Report by the Actuary on the Actuarial Valuation as at 31 March 1996

UNIVERSITIES SUPERANNUATION SCHEME Report by the Actuary on the Actuarial Valuation as at 31 March 1996, March 1997

Directors Professor Sir Graeme Davies (Chairman) L Collinson C D Donald (Deputy Chairman) K F Dibben A S Bell O, K J R Edw><ds Dr Christine Challis Professor Brian Fender Chief Executive DB Chynoweth BA CPFA FCCA F Inst Mgt Lord Mark Ficzalan Howard Professor Martin Harris D,G R Talboc J W D T ry thall Chief Investment Officer P G Moon USS UNIVE RSI TIES SUPERANNUATION SCHEME LIMITED UNIVERSITIES SUPERANNUATION SCHEME Actuarial Valuation as at 31 March 1996 An actuarial valuation of Universities Superannuation Scheme has been carried out as at 31 March 1996 by the actuary, Mr MB Reid of William M Mercer Limited. Mr Reid's report on the 1996 actuarial valuation was accepted by the USS management committee at its meeting on 14 November 1996. The result of the actuarial valuation and the main features of the report were included in a letter (ref I.314) which was sent to all USS institutions on 29 November 1996. The report on the 1996 actuarial valuation is being made available to all USS institutions and it is printed in full in this booklet. The result of the valuation may be summarised as follows: 1 The employers' contribution is reduced to a rate of 14.0% of annual salary with effect from 1 January 1997. 2 The overall past service surplus of 854.6 million represents 8% of the past service liabilities of the scheme. There is a surplus of 58.2 million attributable to the supplementary section leaving a past service surplus of 796.4 million in the main section. The institution contribution rate required for the future service benefits alone is 14.6% of salaries. Based on the method and assumptions used it has been agreed that the institutions' contribution rate will be 14.0% of salaries, with effect from 1 January 1997. Applying this reduction in contribution rate over the average remaining working lifetime of the current active members will utilise 165 million of the past service surplus, leaving a residual past service surplus of 689.6 million to be carried forward. 3 The position will be subject to review at the next actuarial valuation which is due to take place at 31 March 1999. The management committee considers that the funding objective, the valuation method and the assumptions underlying the valuation calculations represent a satisfactory basis for the long-term funding of the benefits provided by USS. / DB Chynoweth / Chief Executive Universities Superannuation Scheme Limited March 1997 FS29170 ROYAL LIVER BUILDING, LIVERPOOL L3 lpy TEL: 0151 227 4711 FAX: 0151 236 3173 Registered in England No 1167127 Registered Office as above London Investment Offin. : 1 lth Floor. Angel Court, London EC2R 7HJ. Tel: 0171 972 OJOO Fax: 0171 600 4815 Regulated by IMRO m the conduct of Investment Business

WILLIAMM. MERCER Actuaries and Consultants Universities Superannuation Scheme Actuarial Valuation as at 31 March 1996 1. Introduction 1.1 In accordance with the instructions of the Trustee Company and under the provisions of Rule 20.20, I have undertaken an actuarial valuation of the Universities Superannuation Scheme ("the Scheme") as at 31 March 1996 and now have pleasure in submitting my report to the Trustee Company. 1.2 The previous actuarial valuation of the Scheme was undertaken as at 31 March 1993. This report has been prepared in accordance with the current guidelines "Retirement Benefit Schemes - Actuarial Reports (GN9)" published jointly by the Institute of Actuaries and the Faculty of Actuaries. 1 William M. Mercer Limited 30 Exchange Street East Liverpool L2 308 Tel: 0151 236 9771 Fax: 0151 236 1831 William M. Mercer Limited is regulated by IMRO and the Personal Investment Authority Registered in London No. 984275 Registered Office: Telford House, 14 Tothill Street, London SW1H 9NB

2. Object of the Valuation 3. Benefits and Contributions 2.1 Purpose of the Valuation The purpose of the actuarial valuation is to:- + examine the financial position of the Scheme in relation to the benefits already promised and assess the adequacy or otherwise of the current rate of contribution. 3.1 Outline 3.1.1 The Scheme provides pension and other superannuation benefits for the academic and senior administrative staff of participating universities and certain other bodies engaged in higher education or research ( 11 the Institutions"). 3.1.2 Appendix A sets out an outline of the conditions for membership, contributions and benefits of the Scheme at the valuation date. 2.2 Funding Objective 2.2.1 Funding is the making of financial provision in advance to meet the cost of accruing pension benefit promises. There is a considerable choice about the pace at which this advance provision can be made and the pace is best decided by having a funding objective. 2.2.2 The Trustee Company has for this valuation decided to use the same funding objective for the Scheme as was used in the 1993 valuation. The continuing objective is to achieve a fund at 100% of the projected past service liability and thereafter to maintain the fund at or about this level. 3.1.3 3.2 The Universities Superannuation Scheme + has an effective date of commencement of 1 April 1975 + is approved by the Inland Revenue under Chapter I Part XIV of the Income and Corporation Taxes Act 1988 + is contracted-out of the State Earnings-Related Pension Scheme (SERPS) under the provisions of the Social Security Pensions Act 1975. The contracting-out basis is for Guaranteed Minimum Pensions (GMPs) to be provided. Changes During Intervaluation Period 2.2.3 This funding objective is, therefore, designed to:- + give members a reasonable level of security in respect of accrued pension rights and ensure that the Institution contribution rate to the Scheme is realistic and that it is reasonably stable. The following benefit changes were made to the Scheme during the intervaluation period and have been allowed for in this valuation:- 3.3 Pension Increases removal of the 100 deduction from salaries in the calculation of benefits and contributions equalisation of the age at which benefits are payable. 3.3.1 During the intervaluation period, the rates of increase to pensions in payment and in deferment have been as follows:- Date 21 April 1993 21 April 1994 21 April 1995 Rate of increase 3.6% 1.8% 2.2% 3.3.2 The 1993 pension increase was allowed for in the last valuation. A further increase at the rate of 3. 9% has been made on 21 April 1996 and this has been allowed for in the current valuation. 2 3

