1.1  This is a report on the actuarial valuation of the Parliamentary Contributory Pension Fund as at 1 April 2005. The main objective is to recommend the rate of contributions to be paid into the scheme by the Exchequer, so as to produce a fund of assets expected to be sufficient to provide the benefits promised.

  1.2  Methodology. The valuation has been performed using a standard actuarial methodology. The liabilities, which comprise the future outgo on benefits and expenses, are capitalised as at the valuation date, by discounting the future payments with allowance for interest and the probability of payment. The value of assets is assessed by discounting the future stream of income expected to be produced on assumptions consistent with those used for valuing the liabilities.

  1.3  Assumptions. Assumptions are needed for financial factors and demographic factors such as rates of mortality, retirement and withdrawal from Parliament. Compared with the 2002 valuation, a greater longevity of PCPF members has been assumed. Serving members are also assumed to start drawing benefits at higher ages than was previously assumed. The main financial assumptions are that investment yields over the long term will exceed general increases in earnings by 2% a year, and will exceed price increases by 3.5% a year. The value of the equity assets has been determined by discounting the expected dividend income assuming that the current level of dividend income will increase at 0.5% a year in real terms. This approach results in the assets being brought into account at close to market value at this valuation.

  1.4  Past Service Assessment. The value of liabilities accrued up to the valuation date is assessed as £328.1 million and the value of the assets on the same date is assessed as £278.6 million. The deficit is assessed as £49.5 million, compared with £25.2 million at the valuation in 2002. The main reasons for the increase in deficit can be summarised as follows:

Interest accrued on 2002 deficit	£7 million
Divergence of experience from assumptions made   at the 2002 valuation	£5 million
Changes to actuarial assumptions	£13 million

  1.5  If the experience of the scheme had developed entirely in line with the assumptions made at the 2002 valuation, the deficit would have risen by around £7 million because of the interest assumed to accrue on the existing deficit and because the increase in contributions recommended at the previous valuation only took effect a year after the valuation date. The reduced level of contributions paid in 2002-03 broadly cancelled out the additional contributions paid from 2003 onwards.

  1.6  The main area where the experience of the scheme has differed from what was assumed is investment returns, which were lower than expected. The low investment returns were offset to some extent by other factors such as a lower than expected level of salary increases to active members of the scheme.

  1.7  The most important change to the assumptions is increased longevity, which serves to increase the scheme's liabilities and hence the deficit. That is partly offset by increases to the assumed average retirement age of serving members, which reduces the assessed value of the liabilities in respect of serving members.

  1.8  Future Service Assessment. The cost of benefits accruing each year is assessed as 27.4% of scheme payroll, compared with an assessed cost of 28.0% of pay at the 2002 valuation. The decrease is primarily attributable to changes made to the actuarial assumptions. In particular, for serving members, the effect of assuming an increased average age at retirement outweighs the impact of the increased longevity assumption.

  1.9  Members' contributions are expected to total 9.3% of the scheme payroll, compared with 8.7% at the 2002 valuation. The Exchequer's share of the cost of accruing benefits is therefore assessed as 18.1% of payroll, compared with 19.3% at the 2002 valuation.

  1.10  Recommended Exchequer Contribution Rate. Exchequer contributions should be at a higher level than the Exchequer's share of the cost of accruing benefits in order to amortise the deficit. Amortising the deficit over a 15-year period results in an addition of 8.7% to the Exchequer's share of the cost. The contribution rate recommended to be paid by the Exchequer from 1 April 2006 is 26.8% of the pensionable salaries of scheme members.

  1.11  The contribution rate recommended following the 2002 valuation was 24.0% of pensionable salaries. The main factors that account for the 2.8% increase now recommended are summarised as follows.

	Percentage of payroll
Higher contributions from scheme members	-0.6%
Lower ongoing cost of benefit accrual as a result ofchanges to assumptions	-0.6%
Higher deficit contributions as a result of divergence of experience from 2002 valuation assumptions	+1.5%
Higher deficit contributions as a result of changes to assumptions	+2.5%