This Presidential Address highlights the national problem of inadequate savings for retirement by the current working population. It examines what can be done to restore confidence in long-term savings and, in particular, looks at the contribution that individual actuaries and the Actuarial Profession can make. The Address also examines the origins in the current shortfalls in final salary pension schemes and the lessons to be learned from recent events, before going on to comment on the lessons from the report on Equitable Life by Lord Penrose.

This Presidential Address takes place at a time of great change for the Actuarial Profession, not least the review of the Actuarial Profession by Sir Derek Morris and his team. The Address concentrates on the changes that the Actuarial Profession, like many other professions, needs to address from a professional perspective in the 21st century. Key aspects such as peer review, monitoring of compliance with standards, CPD and revalidation of a member's competence are considered and the changes that need to be made in these areas outlined. A review of the complicated area of Conflicts of Interest as it impacts on the work of actuaries, especially in today's business environment and the high expectations of clients, points towards the need for additional professional guidance in this area. The need for an Independent Actuarial Standards Board with a significant non-actuarial membership to take responsibility for the standard setting process of the Actuarial Profession is a necessity going forward.

The meeting took the form of a Panel Discussion, chaired by Mr D. O. Forfar. Before the meeting he prepared a short paper on topics for discussion, and this is summarised here.

This paper considers the impact that the current trend towards fair valuation of assets and liabilities is likely to have on risk measurement and management practices within the financial services industry. The paper analyses the different sorts of risks faced by organisations such as asset managers, pension funds, banks and insurers, and seeks to identify how their approach to the measurement and management of these sorts of risks might change as fair valuation becomes more entrenched. It argues that what it describes as traditional ‘time series’ based risk measurement is likely to be progressively displaced over time by a greater emphasis on what the paper refers to as ‘derivative pricing’ (or ‘fair value’ or ‘market consistent’) based risk modelling. It comments on the trend towards liability driven investment. The paper focuses on ‘financial’ risks (market, credit, liquidity and, more generally, asset/liability risk) rather than ‘operational’ risks, whilst noting that the dividing line between the two can be open to interpretation. Insurance risk is seen as in some respects straddling both camps.

In this paper we present many investigations into the results of simulating the process of hedging a vanilla option at discrete times. We consider mainly a ‘maxi’ option (paying Max(A, B)), though calls, puts and ‘minis’ are also considered. We show the sensitivity of the variability of the hedging error to the actual investment strategy adopted, and to the many ways in which the simulated real world can diverge from the assumed option pricing model. We show how prudential reserves can be calculated, using conditional tail expectations, and how net premiums or fair values (which we present as the same) can be calculated, allowing for the necessary prudential reserves. We use two bond models, the very simple Black-Scholes one and a less unrealistic one. We also use the Wilkie model as an even more realistic real-world model, allowing for many complications in it to make it more realistic. We make observations on the important difference between real-world models and option pricing models, and emphasise the latter as the way of getting hedging quantities, and not just option prices.

This paper reviews the developments in reporting of traditional embedded value and summarises some of the reasons why this is now undergoing change. It considers the purpose of an embedded value calculation and the effect of differing attitudes to risk. It comments on the recently developed European Embedded Value Principles and sets out the main areas where scope remains to apply judgement.

The paper proposes the market-consistent embedded value framework as a way forward to help provide guidance in some of these areas, in particular on the choice of discount rate and on calibration of stochastic techniques used to value embedded options and guarantees. The paper recognises that market-consistent embedded values are in relative infancy and sets out areas for possible future development.

This paper puts the case for the Actuarial Profession revising and tightening its standards on actuarial funding advice in relation to United Kingdom occupational pension schemes. We critique current actuarial practice and advocate principles for measuring solvency and providing funding advice. In particular, we advocate that funding targets should be clearly and unambiguously related to scheme solvency. The paper also covers optimal investment strategy, treatment of the ‘company covenant’ when giving funding advice and governance issues relating to pension schemes.

As the national debate hots up, this Sessional Meeting is being devoted to the following important topics, which affect life, pensions and investment actuaries:

— What should be the role of the State as pension provider — safety net or income replacement?

— Should the State Pension Age be raised? If so, when and by how much?

— Should the United Kingdom adopt a Citizen's Pension and scrap the State Second Pension and contracting out?

— Should there be more compulsory savings for retirement? If not, how can a voluntarist system be made to work better?

— What is the role for equity release?

— How can consumers become better educated in financial matters, and what role can actuaries play in helping to achieve improved levels of financial literacy?

These, and many other, challenging questions will be discussed.

The text of this paper, together with the abstract of the discussion held by the Institute of Actuaries on 25 October 2004, are printed in British Actuarial Journal, 11, I, 63-131.

In the recent past life companies have made many decisions which they have had cause to deeply regret. This paper looks at the range of decision making theories available. It then examines recent examples of decisions that had unfavourable consequences and explores why they were taken, and goes on to describe a systematic approach to decision making which can help management assess more objectively the difficult choices confronting them today. The approach does not require espousal of any specific decision theory or method of value measurement. The focus is on the decision making process and the organisation's capacity to handle change. The paper identifies the three requirements for effective decision making.