4. Membership 5. Assets 4.1 Membership Details 5.1 Market Value Data have been provided by Universities Superannuation Scheme Limited. A brief summary of the combined membership details as at 31 March 1996 is set out below, the corresponding details as at 31 March 1993 being in brackets. A more detailed summary of the membership is shown in Appendix B. Numbers Active Members 74,629 (05,582) Current Beneficiaries 23,918 (20.(r6J Total Annual Salaries/Pensions 2,009.3m ( 1,028.../m) 287.7m ( 220.81 1 1) 5.2 The market value of the assets held by the Scheme at 31 March 1996 was 12,086.7m based on the audited accounts. A summary of the distribution of assets is set out in Appendix C. Investment Policy I am satisfied that the investment policy followed is appropriate to the liabilities of the Scheme. 5.3 Income and Expenditure A summary of the income and expenditure of the Scheme over the intervaluation period is set out in Appendix D. Deferred Pensioners 27,470 (18,../90) 49.6m ([33.2m) Annual salaries are shown for active members and annual pensions for current beneficiaries and deferred pensioners. The deferred pensions include estimated increases up to the respective valuation dates. + During the 3 years under review, active membership has increased by 14 per cent whilst total salaries have increased by 23 per cent. The increase in average salaries has been 8 per cent (i.e. just under 3 per cent per annum over the intervaluation period). These figures reflect the effects of general salary increases and membership changes. + As part of the valuation, I have carried out simple validation checks on the data. These checks cannot guarantee the complete accuracy of the data and, for this purpose, the valuation relies on the regular checks which are carried out by the administrators and auditors. 4 5

6. Actuarial Method and Assumptions 6.2 Valuation Assumptions 6.2.1 The most significant actuarial assumptions are the financial ones namely:- + Future investment returns, i. e. the valuation rate of interest 6.1 I have continued to use the projected unit method as this is consistent with meeting the funding objective for the Scheme. As a result of actual experience since the 1993 valuation a number of changes have been made to the actuarial assumptions and these are detailed below. Valuation Method 6.2.2 + Future salary inflation + Future pension increases, i.e. the rate of price inflation + Future increases in dividends and property rents The contribution rate and the past service position of the Scheme are particularly sensitive to: - the difference between the valuation rate of interest and the assumed rate of future salary inflation 6.1.1 The method used is known as the projected unit method. This is the same method as was adopted for the 1993 valuation and I consider it to be an appropriate method to adopt, having regard to the funding objective set out in Section 2.2.2. 6.1.2 Under the projected unit method: benefits relating to past and future service are dealt with separately the normal contribution rate for future service is calculated as the value of benefits expected to accrue to the membership in respect of one year's service if the membership profile of active members remains stable in terms of age, sex and salary, then the normal contribution rate ( as a percentage of salaries) will remain stable. The method therefore implicitly allows for new entrants + if the supply of new entrants to the Scheme is cut off or declines, then the normal contribution rate will tend to rise at future valuations + the actuarial past service liability is calculated as the present value of accrued liabilities at the valuation date ( allowing for projected salaries for members in service and for future pension increases) and is then compared with the actuarial value of the Scheme's assets + if the past service position shows an imbalance of assets and liabilities, the normal contribution rate may be varied appropriately. and the difference between the valuation rate of interest and the assumed rate of future pension increases and the difference between the valuation rate of interest and the assumed rate of future increases in dividends and property rents. 6.2.3 For this valuation, I have adopted the following financial assumptions {1993 valuation assumptions in brackets): valuation rate of interest 8.5% p.a. (8.5% p.a.) assumed rate of future salary inflation 6.5% p.a. (6.5% p.a.) assumed rate of future pension increases 5% p.a. (5%p.a.) assumed rate of future increases in dividends 4.5% p.a. (4.5%p.a.) assumed rate of future increases in property rents l.5% p.a. (4.5% p.a.) assumed rate of future increases to index-linked proceeds 5% p.a. (5%p.a.) 6.2.4 Therefore, the only change in the financial assumptions from those adopted for the previous valuation is a decrease of 3 per cent per annum in the assumed rate of future increases in property rents. This reflects the high rents currently available and the correspondingly lower levels of likely growth. 6 7

