The last paper on the winding-up of pension schemes was presented to the Institute by Gilley in March 1972. Since that time it has justifiably been the standard work on the subject and it has only recently been withdrawn from the Institute's examination syllabus. This paper is an attempt to up-date Gilley's work and to describe a complex and practical field of actuarial operation.

Since 1972 there has been a substantial amount of pensions legislation which has inevitably changed the detailed procedures involved in a pension scheme dissolution. Nevertheless, many of the general considerations and ideas expressed in Gilley's paper are still valid today.

The requirement for a United Kingdom life office to hold solvency margins in addition to its normal actuarial reserves took full effect on 15 March 1984. At the time of writing, solvency margins for U.K. life offices have therefore had an effective life of under two years.

Before the introduction of the regulations, many comments were made within the life insurance industry about the effects which the introduction of the life solvency margins would have on the financial position of U.K. life offices. This therefore seems an appropriate time to reflect on the theoretical financial consequences of solvency margins from the point of view of a U.K. life company, and comment on the practical effects which have been observed to date.

The origins of leveraged leasing are the trust arrangements used in the 1870's in the United States of America by railroad companies to finance the acquisition of rolling stock (Fritch, 1977, p. 98). A trust was established to purchase the equipment. The trustee issued trust certificates to investors who provided the funds for the equipment acquisition. The trust certificates provided for the repayment of principal and interest at specified dates. The trust then leased the equipment to the railroad company and the rental paid by the railroad company was used to repay the trust certificates as they fell due. These arrangements were in reality conditional sale agreements and not leveraged leases.

Leveraged leasing as we know it today was introduced in the U.S.A in 1963 after the Comptroller of the Currency permitted national and state chartered banks to own and lease personal property (Weston, 1983, p. 271). The arrangement was used initially by railroad and airline companies to finance the acquisition of large items of capital equipment. Companies within capital intensive industries could not absorb the tax benefits of ownership whereas the banks could. Leveraged leasing meant that the banks owned the equipment and claimed depreciation and other tax deductions associated with ownership. These benefits were passed onto the railroad companies through lower rentals which reflected the value of these taxation benefits.

Daykin (1976) suggested a method of evaluating the rate of return achieved over a past period which did not depend directly on the market value at the end of the period in question. This was intended to avoid the volatility in the results of an assessment based on market values and sought to give a more reliable indication of the underlying rate of return which had been achieved.

If the general problem in relation to equities is considered, an investment of 1 at the beginning of year M will roll up with reinvestment of dividends to give an accumulated investment, XN, at the end of year N, in terms of ‘units’ in an index P, of:

(1)

An actuary has two major responsibilities in respect of a fully functional pension scheme:

(i) To perform (and report on) periodic actuarial investigations; these have the dual purpose of confirming the security of the members' accumulated benefits and of determining, with the agreement of the employers, an appropriate scheme of funding;

(ii) To provide tables for application to early leaver benefits for the determination of alternative options.

Much has been written on the first of these functions and I expand on this only to a limited extent in §2. This paper addresses itself more to the practical implications of the second of them and, in particular, to the early retirement option.

In the last ten years Staple Inn has played host to two major discussions on performance measurement. In November 1976, Holbrook's definitive paper to the Institute set out in some detail the theoretical basis of performance measurement while in January 1980 Hager's paper to the Student's Society gave a detailed view of performance measurement in practice.

Between them the two papers provide a fairly comprehensive description of what was, even in 1980, a relatively novel science for many U.K. pension funds. At the time of writing the majority of large- and medium-sized directly invested pension funds have their investment performance measured. Yet even after fifteen years of performance measurement in the U.K. some of the fundamentals of performance measurement are questioned and even disputed by a sizeable proportion of actuaries—for example in his March 1985 paper to the Faculty of Actuaries Marshall states, “This must call in question the validity of its (the Time Weighted Rate of Return) use for comparative purposes”.

In September 1974 Barbara Castle published her proposals for a new earnings-related State pension scheme in her White Paper “Better Pensions”. This followed a succession of attempts by previous Secretaries of State for Social Services to change State pension arrangements radically. Unlike the ill-fated Crossman and Joseph schemes, however, the Castle scheme succeeded both in reaching the statute book and in coming into operation. A Bill was introduced in February 1975 and on 7 August 1975 the Social Security Pensions Act 1975 received the Royal Assent.

The State earnings-related pension scheme (SERPS) came into operation on 6 April 1978. It provided State pensions related to earnings, but also offered to employers with good occupational pension schemes the possibility of ‘contracting-out’ and providing equivalent or better earnings-related benefits through their own scheme.