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Universities Superannuation Scheme (USS) - Report by the actuary on the actuarial valuation as at 31 March 2008

4 May 2009

The Council gives notice that the report by the actuary on the actuarial valuation as at 31 March 2008 is now available.

The results of the valuation may be summarized as follows:

1. The employers' contribution rate will increase to 16% of annual salary from 1 October 2009, while the employees' contribution rate remains at 6.35% of annual salary as currently specified in the rules of USS.
2. Under the scheme funding regulations, the assets of the scheme at the valuation date were 103% of the scheme's technical provisions based on projected pensionable salaries with a past service surplus of £707m.
3. Based on the trustee company's historic funding basis, which makes no allowance for expected equity outperformance over gilts, the assets of the scheme at the valuation date were 71% of the accrued liabilities based on projected pensionable salaries, with a past service deficit of £11,777m.
4. The Scheme is 107% funded in terms of the Pensions Protection Fund regulations introduced by the Pensions Act 2004.
5. The valuation includes a reserve of £1,350m to take account of recent promotional salary increase experience. Further analysis of promotional salary increases will be carried out to determine whether the high rate of increases experienced between 2002 and 2008 is likely to continue into the future and whether the provision is necessary or sufficient.
6. The contribution rate will be subject to review at the next actuarial valuation which is due to take place at 31 March 2011. Depending on the analysis of promotional salary increases and other factors, it may be necessary to consider the contribution rate in advance of the next actuarial valuation.
7. 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 2008 using the FRS17 formula was approximately 104%.

As can be seen by the disparity between the results of the valuation under the scheme funding regulations and the valuation based on the trustee company's historic funding basis, the scope for variation in the funding level is substantial. The only difference between the two valuation calculations is in the discount rate used to value the liabilities. The former assumes the USS assets will return 2% a year in excess of gilts, an assumption which most investment professionals would consider to be reasonably cautious, whereas the latter is based on the conservative assumption that there will be no outperformance over gilts.

The report states that the employer contribution rate will increase to 16% from 1 October 2009. The USS board recognizes, however, that the employers and the members, the latter represented by the University and College Union (UCU), are currently discussing ways in which the scheme can remain attractive and affordable. These discussions may lead to scheme changes which could affect the contribution rate. In the event that changes are agreed in the next few months, the USS board will be able to consider the effect of the changes on scheme funding and, if appropriate, decide on any changes to the increase specified above in advance of the 1 October 2009 implementation date.

While the board of USS considers that the funding objective, the valuation method, and the assumptions underlying the valuation calculations together represent a satisfactory basis for the long-term funding of the benefits provided by USS, it recognizes that factors such as uncertainty over future investment returns, improving mortality, and salary pressures arising from the competitive recruitment market in higher education, continue to put pressure on the scheme. The USS board will continue to monitor these factors closely and provide assistance where appropriate to the employer and member representatives in their discussions on the future of the scheme.

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, Human Resources Division, 10 Peas Hill, Cambridge, CB2 3PN.

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Cambridge University Reporter 07 May 2009
Copyright © 2011 The Chancellor, Masters and Scholars of the University of Cambridge.