6.2.5 In addition to the allowance for general salary inflation there is a salary scale included in the valuation assumptions to cover increases due to promotion or increased responsibilities. I have decided to steepen the salary scale to partly reflect the experience over the three year period. 6.2.6 The allowance for future pension increases is appropriately reduced to allow for the State's responsibility to provide increases on GMPs once in payment. 6.3.3 I have valued the main types of assets held by the Scheme as follows: Equities and Managed Fund: market value notionally invested in the FT Actuaries' All Share Index and dividends assumed to increase at the rate of 4.5% per annum and then discounted at the valuation rate 6.2.7 The non-financial or demographic assumptions made to complete the valuation calculations include: average age of retirement of members in good health rates of ill-health retirement rates of mortality for active members in service, for deferred pensioners prior to retirement and for pensioners and spouses in receipt of benefits proportion of members married. Index Linked: Fixed Interest: Properly: interest and redemption proceeds assumed to increase at the rate of 5% per annum and then discounted at the valuation rate interest and redemption proceeds discounted at the valuation rate property rents assumed to increase at the rate of 1. 5% per annum and then discounted at the valuation rate 6.2.8 Three changes have been made to these assumptions since the 1993 valuation: the assumed average age of retirement for active members in good health has been reduced from 61 to 60. Life Assurance Policies: balance sheet value notionally invested in a spread of asset types as notified by the Equitable Life and each asset type valued as above. the allowance for ill-health retirements has been increased. an allowance for withdrawals has been introduced. The changes in the assumptions mentioned above are considered in more detail in Section 7. 6.3 Valuation of Assets 6.3.1 For the purpose of the valuation, I have valued the assets by discounting, at the valuation rate of interest, the expected income and redemption proceeds generated by the investments held. Allowance has been made, where appropriate, for future growth mmcome. 6.3.2 I believe that this method of valuation provides an appropriate basis from which to produce a value for the assets because dividend income, property rents and interest generated by securities are relatively unaffected by day to day fluctuations in market values. 6.3.4 The above approach has produced a total value for the fund of 11,710.2m compared with its market value of 12,086.?m. Thus the actuarial value of the assets of the Scheme has been taken as around 3 per cent lower than their market value. 6. 3. 5 I consider the above method of valuation of assets to be consistent with my valuation of the liabilities. The method is, in all material respects, the same as that used for the 1993 valuation except for the decrease in the rental growth allowance from 4.5 to 1.5 per cent per annum. 6.4 Expenses The Scheme is responsible for its administration costs and the current level of these costs is roughly 0.2 per cent of salaries. I have therefore included a margin of 0.2 per cent of salaries in the calculation of the future service contribution rate disclosed in Section 8.1. The same margin was included in the 1993 valuation. 8 9

7. Comment on Actuarial Assumptions 7.3 Other Assumptions 7.3. l Average Age of Retirement in Good Health In the following paragraphs I comment on each of the important actuarial assumptions in tum. During the intervaluation period the average age of retirement in good health from active membership was 60. 3. This compares with the assumption of age 61 used in the 1993 valuation. Comment 7.1 Financial Assumptions - Liabilities In the light of the actual experience I have decided to change the assumed age of retirement to 60. 7.3.2 Ill-Health Retirements 7.1.1 As indicated in Section 6.2.3, the main financial assumptions adopted for the valuation of the liabilities are:- and a positive real rate of investment return of 2 per cent per annum over salary inflation + a positive real rate of investment return of 3. 5 per cent per annum over price mcreases. 7.1.2 These assumptions are long term average rates of return and are considered reasonable for the purpose of funding the Scheme. 7.2 Financial Assumptions - Assets 7.2.1 The most significant assumptions adopted for the valuation of the assets are the rate of growth of future dividends and the rate of increase in future property rents. 7.2.2 The assumption about future dividend growth, when taken together with the other assumptions, can be viewed as anticipating future increases in dividends at O. 5 per cent per annum below the level of price inflation. I believe this assumption represents a slightly cautious but realistic long term view. 7.2.3 The assumed rate of future property rental growth is 3 per cent per annum less than that assumed for future dividend growth. This allows for the current high level of rents available and the expectation oflower levels of growth in the future. Experience during the intervaluation period was as follows:- Comment Expected number of ill-health retirements 244 Actual number of ill-health retirements 323 At the last valuation the ratio of actual to expected was 115%, the difference being of little financial significance. The ratio has now increased to 132%. I have decided to increase the allowance for ifl.. };ealth retirements to reflect the experience. 7.3.3 Deaths in Service Experience during the intervaluation period was as follows:- Comment Expected number of deaths in service Actual number of deaths in service Although the actual experience has again been lighter than expected, I have retained the standard assumptions which are based on national statistics, but already adjusted to some extent to reflect the lighter mortality experienced The financial effect f va,ying this assumption would be relatively small compared to the effect of va,ying some cif the other assumptions. 392 238 10 11

