The President (Professor P. G. Moore): Gordon Bayley joined the Equitable as an actuarial student from Abingdon School in 1938; 41 years later he was to become Chairman of its Board of Governors. He served in the Royal Artillery in the later part of the last war, but with the temporary suspension of examinations from 1942 to 1945 it was not until 1946 that he qualified in what many have had me believe was a vintage year for qualification. He moved into consultancy in 1954 on becoming a partner in Duncan C. Fraser and then moved back to the world of the insurance companies a few years later by joining National Provident Institution in 1957; he became its chief executive in 1964 until his retirement earlier this year.

The President (Professor P. G. Moore): After taking his degree at Cambridge, Sidney Benjamin joined the Prudential, becoming a Fellow of the Institute in 1957. Shortly after that he left the Prudential to join Ferranti Computers, but after a few years with them he moved on to the consulting firm of Bacon and Woodrow where he has remained ever since. He has been extremely active in Institute affairs, having served on Council with the statutory breaks for over 20 years. He has always been a staunch defender of the concept of professionalism, but his greatest contribution to Council has been his Chairmanship of the Research Committee, where he has done so much to stimulate research by a generation of members of the profession.

The President (Professor P. G. Moore): I have the privilege this evening of presenting a Finlaison Medal to Mr Rodney Barnett. Earlier this year the Council reviewed the procedures for awarding medals and, whilst retaining the base metal, namely silver, decided to widen the eligibility of the old silver medal and to change its designation to a renamed Finlaison Medal.

In your Presidential Address last year, Mr President, you argued eloquently for the necessity and the inevitability of change in the nation's economic life, and you examined both the opportunities for, and the barriers to, the sort of fruitful innovation which you saw as essential to future prosperity. I want to pick up your theme, and pursue it with particular reference to the role of science and scientists in this process.

1.1 The purpose of this paper is to review current practice regarding the pension aspects of takeovers and mergers of companies and businesses in the UK, with particular reference to the involvement and responsibilities of actuaries. Although there is an increasingly international aspect to such transactions, this is outside the scope of this paper.

1.2 Previous papers dealing with this subject either in part or in whole include those by Gilley, by Pomery and Jones, and by Chapman and Jagelman.

The paper concerns the situation in which an evaluation of outstanding claims is discounted, in anticipation of investment return earned by the funds supporting that liability. Factors bearing upon the choice of an appropriate rate of return to be assumed in this evaluation are considered.

The ‘standard approach’ to this problem is criticized in two main respects:

(i) there is usually no statement (indeed, no consideration) of whether the discounted value of outstanding claims is to be associated with assets at book, market, or some other value;

(ii) the discounting of outstanding claims is often performed by means of an assumed ‘inflation gap’, i.e. an assumed difference between future rates of inflation and investment return.

Various other matters germane to the determination of an appropriate rate of investment return are listed in Section 2.

Sections 3 and 5 deal particularly with points (i) and (ii) raised above. It is suggested that, in certain circumstances, an evaluation of outstanding claims which fails to address (i) or is carried out on an ‘inflation gap’ basis will be virtually meaningless.

Section 4 deals with the case of an insurance fund in which assets are matched with technical liabilities by amount and term. The considerations which would cause the rate of investment return projected in these circumstances, to differ from that projected in the case of an absence of matching are discussed.

Section 6 deals with the issue of exactly which assets are to be regarded as supporting the liability for outstanding claims. It is apparent that the identification of such assets will affect the rate of return to be regarded as referable to outstanding claims. Particular matters considered include:

(i) assets to be associated with acquisition of new business (and hence not with outstanding claims);

(ii) debtor and creditor items. particularly outstanding premiums and inwards loans.

Section 7 gives a numerical example of the projection of future rates of investment return. This is done by means of a computer projection of various items of a hypothetical insurance fund, taking into account projected future:

(i) interest rates;

(ii) rate of growth of new premium;

(iii) the required distribution of assets by sector;

(iv) profitability of business underwritten.

Conclusions on the various matters considered are dotted through the paper. For convenience, they are collected together in Section 8.

1.1. In 1979 the first set of graduated sickness rates derived from the data supplied by a number of insurance companies was published by the PHI Sub-Committee (C.M.I.R. 4, 1979).

Sickness is a much more complex phenomenon than mortality. I get the impression from working on the 1972–75 sickness experience of, as it were, a certain looseness and lack of coherence in the data which I have not found in mortality data. Some of this could be due to the much smaller size of the data and to the heterogeneity of the experience. Much of the latter has been removed in the Standard experience of 1975–78 but, not having studied these data, I can say nothing about the effect of this. It is therefore not surprising that the PHI Sub-Committee had considerable doubts “about the possibility of judging the success of the graduation by applying standard statistical tests” such as those normally used for mortality data.

The discussion on Maturity Guarantees, as applied to unit linked life assurance policies, has followed two quite distinct paths—the conventional or mainstream approach, as exemplified by Benjamin (1976) and endorsed by the Maturity Guarantees Working Party (MGWP 1980) on the one hand, and those who seek to reduce the risks associated with maturity guarantees by using an immunization strategy on the other (Brennan & Schwartz, 1976).

In an earlier paper (Benjamin, 1981) on the subject of cigarette smoking and mortality, statistics from a number of national prospective studies were brought together. These studies agreed in the general finding that the smoking of cigarettes doubled the risk of dying before the age of 65; that diseases most likely to intervene to produce this excess mortality were lung cancer, bronchitis, and emphysema, ischaemic heart disease, certain other cancers (notably of buccal cavity, oesophagus, bladder) and cirrhosis of the liver. It was emphasized that the excess mortality from heart and circulatory disease was not restricted to coronary heart disease, though this latter cause provided the most important element. There was for cigarette smokers a 70% higher risk of dying from myocardial infarction (for the same level of smoking that risk was not less for women than for men). A restricted number of international comparisons of mortality were provided. In almost all countries in Europe, ischaemic heart disease mortality was rising. Outside Europe there was a contrast between the less developed countries where the amount of tobacco consumed was low and those developed countries where consumption was higher. Death-rates were much higher in the latter group. The most pronounced association between smoking and disease was that of lung cancer. The recent experience of lung cancer mortality in a number of countries was recorded. In all countries where there was substantial participation in smoking, death-rates had been rising for men. In most countries where a high proportion of women had been smoking for many years the death-rate for cancer of the lung was rising and in most cases quite rapidly. A reminder was given that heart disease and cancer were not the only penalties of smoking. Emphysema, bronchitis, asthma, influenza, pneumonia and respiratory tuberculosis were diseases for which the risk of dying was increased in cigarette smokers.