alexander McQueen: Savage Beauty – the successful exhibition about the most talked-about designer in a generation – from New York to
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THE ACTUARY • January 2015 www.theactuary.com
LET’S CALL IT A the capital. The collection will be presented in themes, from McQueen’s graduate collection to his unfinished collection for Autumn/Winter 2010. Described as having dramatic staging resembling his catwalk shows, this exhibition will journey through the life of the man who invented the bumster trouser, revived skull print and who wowed his audience to the very end. This is bound to be a stunning exhibition with the works of a true original. Exhibition opens 14 March – 19 July 2015
Samuel Pepys: Plague, Fire and Revolution
One of the most famous diary-keepers gets a nod from the National Maritime Museum in Samuel Pepys: Plague, Fire and Revolution. This will offer an interesting insight into the turbulent period between the execution of Charles I in 1649 and the Glorious Revolution of 1688, narrated by Pepys himself, and with 200 paintings and objects. Exhibition opens 20 November 2015 – 28 March 2016
SCIENCE MUSEUM
At the back Arts Main picture: Paint the town any colour you desire at the Alexander McQueen: Savage Beauty exhibition Left: If shoes are your sole desire, then beat a path to the V&A
stories showing how science helped Britain to win the war. Original archive film footage, letters and photographs will shed light onto how Robert Watson-Watt invented radar, how the Tube Alloys project made a home-grown atomic bomb and on the powerful high-speed camera built to film the first seconds of detonation. There were also breakthroughs in medicine with the production of penicillin and antibiotics and in nutrition with the pioneering work of Elsie Widdowson. Her research into the war diet, compiled in the book The Composition of Foods, is still referred to today. But these developments may not have happened without Churchill’s fascination with and encouragement of science. Visitors can also see Churchill’s personal items, including one of his many famous cigars – smoked upon hearing he had been re-elected in 1951. Exhibition opens 23 January
Sport
DATE Churchill’s Scientists
The Science Museum kicks off Churchill 2015, a unique programme of events to commemorate British wartime prime minister Winston Churchill’s life, work and achievements, with the Churchill’s Scientists exhibition. In honour of the 50th anniversary of his death and the scientific breakthroughs that occurred during his leadership, the exhibition will tell the many remarkable
Three years after the Olympic Games upped the ante in British sport, fans won’t be disappointed by what’s lined up this year. ● The Rugby World Cup is coming to our shores in the autumn. The six-week-long clash between 20 nations will be held in 13 venues across 11 cities, including Newcastle, Manchester, Cardiff and London. The final will take place at the home of rugby, the Twickenham Stadium, on 31 October. Around half a million international visitors are expected, and with prices starting at £15 per ticket it’s accessible for rugby novices to soak up a great atmosphere while watching great sport. The tournament opens on 18 September
Below: Keep calm and turn to Churchill’s Scientists
● Scotland may be missing out on hosting the Rugby World Cup (it did host last year’s Commonwealth Games after all), but Glasgow will get its hands on the World Gymnastics Championships this autumn. Olympic medallist Louis Smith and other familiar faces will be back to consolidate past successes, and, no doubt, the recently retired record-breaking British gymnast Beth Tweddle will make an appearance. The championships take place from 23 October to 1 November
Music
Leading a spurt of new blood are two bands, both trios, one from the north and the other from the south. ● All We Are delivers a sound from LA via Liverpool. Based in the latter, Guro, Rich and Luís have a mix of funky guitars, Beatlesinspired hooks and daydream harmonies up their sleeves. The slow, lovesick shuffle of Utmost Good is a lo-fi soul-rock sound and their own haunting harmonies are akin to bands like Metronomy and Haim. The strength of the tracks on offer online, however, hints that All We Are could carve a path of their own. Anyone that describes their sound as “the Bee Gees on diazepam” is certainly worth a listen. Catch them on tour in March. UK/Irish tour from 9 – 17 March, playing Manchester, Brighton, London, Cork, Dublin and Glasgow ● Another hotly tipped act, Years & Years, has been described as ’90s R&B left out in the Ibizan sun. In the running for the BBC’s Sound of 2015 list, the Londoners’ singles Take Shelter and Desire have futuristic synths, bouncing steel drums and addictive pop melodies peppered with soulful yet innocent vocals from lead Olly Alexander, who abandoned acting to conquer UK dancefloors with mates Mikey and Emre. With the current buzz around them and anticipation of their album, look forward to futuristic and more mature dance music coming out of your speakers. Years & Years begins its UK tour in February. UK tour from 26 February – 7 March, playing Digbeth, Manchester, Nottingham, Bristol, Glasgow, London and Brighton
January 2015 • THE ACTUARY www.theactuary.com
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