7.3.4 Deaths in Retirement 8. Valuation Results Experience during the intervaluation period in respect of former active members of the Scheme, i.e. excluding spouses and dependants, was as follows:- Comment Expected number of deaths in retirement 1,254 Actual number of deaths in retirements 1,357 I set out below the main valuation results using the actuarial method and assumptions described in Section 6. For comparison the results qf the 1993 valuation are also set out. The actual experience is broadly in line with that expected and as a result I have made no change to this assumption. 7.3.5 Withdrawals Comment The benefits granted to members on withdrawal, whether in the form of deferred pensions or transfer values, are not very dissimilar to the actuarial reserves held on their behalf, but are generally lower due to the linkage to prices instead of pay injlation. In the previous valuation no allowance was made for withdrawals. For this valuation I have decided that it is appropriate to include an allowance. In practice, the Scheme makes a small gain from withdrawals. However, as all such gains may not arise it has been decided to introduce an allowance for only a proportion qf the Scheme 's withdrawal experience. 7.3.6 Salary Scale The salary structure of the membership shows a gradual increase in salary to reflect age and promotion. Comments The valuation data imply that the actual rate of salary progression with age is somewhat greater than the previous a :rumptions implied Consequently I have steepened the salary scale to partly reflect the experience over the 3 year period 8.1 Future Service Contribution Rate 8.1.1 Under the projected unit method, the normal contribution rate required from the Institutions for future service benefits is 14.6 per cent of salaries. This compares with the normal rate at the 1993 valuation of 13. 78 per cent. (In addition a rate of 4. 77 per cent was being paid for the period up to 31 March 1998 to eliminate the past service shortfall.) 8.1.2 The increase in the normal contribution rate is due to the additional 0.7% contribution required in respect of the chaege in benefits resulting from the Pensions Act 1995 (see Section 11 ). In addition the average age of the membership has increased slightly since the previous valuation. 8.2 8.2.1 Past Service Position The position is set out below, with a more detailed breakdown of the past service liabilities given in Appendix E. In addition, a comparison with the position at the previous valuation is shown:- Value of assets Less Value of liabilities - current beneficiaries - deferred pensioners - active members Surplus (shortfall) of assets 1996 Valuation m 3,913.5 482.6 6,459.5 11,710.2 10,855.6 854.6 1993 Valuation m 3, 128.7 320.9 5,320.0 8,496.5 8,769.6 (273.1) 12 13

8.2.2 The assets of the Scheme therefore total 108 per cent of the liabilities, the excess of assets over accrued liabilities being 854.6m. For comparison, in 1993 the assets totalled 97 per cent of the liabilities, the shortfall of assets below accrued liabilities being 273.lm. 8.2.3 The above figures allow for the impact of the potential transfers in respect of the College of Health employees. I remain satisfied that the agreed transfer basis is reasonable, and will provide sufficient funds to meet the liabilities to be accepted by USS on a "middle of the road" approach. However, the funding basis used for this valuation is somewhat stronger than that transfer basis. Because of the more cautious assumptions used for the valuation, there will be a strain on the Scheme if these members transfer their past service benefits to USS. Therefore a reserve of 20m has been included in the above results to reflect the potential "cost". 8.3 8.3.1 Supplementary Section The assets and liabilities of the Supplementary Section are included in the above results. However, the Rules of the Scheme require the financial position of the Supplementary Section to be identified separately at the time of an actuarial valuation of the Scheme. 8.4.4 The main items which have acted to reduce the excess have been:- 8.5 reduction in the assumed average age of retirement in the future increase in the allowance for ill-health retirements + increase in the assumed rate of promotional salary progression + introduction of a reserve for College of Health transfers change in the rental growth assumption. Contribution Rates At the last valuation it was estimated that the shortfall in assets would be eliminated after 5 years with an additional contribution rate of 4. 77 per cent of salaries (i. e. a total rate of 18.55 per cent). Due to the factors mentioned in Section 8.4 the funding position of the Scheme has moved into surplus quicker than expected. Therefore, it will no longer be necessary for the additional contribution to be paid. 8.3.2 The value of the assets of the Supplementary Section is 11 l.8m, while the value of the past service liabilities is 53.6m. The Supplementary Section has therefore an excess of assets over liabilities of 58.2m. 8.3.3 The overall past service excess of assets of 854.6m is therefore deemed to consist of a past service excess of assets of 796.4m in respect of the Main Section and an excess of 58.2m in respect of the Supplementary Section. 8.4 Analysis of Valuation Results 8.4.1 At 31 March 1993 the Scheme had a past service shortfall of assets of 273. lm while the current valuation as at 31 March 1996 has disclosed a surplus of 854.6m. 8.4.2 The move into surplus is due to a number of factors which are set out in Appendix F. 8.4.3 The main items which have acted to produce the excess have been:- investment returns considerably in excess of those allowed for in the 1993 valuation salary and pension increases below the assumed level during the intervaluation period + excess contributions over those required for future service (i.e. the additional 4.77 per cent of pensionable salaries) account being taken of a proportion of future withdrawal gains. 14 15

