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Financial Statements 2011-12 39

Notes to the Financial Statements For the year ended 31 July 2012

26 Universities Superannuation Scheme (continued) Standard mortality tables were used as follows:

Male member’s mortality Female member’s mortality

S1NA [ light ] YoB tables - no age rating S1NA [ light ] YoB tables - rated down 1 year

Use of these mortality tables reasonably reflects the actual USS experience but also provides an element of conservatism to allow for further small improvements in mortality rates the CMI 2009 projections with a 1.25% pa long term rate were also adopted. The assumed life expectations on retirement at age 65 are:

Males (females) currently aged 65 Males (females) currently aged 45

23.7 (25.6) years 25.5 (27.6) years

At the valuation date, the market value of the assets of the whole scheme was £32,433.5m and the value of the scheme’s technical provisions was £35,343.7m, indicating a shortfall of £2,910.2m. The assets were therefore sufficient to cover 92% of the benefits which had accrued to members after allowing for expected future increases in earnings.

The actuary also valued the scheme on a number of other bases as at the valuation date. On the scheme’s historic gilts basis, using a valuation rate of interest in respect of past service liabilities of 4.4% per annum (the expected return on gilts) the funding level was approximately 68%. Under the Pension Protection Fund regulations introduced by the Pensions Act 2004 it was 93% funded; on a buy-out basis (i.e. assuming the Scheme had discontinued on the valuation date) the assets would have been approximately 57% of the amount necessary to secure all the USS benefits with an insurance company; and using the FRS 17 formula as if USS was a single employer scheme, using a AA bond discount rate of 5.5% per annum based upon spot yields, the actuary estimated that the funding level at 31 March 2011 was 82%.

As part of this valuation, the trustees have determined, after consultation with the employers, a recovery plan to pay off the shortfall by 31 March 2021. The next formal triennial actuarial valuation is as at 31 March 2014. If experience up to that date is in line with the assumptions made for this current actuarial valuation and contributions are paid at the determined rates or amounts, the shortfall at 31 March 2014 is estimated to be £2.2 billion.

Since 31 March 2011 global investment markets have continued to fluctuate and following its peak in September 2011 inflation has declined rapidly towards the year end, although the market’s assessment of inflation has remained reasonably constant. The actuary has estimated that the funding level as at 31 March 2012 under the scheme specific funding regime has fallen from 92% to 77%. This estimate is based on the results from the valuation at 31 March 2011 allowing primarily for investment returns and changes to market conditions. These are sighted as the two most significant factors affecting the funding positions which has been taken into account for the 31 March 2012 estimation.

On the FRS17 basis, using an AA bond discount rate of 4.9% per annum based upon spot yields, the actuary estimated that the funding level at 31 March 2012 was 74%. An estimate of the funding level measured on a buy-out basis was approximately 56%.

Surpluses or deficits which arise at future valuations may impact on the University’s future contribution commitment. A deficit may require additional funding in the form of higher contribution requirements where a surplus could, perhaps, be used to similarly reduce contribution requirements. The sensitivities regarding the principal assumptions used to measure the scheme liabilities on a technical provisions basis as at the date of the last triennial actuarial valuation are set out below:

Assumption Investment return

The gap between RPI & CPI Rate of salary growth

Members live longer than assumed Equity markets in isolation

Change in assumption Decrease by 0.25% Decrease by 0.25% Increase by 0.25% 1 year longer Fall by 25%

Impact upon scheme liabilities Increase by £1.6 billion Increase by £1 billion Increase by £0.6 billion Increase by £0.8 billion Increase by £4.6 billion

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