The title of the paper may suggest to readers that the authors are about to enter into a highly moralistic debate comparing those persons who take the ‘evil weed’ against those that lead ‘clean wholesome lives’. Whilst this is obviously not the case, the inference of competition is totally relevant. As the U.K. life insurance market moves slowly but surely to a smoker/non-smoker division, new dimensions of competition could open up between those offices who adopt a differential system and those who do not. One purpose of this paper is to comment on this feature.

The main purpose of the paper, however, is to highlight the financial and underwriting problems involved in this type of market which represents a highly significant departure from previous practice. Many readers will have already debated these problems within their offices and perhaps with their reassurer. However, to our knowledge, no discussion has yet taken place across the British actuarial profession as a whole, and we believe it highly desirable that such debate takes place. This paper, therefore, should be seen as offering nothing new or conceptually original, but as merely the catalyst for discussion.

(F. H. Townsend, after Wordsworth)

Examinations have taken a central place in Institute life for the last 130 years—indeed, from its very foundation the Institute's function as an examining body was clearly recognized. Many members of the Institute have an interest in the examinations, and no doubt this interest is greatest amongst those still in the process of taking them. It is therefore perhaps surprising that, although there is no shortage of official material relating to the examinations, there has been very little attempt to open the subject to discussion by presentation of a general paper. Indeed, apart from Professor Pegler's provocative but slightly specialized paper (11) presented to the Society in December 1979, I can find no evidence of any. It seems probable that the topic has often been discussed but that, perhaps from an unnecessary fear of breaches of secrecy, few if any have committed their views to paper.

This paper looks at the new financial terms for contracting-out which will operate during the 5 years commencing 6 April 1983. In the remainder of this section we briefly review the background to the terms which operated during the first 5 years of contracting-out, while in §§2–6 we consider the individual elements of the new terms. In § 7, we describe how projection techniques can be used to determine whether the new terms may be favourable for a particular group of employees.

The framework of the current earnings-related State pension scheme was first proposed in September 1974 in the White Paper ‘Better Pensions’. The White Paper emphasized the need for an earnings-related component to build on the basic flat-rate pension, together with the need for full inflation-proofing of State pensions.

In recognition of the large proportion of the population that was already covered by ‘final salary’ occupational schemes it was proposed that the new State scheme should operate in partnership with such schemes. Thus occupational schemes of a sufficient standard would be permitted to ‘contract-out’ and accept responsibility for paying the guaranteed minimum pension (or GMP, broadly equivalent to the earnings-related State pension), the members and their employers in return paying reduced rates of National Insurance (NI) contribution.

1982 saw the introduction of a new dimension in financial planning both for individuals and for institutional investors; namely the indexation of capital gains. In his Budget speech in the House of Commons on 9 March 1982, the Chancellor of the Exchequer, Sir Geoffrey Howe, spoke as follows:

I propose that as from this April, gains will in principle be calculated after taking account of inflation which occurs after that date. No relief will however be given in respect of the first year of ownership …

Because we have not found it possible to extend the new scheme to cover past gains, I propose also that the exempt slice should be increased to £5,000. That is the best solution to the problem of the past and will simplify administration both for the taxpayer and the Revenue. For the future, I intend that this threshold should be statutorily indexed.

There will be no revenue cost in the coming year. In 1983–84 the cost of these two measures will be £55m.

But this ought not to be looked at as a measure of the cost to the Exchequer. It is rather a measure of the tax that ought never to have been levied in the first place. This change is no more than simple justice, which should be welcomed on all sides of the House.

This paper is devoted to a particular type of unit-linked policy which was first introduced in 1977, and which has since been much copied and amended; there are now over 20 such policies on the market, with more being introduced at regular intervals.

The essential features of this type of policy are:

(a) The cost of mortality is met by the regular cancellation of units attached to the policy to the value of the current cost of the risk.

(b) The policy conditions allow the office to review the premium and/or sum assured in the light of experience, in particular investment experience.

The paper first describes the development of the policy in its various forms, and surveys the current state of the market.

The decisions to be taken by the life office in designing such a policy are then reviewed.

The pricing of the contract is then discussed, including the cost of various options which can be offered.