9. Discontinuance Position and Minimum Funding Requirement (MFR) 9.1 Purpose of Discontinuance Valuation 9.1.1 So far I have considered the position on the basis that the Scheme will continue. The main purpose of the discontinuance valuation is to assess whether, on the valuation date, the assets would have been sufficient to secure the accrued benefits. Accrued benefits are benefits in payment and those prospectively payable at Normal Retirement Age (based on accrued pensionable service and pensionable salaries and including allowance for any statutory and contractual increases). 9.1.2 9.1.3 The discontinuance valuation is, therefore, a "snapshot" of the Scheme and the position which existed on a particular day. This position is often called the current level of solvency. The level of solvency disclosed by the discontinuance valuation shows + the extent of the coverage of the contractual benefits by the assets + the extent to which any excess assets could be used to provide additional increases in accrued benefits in the future + the extent to which the Institutions might be liable for any shortfall between the realised assets and the cost of securing the accrued benefits. 9.1. 4 The discontinuance valuation is included to satisfy the requirements of Guidance Note GN9 (referred to in Section 1.2). It is not intended to suggest that there is any likelihood of the discontinuance of the Scheme taking place in practice. J I.. 9.2 Assumptions for Discontinuance Valuation 9.2.1 The level of solvency should be calculated using one of the following methods:- ( a) estimated cost of purchasing deferred and immediate annuities from a life office, or (b) transfer values for active members and deferred pensioners and estimated cost of purchasing immediate annuities for current beneficiaries. 9.2.2 Due to the size of the Scheme I have estimated the Scheme's liabilities as the Public Sector Club transfer values for active and deferred members and the cost of purchasing immediate annuities from a life office for pensioners. In calculating benefits for active members I have assumed that they left service on the valuation date with entitlement to deferred pensions. 9.3 9.3.1 9.3.2 9.3.3 9.4 Discontinuance Position as at 31 March 1996 I calculate that the level of solvency at 31 March 1996 was 125 per cent. Thus, on the assumptions described, the assets fully cover the contractual benefits of the Scheme with a margin of 25 per cent. For comparison, the solvency position was 107 per cent at the 1993 valuation. For the purposes of this report, which is prepared on the basis the Scheme continues, I have confirmed that the investment policy currently being followed is appropriate to the liabilities of the Scheme. However, should the Scheme wind up, different liabilities crystallise, particularly if the winding up occurs in circumstances where continuation of the Scheme or bulk transfer to another scheme is impossible. In these circumstances wind up liabilities would usually be settled by the purchase of insurance policies and the payment of transfer values. The best match for those wind up liabilities is therefore a mixture of index-linked and fixed interest sterling securities, these being the investment basis underlying non-profit annuity premiums and the calculation of Public Sector Club transfer values. The current investment policy is mainly equity based. This would leave the Scheme open to variation in its ability to meet these winding up liabilities due to fluctuations in the relative levels of equity and gilt markets. Minimum Funding Requirement (MFR) 9.4. 1 I have also considered the position of the Scheme under the Minimum Funding Requirement (MFR) introduced by the Pensions Act 1995. A formal MFR valuation will not be required until the completion of a valuation of the Scheme after 5 April 1997. Based on triennial valuations this would result in the first MFR certificate being required following the valuation as at 31 March 1999. I have, however, completed calculations on an approximate basis, which show that the MFR level as at the valuation date is in the range 125% - 130%. 9.4.2 In these circumstances, as the MFR level is greater than 100%, no correction process would have been required. 16 17

10. Overfunding Regulations 11. Pensions Act Changes 10.1 Inland Revenue Requirements 10.1.1 The Income and Corporation Taxes Act 1988 requires an actuarial valuation to be carried out on a statutory basis (referred to as the prescribed basis) for the purpose of establishing whether on the prescribed basis the Scheme is in surplus. This valuation is in addition to the normal funding valuation and the discontinuance valuation. 10.1.2 If the surplus of assets over liabilities on the prescribed basis exceeds 5 per cent of the Scheme's liabilities corrective action must be taken in order to avoid unfavourable tax consequences. 10.2 Position as at 31 March 1996 11.1 Forthcoming Changes 11.1.1 The changes in contracting-out terms with effect from 6 April 1997 will abolish the accrual of GMPs for service after that date, and so pension increases will be granted on the whole pension in respect of service after that date. This does not represent an overall improvement in benefits for active members, however, because there will be a corresponding reduction in the benefit provided by the State. The cost imposed on the Scheme for service from 6 April 1997 is as follows:- Increase in normal contribution rate 0. 7 per cent of salaries 11.1.2 This increase in contribution rate has been included in the contribution rate of 14.6 per cent stated in Section 8.1. 1. It is my view that the actuarial surplus as at 31 March 1996 measured on the prescribed basis does not exceed 5 per cent of the Scheme's liabilities. My calculations show, in fact, a shortfall of assets below liabilities on the prescribed basis. As a consequence, no corrective action needs to be taken. 18 19

