British Actuarial Thought in Defined Benefit Pensions (1905-1997)

The recognisable British private staff pension scheme, funded by a mixture of employer and employee contributions based on percentage of salary, paid over the period of service of the employee and invested in a trust fund, with benefits defined with reference to the salary history and years of service of the employee, first emerged over the second half of the nineteenth century. Ad hoc unfunded pension arrangements arose amongst some large employers earlier in that century. The occasional historical precedent of earlier funded arrangements for post-employment benefits can also be found: the earliest funded scheme for the provision of widows’ annuities to ‘employees’ is thought to be the Scottish Ministers’ Fund, which was established in the mid-eighteenth century.[1]

Actuaries have provided technical and professional advice on the financial management of defined benefit pension funds since around 1875. The British profession has been actively engaged in this role continuously from then to the present day. Whilst the task of funding long-term life-contingent pensions had many parallels with the actuarial work in the more-established life assurance sector, pensions work has also always had its own unique requirements and challenges: typically, pension benefits were even longer-term than the liabilities that arose in the life sector; and the ultimate size and cost of the benefits were a function of a wider array of uncertain variables than the liabilities of life offices. Whilst rates of interest and mortality tables were similarly vital to pensions work, the cost of the pension benefit would also depend on other variables such as long-term salary inflation and the rates at which employees would leave their employer prior to retirement. The trust arrangement that formed the bedrock of funded pension arrangement also implied a different legal and commercial context to that of a mutual life office. This raised subtle issues about the purpose of funding which had important implications for the objectives that the actuary’s advice should attempt to meet.

Amidst these new challenges, there was a plethora of external drivers of change in pensions actuarial thought that will be familiar from the history of actuarial thought in the life sector: economic and political shocks; increasing government regulation in both solvency and consumer protection that gradually saw statutory responsibilities displace unbridled actuarial judgement and discretion; financial reporting metrics that demanded alignment with accounting principles; the emergence of financial economics and the new insights it could provide into financial management and the difficulty in reconciling them with traditional actuarial approaches.

This chapter identifies some of the key developments in pension actuarial thought that arose over the long history of actuarial involvement in the field. Their historical context can help us understand the ways that thinking in this field meandered, circled and occasionally underwent revolutions. A final word on terminology—the terms final salary pension scheme, defined benefit pension fund and so on are used interchangeably in this history, and none generally provide a perfect description of how these pension arrangements worked. Most of the schemes had pensions based on final salary, but a minority were based on salary levels over a longer period of employment. Pension benefits were generally not always prescriptively defined: for significant periods of the history early leaver benefits and in-force pension increases included significant discretionary elements that would tend to be greater when funding levels were strong.

  • [1] Crabbe and Poyser (1953), p. 1. © The Author(s) 2017 C. Turnbull, A History of British Actuarial Thought,DOI 10.1007/978-3-319-33183-6_6
 
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