Financial Statements 2011 - Royal Holloway, University of London

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Notes to the Financial Statements(continued)28 Pension SchemesThe total pension cost for Royal Holloway and its subsidiary was:2010/11 2009/10£000 £000Contributions to USS 9,357 8,193Contributions to SAUL 1,487 1,356Other pension contributions and costs 46 48Total Pension Cost (note 8) 10,890 9,597The College participates in the Universities Superannuation Scheme(USS) and the Superannuation Arrangements of the University ofLondon (SAUL), and has adopted FRS 17 for accounting for pensioncosts. USS provides benefits based on final pensionable salary foracademic and related employees of UK universitiesand some otheremployees. SAUL provides similar benefits prinicipally for otherstaff of the University of London.From December 2009 employees were able to opt for a reducedcontractual salary, with the College then making the pensioncontribution, formerly paid by the employee, as additionalemployer’s contributions. The contributions for both USS andSAUL have therefore increased. The amount relating to the salarysacrifice in 2010/11 was £2,988k (2009/10 £1,943k).The schemes are defined benefit schemes which are externallyfunded and contracted out of the State Second Pension. The assetsof the schemes are held in separate trustee-administered funds.It is not possible to identify the College’s share of the underlyingassets and liabilities of the schemes on a consistent and reliablebasis and therefore, as required by FRS 17 “Retirement Benefits”,the College accounts for the schemes as if they were definedcontribution schemes. As a result, the amount charged to theincome and expenditure account represents the contributionspayable to the schemes for the accounting period.The schemes are valued every three years by a professionallyqualified independent actuary using the projected unit method,the rates of contribution being determined by the trustee on theadvice of the actuary. In the intervening years, the actuary reviewsthe progress of the scheme.USSThe latest published actuarial valuation of the scheme was at31 March 2008. This was the first valuation for USS under thenew scheme-specific funding regime introduced by the PensionsAct 2004, which requires schemes to adopt a statutory fundingobjective, which is to have sufficient and appropriate assets tocover their technical provisions.The assumptions which have the most significant effect on theresult of the valuation are those relating to the rate of return oninvestments (i.e. the valuation rate of interest), the rates of increasein salary and pensions and the assumed rates of mortality. Thefinancial assumptions were derived from market yields prevailingat the valuation date. An “inflation risk premium” adjustment wasalso included by deducting 0.3% from the market-implied inflationon account of the historically high level of inflation implied bygovernment bonds (particularly when compared to the Bank ofEngland’s target of 2% for CPI which corresponds broadly to2.75% for RPI per annum).To calculate the technical provisions, it was assumed that thevaluation rate of interest would be 6.4% per annum (whichincludes an additional assumed investment return over gilts of2% per annum), salary increases would be 4.3% per annum (plusan additional allowance for increases in salaries due to age andpromotion reflecting historic scheme experience, with a furthercautionary reserve on top for past service liabilities) and pensionswould increase by 3.3% per annum.Standard mortality tables were used as follows:Male members’mortality:Female members’mortality:PA92 MC YoB tables - rated down 1yearPA92 MC YoB tables - no age rating36
Notes to the Financial Statements(continued)Use of these mortality tables reasonably reflects the actual USSexperience but also provides an element of conservatism to allowfor further improvements in mortality rates. The assumed lifeexpectations on retirement at age 65 are:Males (females)currently aged 65Males (females)currently aged 4522.8 (24.8) years24.0 (25.9) yearsAt the valuation date, the value of the assets of the scheme was£28,843 million, and the value of the scheme’s technical provisions was£28,135 million indicating a surplus of £708 million. The assets thereforewere sufficient to cover 103% of the benefits which had accrued tomembers after allowing for expected future increases in earnings.The actuary also valued the scheme on a number of other bases asat the valuation date. On the scheme’s historic gilts basis, using avaluation rate of interest in respect of past service liabilities of 4.4%per annum (the expected return on gilts) the funding level wasapproximately 71%. Under the Pension Protection Fund regulationsintroduced by the Pensions Act 2004 the scheme was 107% funded;on a buy-out basis (i.e. assuming the scheme had discontinued onthe valuation date) the assets would have been approximately 79%of the amount necessary to secure all the USS benefits with aninsurance company; and using the FRS 17 formula as if USS was asingle employer scheme, using a AA bond discount rate of 6.5% perannum based on spot yields, the actuary estimated that the fundinglevel at 31 March 2008 was 104%.The technical provisions relate essentially to the past serviceliabilities and funding levels, but it is also necessary to assess theongoing cost of newly accruing benefits. The cost of future accrualwas calculated using the same assumptions as those used to calculatethe technical provisions except that the valuation rate of interestassumed asset outperformance over gilts of 1.7% per annum(compared to 2% per annum for the technical provisions) giving adiscount rate of 6.1% per annum; also the allowance for promotionalsalary increases was not as high. There is currently uncertainty in thesector regarding pay growth. Analysis has shown very variable levelsof growth over and above general pay increases in recent years, andthe salary growth assumption built into the cost of future accrual isbased on more stable, historic, salary experience. However, whencalculating the past service liabilities of the Scheme, a cautionaryreserve has been included, in addition, on account of the variabilitymentioned above.The scheme-wide contribution rate required for future servicebenefits alone at the date of the valuation was 16% of pensionablesalaries and the trustee company, on the advice of the actuary,agreed to increase the institution contribution rate to 16% ofpensionable salaries from 1 October 2009.Since 31 March 2008 global investment markets have continued tofluctuate and at 31 March 2010 the actuary has estimated that thefunding level under the new scheme specific funding regime hadfallen from 103% to 91% (a deficit of £3,013m). Compared to theprevious 12 months, the funding level has improved from 74% (asat March 2009) to 91%. This estimate is based on the funding levelat 31 March 2008, adjusted to reflect the fund’s actual investmentperformance over the two years and changes in market conditions(market conditions affect both the valuation rate of interest andalso the inflation assumption, which in turn impacts on the salaryand pension increase assumptions).On the FRS 17 basis, using a AA bond discount rate of 5.6%per annum based on spot yields, the actuary estimated thatthe funding level at 31 March 2010 was 80%. An estimate ofthe funding level measured on a buy-out basis at that date wasapproximately 57%.Surpluses or deficits which arise at future valuations may impacton the College’s future contribution commitment. A deficit mayrequire additional funding in the form of higher contributionrequirements, where a surplus could, perhaps, be used to similarlyreduce contribution requirements. The sensitivities regardingthe principal assumptions used to measure the scheme liabilitieson a technical provisions basis as at the date of the last triennialvaluation are set out below:Assumption Change in assumption Impact on scheme liabilitiesValuation rate of interest Increase / decrease by 0.5% Decrease / Increase by £2.2bnRate of pension increases Increase / decrease by 0.5% Increase / decrease by £1.5bnRate of salary growth Increase / decrease by 0.5% Increase / decrease by £0.7bnRate of mortality More prudent assumption Increase by £1.6bn(move to long cohort)37
Page 4 and 5: Financial HighlightsYear Ended31 Ju
Page 6 and 7: Operating and Financial Review(cont
Page 8: Operating and Financial Review(cont
Page 12 and 13: Responsibilities and Membershipof t
Page 18: Consolidated Statement of Total Rec
Page 22 and 23: Notes to the Financial Statements(c
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Financial Statements 2011 - Royal Holloway, University of London

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