12. Recommendations 12.1 Summary of Results 12.1.1 The overall past service surplus of 854.6m represents 8 per cent of the past service liabilities of the Scheme. There is a surplus of 58.2m attributable to the Supplementary Section leaving a past service surplus of 796.4m in the Main Section. 12.1.2 The Institution contribution rate required for the future service benefits alone is 14.6 per cent of salaries. Universities Superannuation Scheme Actuarial Valuation as at 31 March 1996 Appendices: A Outline of Benefits and Contribution Structure at 31 March 1996. B. Summary of Membership. 12.2 Future Contributions 12.2.1 Based on the method and assumptions described in this report it has been agreed that the Institution contribution rate will be 14. 0 per cent of salaries, with effect from 1 January 1997. Applying this reduction in contribution rate over the average remaining working lifetime of the current active members will utilise 165 million of the past service surplus, leaving a residual past service surplus of 689.6 million to be carried forward. 12.2.2 The contribution rate will be subject to review at the next actuarial valuation which would normally take place at 31 March 1999. c. Distribution of Assets. D. Income and Expenditure. E. Analysis of Past Service Liabilities. F. Analysis of Change from a Past Service Shortfall to a Surplus of Assets above Liabilities. MB Reid Fellow of the Institute of Actuaries 20 21

Universities Superannuation Scheme Outline of Benefits and Contribution Structure at 31 March 1996 A. l Eligibility Employees of the Institutions on 1 April 1975 in academic, senior administrative and comparable occupations who were then members of the Federated Superannuation System for Universities (FSSU), the Teachers Superannuation Scheme (TSS), the National Health Service Superannuation Scheme (NHSSS) or a Local Government Scheme (LGS) were eligible to transfer to USS up to 5 April 1980. Employees in the above category subsequently joining the pensionable service of an Institution are eligible to join USS provided they are not within five years of Normal Retirement Age, although the Trustee Company has power to waive this condition. A.2 Definitions (a) NORMAL RETIREMENT AGE means, for both male and female members, age 65. (b) (c) (d) (e) PENSIONABLE SERVICE is broadly the time during which a member has been engaged in academic or similar employment with an Institution and may include periods of service before the start of USS. Pensionable service is, however, limited to a maximum of forty years. An employee who transferred before 29 August 1992 from employment in an Institution other than academic or related employment had service in such employment counted in USS on a year-for-year basis. An employee who transferred before 6 April 1980 from FSSU, TSS,NHSSS or a LGS had pensionable service in that scheme transferred to USS on a year-for-year basis. SCHEME SERVICE is the total period of Pensionable Service which the member would have completed if the member had remained in the employment of the Institution until Normal Retirement Age. SALARY is the total annual fixed salary of the member, but subject to the Finance Act 1989 cap for post 31 May 1989 joiners. PENSIONABLE SALARY is normally the member's highest Salary, as defined above, received for a period of twelve months during the last three years before Normal Retirement Age or before leaving service (whichever is the earlier) or, if greater, the highest yearly average of the member's total Salary for any three year period ending in the last ten years. For this purpose, Salary for any year, except the last before the date of calculation, is increased in proportion to the rise in the Index of Retail Prices from the last day of that year up to the date of calculation. A.3 Contributions Members pay contributions at the rate of 6.35 per cent of Salary. Members may, within certain limits, pay additional voluntary contributions m order to secure additional benefits. A member's contributions cease on reaching Normal Retirement Age or completing forty years' Pensionable Service, whichever occurs first, provided that if the member has not completed forty years' Pensionable Service at Normal Retirement Age and remains in service, contributions may be continued so as to provide further benefits on actual retirement. The balance of the cost of the benefits is met by the Institutions which pay such rate of contribution as the Actuary recommends to be appropriate. This has been 18.55 per cent of Salaries since 1 April 1983. A.4 Pension payable on Normal Retirement On retirement at Normal Retirement Age, or after age 63 Yz, a pension is payable to the member at the rate of one-eightieth of Pensionable Salary for each year of Pensionable Service with allowance for completed days. A.5 Retirement before Normal Retirement Age because of Ill-Health or Incapacity On such retirement, provided two years' Pensionable Service has been completed, a member is normally entitled to an immediate pension calculated as one-eightieth of Pensionable Salary for each year of Scheme Service. If an ill-health withdrawal takes place after less than two years' Pensionable Service has been completed then the member is entitl.ed to normal leaving service benefits as outlined in paragraph A.14. A.6 Retirement before Normal Retirement Age on grounds other than Ill-Health or Incapacity A member who has reached age 50 and completed five years' Pensionable Service and who retires before Normal Retirement Age either at the request of the employing Institution or on account of redundancy or a member who has reached age 60 and completed five years' Pensionable Service and who retires with the consent of his Institution receives an immediate pension. The amount of the pension is one-eightieth of Pensionable Salary for each year of Pensionable Service up to the date ofretirement. A.7 Retirement after Normal Retirement Age On retirement after Normal Retirement Age a member is entitled to the pension which would have been received at Normal Retirement Age, increased by such an amount as the Trustee Company, acting on actuarial advice, decides is appropriate. 22 23

