The Paper sets out to examine whether existing group pension business written on certain premium bases will prove to be profitable or not. In the first part of the Paper the trends and effects of mortality, interest, income tax and expenses are examined in turn and a table of annuity values is constructed embodying the conclusions drawn.

In the second part of the Paper the working of a model group pension scheme for the year 1955 and the results of the year's working are analysed, firstly according to the assumed experience basis, and secondly according to the premium basis.

A small but growing number of life offices are willing to allow participation in profits to group pension schemes. Well-designed schemes, whether with- or without-profits, satisfy quite different requirements from ordinary policies; these requirements are first examined with special reference to their effects on the design of with-profits schemes. Thereafter, certain general actuarial questions are discussed which an office must settle against the background of its own policy and circumstances, once it has decided in principle to transact with-profits schemes. Different possible types of scheme are then considered in the light of these discussions, with special reference to bonus systems and costing plans, and to the prospects of successful competition with without-profits schemes. The paper ends with a short survey of misunderstandings which an office should guard against in dealing with the public.

Mr. President and gentlemen, I should like to express my pleasure at being back in the Faculty Hall, where I was privileged to listen to your interesting discussion last year on “The Growth of Pension Rights”. I am glad to find that the number of occasions on which economists and actuaries are not only on speaking terms but able to take counsel of one another is increasing, for I am sure that there are many problems, of which the future of pensions is only one, that can only be satisfactorily resolved through our joint efforts and deliberations. This conviction rests partly on my experience as a member of the Phillips Committee, which was heavily dependent both on the actuaries who served on it and on the members of the profession who, in one way or another, helped it along; but it is a conviction that is just as forcibly brought home to me when I look across the Atlantic to the inquiry that has been in progress since 1950 into the long-term trends in savings and investment in the United States—an inquiry carried out by economists but sponsored and largely financed by the Life Assurance Association of America.

1. The standard table of mortality most generally used in Britain at the present time for life assurance calculations is the A 1924-29 table, which was derived from the experience of assured lives during the period 1924–29. During the quarter of a century that has elapsed since that time there have been substantial changes in mortality rates and the A 1924-29 table is today out of date. The publication of the A 1924-29 Light table, based upon the experience of certain selected offices whose mortality was lighter than average, has no doubt been helpful in providing a table which goes some way in the direction of the lower mortality rates of today. However, this table suffers from the disadvantage that, while the mortality rates at young ages are not low enough for current experience, at some of the older age-groups the rates are too low, with the consequence that the shape of the mortality curve does not accord with present conditions. The greatest proportionate reductions in mortality since 1924–29 have occurred at the younger ages, and there can be little doubt that a new table is needed to provide offices with an efficient and up-to-date instrument for life assurance calculations.

The paper deals with the valuation of whole life and endowment assurance business in offices whose solvency is not in question and which are writing an expanding business.

A survey is made of the valuation methods and bases of major British life offices. A large majority of these offices use the net premium method for their published valuations and make these valuations on mortality and interest bases similar to those used in their current premium scales. A model office is used to study the provision for expenses made by net premium valuations. It is shown that the renewal expenses may often be less than the annual provision for expenses in the valuation, with the result that the valuation makes some provision for the initial expenses of new business.

Examples are given showing the rate at which surplus is released by net premium valuations in an expanding business and the rates of reversionary bonus provided are compared with the uniform rates supported by the premiums.

Further examples are given showing the rates of reversionary bonus provided by net premium valuations after changes in the experienced rates of interest, mortality and expense, and these reversionary bonuses are compared with the uniform reversionary bonuses supported by the reserves and the premiums under the new conditions.

The paper describes a new type of deferred life annuity which has recently been introduced in the United States and which has been used, so far, principally in connection with the retirement plans of colleges and other educational institutions and, to some extent, in self-administered pension plans of commercial corporations. These annuities do not guarantee specific or equal money payments. The fund, which is divided into an “accumulation fund” and an “annuity fund”, is invested entirely in ordinary shares (“common stocks”). Premiums (contributions) and income from the fund are applied to purchase “accumulation units”, the value of a unit being determined monthly in accordance with stock market prices. At the retirement date of any individual the then current value of the units he owns is used to purchase a life annuity of a fixed number of “annuity units” in accordance with the then current value of a unit in the annuity fund. The successive cash payments to the annuitant are the current values of the fixed number of annuity units which he holds.

The purpose of this plan is to provide a variable cash income which will, to some extent, reflect the changes in the cost of living, i.e., to provide a more constant “real income” both in times of inflation and deflation.

The paper includes : (1) a short account of the origin and business of the company which has introduced this plan, and which is of a special character, with business limited to educational institutions and their employees ; (2) consideration of the circumstances which led to the adoption of the plan ; (3) a general explanation of the basis of the plan and of its mode of operation ; (4) some illustrations of the results which would have been obtained if this plan had been in operation in the past compared to the conventional type of deferred annuity with fixed payments, including consideration of the relative amounts of cash income realised, the relation of cash income to purchasing power and the extent of fluctuation in income under the “variable annuity” ; (5) reference to the possible use of such a plan by life insurance companies generally and of other means by which variable annuities of this type are being or may be provided.