Universities Superannuation Scheme (USS): Report by the actuary on the actuarial valuation as at 31 March 2005

15 May 2006

The Council give notice that the report by the actuary on the actuarial valuation as at 31 March 2005 is now available.

The results of the valuation may be summarized as follows:

1. The employers' contribution rate is maintained at 14% of annual salary and the employees' contribution rate is maintained at 6.35% of annual salary. The overall future service contribution rate has been calculated as 20.65% of annual salary.
2. The assets of the scheme at the valuation date were 77% of the accrued liabilities based on projected pensionable salaries with a past service deficit of £6,568m.
3. The scheme is 126% funded on the Minimum Funding Requirement (MFR) prescribed assumptions introduced by the Pensions Act 1995. The scheme is 110% funded in terms of the Pension Protection Fund (PPF) regulations introduced by the Pensions Act 2004.
4. The valuation includes a reserve of £800m to take account of recent promotional salary experience. Further analysis of promotional salary increases will be carried out to determine whether the unexpectedly high rate of increases since the 2002 valuation has been a temporary phenomenon or represents a long-term trend.
5. The contribution rate will be subject to review at the next actuarial valuation which is due to take place on 31 March 2008. Depending on the analysis of promotional salary increases and other factors referred to below, it may be necessary to consider the contribution rate in advance of the next actuarial valuation.
6. Although not referred to in the valuation report and not a requirement for USS, the actuary has estimated that the funding level as at 31 March 2005 using the FRS17 formula was approximately 90%.

As can be seen by the disparity between the MFR and PPF bases of valuation on the one hand and USS's own assumptions on the other, the USS assumptions have been and remain conservative. The scope for variation in the funding level is substantial, depending on the various economic circumstances that can arise. For example increasing the valuation rate of interest by 1% would reduce the liabilities by approximately £4 billion.

However, there are a number of issues which USS Ltd and the HE sector will need to address in the near future which impact on the funding of the scheme. The increase in the promotional salary scale already experienced, the implementation of the new pay spine and the move to a more competitive recruitment market in higher education, and the potential for further salary increases arising from the introduction of student fees are important factors. Also, improving life expectancy, the introduction of the Pension Protection Fund (PPF) levy, and the new statutory funding regulations all put pressure on the funding of the scheme and increase the likelihood of an increase in the contribution rate in the near future. USS Ltd will be discussing these issues with members and participating employers during 2006.

The USS management committee consider that the scheme's funding objective, the valuation method used in the valuation, and the assumptions underlying the valuations calculations represent a satisfactory basis for the long-term funding of the benefits provided by USS.

The full report can be viewed on the USS website (http://www.usshq.co.uk/); alternatively copies of the report can be obtained from Mrs S. E. Curryer, Head of Pensions Administration, Finance Division, 10 Peas Hill, Cambridge, CB2 3PN.