AS Lump Sum Benefits on Retirement On retirement on pension a lump sum retirement benefit also becomes payable. The usual scale for this benefit is three times the annual amount of the pension. In certain circumstances a member may request that a higher amount should be payable, in which case the member's pension is reduced appropriately in respect of the excess over the usual scale. A 9 Lump Sum Benefits on Death in Service On the death of a member in service before Normal Retirement Age a lump sum is payable equal to twice the Salary being paid to the member at the date of death. Al O Spouses' Pensions payable on Death in Service On the death of a member, a spouse's pension is payable at the same rate as the deceased member's Pensionable Salary at the date of death but reducing after three months' payments have been made to one-half of the pension which would have been payable had the member retired because of ill-health on the day before the death. The pension is payable until the death of the spouse or (unless the Trustee Company decides otherwise) until the spouse remarries or cohabits with another as a spouse. Where the member does not leave a spouse, the Trustee Company has discretion to pay the pension to a dependant. Where the beneficiary is more than ten years younger than the deceased member, the pension is reduced unless the Trustee Company at its discretion decides otherwise. A 11 Spouses' Pensions payable on Death after Retirement On the death of a member after retirement whilst in receipt of a pension leaving a spouse, a spouse's pension is payable at the same rate as that previously payable to the member (before any reduction because of an allocation to provide an additional dependant's annuity) but reducing to one half that amount after three months' payments have been made. The pension is payable until the spouse's death or (unless the Trustee Company decides otherwise) until the spouse remarries or cohabits with another as a spouse. Where the member does not leave a spouse, the Trustee Company has discretion to pay the pension to a dependant. Where the beneficiary is more than ten years younger than the deceased member, the pension is reduced unless the Trustee Company at its discretion decides otherwise. A.12 Children's Allowances on the Death of a Member before or after Retirement In addition to spouses' pensions, children's allowances are payable in respect of each qualifying child subject to a maximum of two ( as defined in the rules) on the death of a member in service. The children's allowance for each qualifying child is calculated at the rate of three-eighths of the pension that would r.ave been payable to the member on illhealth retirement on the day before the death. Where, however, there is no spouse's pension payable then the rate of the children's allowance is one-half instead of three-eighths of the corresponding member's pension. When a member dies after retirement, children's allowances are payable at the same rates as apply for a member dying in service, as described above, except that reference to the member's ill-health pension is to be taken as referring to the member's actual pension (before any reduction because of an additional lump sum being taken at retirement or because of the provision by allocation of an additional dependant's annuity). A 13 Lump Sum Benefits Payable on Death after Retirement On the death of a pensioner there is a lump sum payable normally calculated as the excess, if any, of the amount payable if the member had died in service less, except in the case of illhealth retirees, the actual amounts received by the member by way of pension and lump sum retirement benefits. A 14 Benefits on Leaving Service Where a member withdraws from service before Normal Retirement Age without becoming entitled to an immediate pension but having completed two years' qualifying service, the member will be entitled to a deferred pension payable from Normal Retirement Age. This is calculated as one-eightieth of Pensionable Salary for each year of Pensionable Service to the date of leaving. There will also be a lump sum payable at eventual retirement on the scale set out in paragraph A 8. A member who leaves with less than two years' qualifying service may take a refund of contributions plus interest subject to certain deductions. Alternatively, such a member may elect to take a deferred pension and lump sum retirement benefit equal in value to the contributions, with interest, less the member's share of the cost of the Contributions Equivalent Premium which is payable to the State On the death of a former member with a deferred pension before the pension starts to be paid, a lump sum of three times the annual rate of the deferred pension is payable, together with a spouse's pension, if applicable, of one-half of the amount of the deferred pension and children's allowances calculated by the same method as for a member who continues in service. In such a case, once the pension has started to be paid, benefits will be payable on the scales set out in paragraphs A 11, A. 12 and A.13. In lieu of the benefits described above, the Trustee Company is able to pay a transfer value to another pension scheme which is empowered to accept such transfers or a "buy-out" policy issued under the provisions of Section 3 2 of the Finance Act 1981 or a personal pension scheme. A. 15 Premature Retirement Terms In accordance with Rule 8.2(g) an employer may pay additional contributions in order to grant a member additional benefits on premature retirement. The additional contribution is determined in accordance with tables approved by the trustee company. 24 25

A.16 Pension Increases Pensions in payment from the Main Section of the Scheme (see A.18 below) and in the period of deferment and annuities are increased in line with the provisions of the Pensions (Increase) Acts as modified by the Social Security Pensions Act 1975. Pensions in payment from the Supplementary Section of the Scheme have in practice been increased to the same extent. Universities Superannuation Scheme Summary of Membership A.17 Social Security Pensions Act 1975 and Social Security Act 1986 From 6 April 1978, the members of USS have been contracted-out of the State Earnings Related Pension Scheme (SERPS). As a consequence the appropriate benefits are guaranteed to be not less than the Guaranteed Minimum Pension (GMP) or the spouse's GMP as the case may be. As the State Pension Scheme will pay all or part of the pension increases (as provided for under the legislation) on both the GMP and the spouse's GMP, the pension increases required in USS under the Pensions (Increase) Acts will be correspondingly reduced. B.1 ACTIVE MEMBERS Numbers Males 51,691 At 31.3.96 Annual Salaries 1,489,774,030 Numbers At 31.3.93 Annual Salaries 48,250 1,273,453,971 A.18 Main and Supplementary Sections The levels of benefits described above are the total benefits from the Scheme. The principal benefits are provided under the Main Section whilst the Supplementary Section provides additional benefits payable when a member retires on the grounds of ill-health or incapacity or dies in service. From the member's contribution of 6.35 per cent of Salary (referred to in paragraph A.3) 6 per cent is paid to the Main Section and 0.35 per cent to the Supplementary Section. The whole of the contributions payable by the Institutions is paid to the Main Section. Females 22,938 Total 74,629 B.2 CURRENT BENEFICIARIES 519,539,126 2,009,313, 156 At 31.3.96 17,332 354 942 427 65,582 1,628,396,398 At 31.3.93 Numbers Annual Pensions Numbers Annual Pensions Male pensioners 16,331 Female pensioners 3,388 230,213,000 32, 114,500 13,838 178,905,099 2,798 2.:/,447,321 Male dependants 115 Female dependants 3,382 Children's allowances 702 Total 23,918 505, 130 22,539,730 2 317 840 287,690,200 66 208,846 2,689 15, 715, 755 685 1,504,243 20,076 220, 781,264 B.3 DEFERRED PENSIONERS At 31 March 1996 there were 27,470 former members entitled to deferred pensions (31 March 1993 : 18,490). The total annual deferred pensions were 49,599,04 l (31 March 1993: 33,174,133). 26 27

Universities Superannuation Scheme Universities Superannuation Scheme Distribution of Assets Income and Expenditure Year Ending:- The accounts indicate that the market value of the assets of the Scheme as at 31 March 1996 was 12,086. 7m. A breakdown of this amount by investment category, together with the 31.3.94 31.3.95 31.3.96 Totals corresponding details as at 31 March 1993, is as follows:- INCOME m m m m Market Value Market Value Fund at beginning of period 31.3.96 31.3.93 m % m % 7,884.3 9,511.7 9,822.5 7,884.3 Institutions' contributions 308.8 328.9 357.0 994.7 Fixed Interest 1,062.6 8.8 732.5 9.3 Members' contributions basic 99.8 106.3 115.4 321.5 Index Linked 270.3 2.2 207.3 2.6 AVCs 7.9 9.2 9.9 27.0 Supplementary Section 5.8 6.2 6.7 18.7 Equities - UK 6,430.3 53.2 3, 704.l 47.3 PRCS receipts 32.6 23.5 39.8 95.9 - Overseas 2,581.3 21.4 1, 756.3 22.4 Transfers from other schemes 33.1 30.7 23.5 87.3 Property 782.6 6.5 694.5 8.9 Life Assurance Policies 276.7 2.3 301.5 3.8 Managed Fund 78.4 0.6 131.5 1.7 Loans and Deposits 465.4 3.9 311.1 4.0 Stockbroker Balances 26.5 0.2 Net Current Assets 112.6 0.9 Totals 12,086.7 100.0 7,838.5 100.0 (0.3) Investment income 317.9 374.3 448.9 1141.1 Net increase (decrease) in market value during the period 1,148.1 (231.1) 1,636.6 2,553.6 Totals 9,838.3 10,159.7 12,460.3 13,124.1 EXPENDITURE m m m m Benefits pensions 240.2 259.6 281.4 781.2 retirement lump sums 57.4 52.4 65.0 174.8 death in service lump sums 4.8 4.2 7.5 16.5 refunds 0.9 1.1 1.1 3.1 commuted pensions 0.2 0.2 Transfers to other schemes 19.5 15.8 12.8 48.1 Administration costs 3.6 4.1 5.8 13.5 Fund at end of period 9,511.7 9,822.5 12,086.7 12,086.7 Totals 9,838.3 10 159.7 12,460.3 13, 124.1 28 29

Universities Superannuation Scheme Universities Superannuation Scheme Analysis of Past Service Liabilities Analysis of Change from a Past Service Shortfall to a Surplus of Assets above Liabilities Present value of:- m Past service shortfall at 31 March 1993 m -273 Benefits in respect of cur.-ent beneficiaries 3,913.5 Interest on shortfall - 100 Benefits in respect of deferred pensioners 482.6 Investment returns + ],000 Benefits in respect of current active members:- Inflation Pensions payable on retirement and lump sums payable on death in retirement Lump sums payable on retirement 4,573.8 930.7 salary inflation pension mcreases + 400 + 300 Spouses' and dependants' pensions payable on death in service Spouses' and dependants' pensions payable on death in retirement Withdrawal benefits 104.0 531.0 300.0 Excess contributions over those required for future service (at 4.77% of salaries) Reduction in assumed rental growth Reserve for Colleges of Health transfers + 700 + 300-700 - 20 Reserve for Colleges of Health transfers 20.0 Net effect of change in actuarial assumptions - 170 Other items + 118 Total past service liabilities 10,855.6 Past service surplus of assets a ove liabilities at 31 March 1996 855 30 31