7.1  It is appropriate to consider the results of the valuation in two parts. The first part deals with the liabilities that have already accrued for current and former members in respect of service given before the valuation date of 1 April 2005 (the Actuarial Liability). The results for this aspect of the valuation are set out in the table at paragraph 7.2 below. The second part of the valuation deals with the liabilities expected to accrue in respect of future service for current members (the Standard Contribution Rate), and this is discussed in paragraph 7.10 below.

  7.2  Past Service Assessment. The liabilities for past service and the assets of the scheme have been determined on the methodology set out in section 5 of this report, using the actuarial assumptions described in section 6. (Assets and liabilities relating to members' Additional Voluntary Contributions are excluded from this assessment.) The results of the valuation in relation to past service liabilities are set out below:

  7.3  The figures in the Valuation Statement show that the liability in respect of former members and dependants, at £153 million (total of rows (3) to (6) above), is only slightly lower than the liability for the past service of current members, at around £167 million (rows (1) and (2) above). However, the liability of £167 million for sitting members at 1 April 2005 includes over £40 million in respect of members who did not continue in service after the General Election in May 2005. Accordingly, allowing for this change, the liability for active members falls to £121 million, and the liability for members no longer serving in Parliament following the General Election rises to £199 million. Thus, taking account of the Election turnover, about 62% of the aggregate liability for accrued benefits relates to former MPs and office holders, and only 38% relates to current members. This indicates that the PCPF has a relatively mature liability profile.

  7.4  The result of the previous actuarial valuation, as at 1 April 2002, was a shortfall of assets to liabilities of around £25 million. The recommended rate of Exchequer contributions was increased by 4.7% of salaries above the Standard Contribution Rate with the objective of making up that deficit over a 15-year period. A further deficiency has arisen in the operations of the scheme in the three-year period up to 1 April 2005, with the shortfall of assets relative to liabilities being assessed as £49.5 million at that date.

  7.5  Analysis of Deficit. The result of the valuation shows an increase in the deficit over the three-year period to the valuation date. For the first year of the inter-valuation period, from 1 April 2002 to 31 March 2003, the rate of Exchequer contributions to the scheme was 7.9% of pensionable payroll, in line with my recommendation following the actuarial valuation in 1999. Only in April 2003, following publication of the 2002 valuation report, did the rate of Exchequer contributions increase to 24% of payroll. An increase in the deficit over the first year of the inter-valuation period would therefore have been expected, clawed back to some extent in the succeeding two years. Taking into account the interest that is assumed to accrue on the deficit during the inter-valuation period, the deficit would have risen by around £7 million if the experience of the scheme had developed as was assumed at the time of the actuarial valuation in 2002.

  7.6  The experience of the scheme has not been entirely in line with assumptions made at the 2002 valuation. Returns on the scheme's investments were lower than was assumed in the valuation. It is not surprising for a scheme that is primarily invested in equities, which exhibit volatile return characteristics, to experience returns over a three-year period that are materially lower or higher than a valuation assumption for the average returns that are expected to be achieved over the long term. Other factors, such as the lower than expected level of salary increases awarded to active members of the scheme, had a positive impact on the deficit position. Overall, divergence of the scheme's experience from assumptions made at the time of the actuarial valuation in 2002 contributed around £5 million to the increased deficit.

  7.7  The other main factor giving rise to an increased deficit is the change made to the assumptions that I have adopted for the purposes of this actuarial valuation from those adopted for the 2002 valuation. A number of changes were made to the assumptions. The most important changes were to the assumed longevity of members (as described at paragraph 6.3 above) and to the expected retirement ages of MPs (as described at paragraph 6.4 above). The longer period now assumed for payment of pensions as a result of increased longevity results in a higher value being placed on the pension liabilities. The change to assumed retirement ages of serving members allows for commencement of pensions at later ages than was previously assumed, which means a shorter period during which the pensions are paid, resulting in a lower value being placed on the pension liabilities of active members. The change to the retirement pattern for active members partly offsets the increased liability that results from assumed increased longevity of all categories of scheme member. In aggregate, changes to the actuarial assumptions contributed around £13 million to the increased deficit.

  7.8  The change in the deficit between the actuarial valuation in 2002 and the current valuation can be summarised as follows, both in cash terms and as a percentage of the 2005 liabilities.

  7.9  My recommendations for dealing with the deficiency are considered below after reporting on the results for benefits that will accrue after the valuation date.

  7.10  Future Service Assessment. The cost of benefits accruing for future service is assessed by means of the Standard Contribution Rate, as described at paragraph 5.6 of this report. The Standard Contribution Rate calculated on the actuarial assumptions set out in section 6 of this report is 27.4% for MPs and office holders taken together. The corresponding rate calculated at the time of the 2002 valuation was 28.0%.

  7.11  The Standard Contribution Rate assessed at this valuation is slightly lower than the rate assessed at the previous actuarial valuation in 2002. The decrease is primarily attributable to changes made to the actuarial assumptions, which have a small net effect of reducing the expected cost of future benefit accrual.

  7.12  The different impact of the changes to actuarial assumptions upon the future service assessment and the past service assessment (where changes to assumptions contributed to the increased deficit) is because of the differential impact of assumption changes upon different membership categories. In particular, the changes to the average assumed retirement age of serving MPs affect only active members whilst the increased longevity assumptions affect all membership categories. When active members are considered in isolation, the change to retirement patterns outweighs the longevity change, resulting in a lower cost of benefits accruing in future. For the past service assessment, when former members (who are affected by the change to the longevity assumption but not by the change to the retirement pattern) are also considered, the longevity change predominates over the changed retirement pattern, giving an increased Actuarial Liability.

  7.13  Contributions are payable by members at the rate of 6% or 10% of pensionable salaries. On the basis of current members' chosen accrual rate, members' contributions are expected to total 9.3% of the scheme's pensionable payroll for the duration of the current Parliament. At the 2002 valuation members' contributions were expected to total 8.7% of the scheme's pensionable payroll. The increase of 0.6% in contributions from members from the last valuation is attributable to the increase of 1% in the rate of contributions payable by members accruing benefits at the 1/40th rate (as described at paragraph 3.3 above), partly offset by allowance for members who will reach the limits for maximum benefit accrual in the scheme, who cease paying contributions.

  7.14  The Exchequer's share of the Standard Contribution Rate, which is the balance of costs that would fall to be met by the Exchequer in the absence of any surplus or deficiency, is assessed as 18.1% of pensionable salaries (being 27.4% less 9.3%). This is 1.2% of payroll lower than the Exchequer's share of the Standard Contribution Rate at the 2002 valuation. Half of the 1.2% decrease relates to a decrease in the overall Standard Contribution Rate and half relates to the higher rate of contributions payable by serving members.

  7.15  The assessed Standard Contribution Rate can be expected to remain broadly stable if the distribution of the membership by age, salary, length of service and each member's chosen accrual rate remain broadly constant, and if there is no change in actuarial assumptions.

  7.16  Recommended Rate of Exchequer Contributions. Under Section 3 of the Parliamentary and other Pensions Act 1987, I am required to determine the rate of Exchequer contributions needed to meet the balance of the cost of the scheme, having regard to the benefits and to the contributions payable by members. In line with my recommendation at the previous actuarial valuation, the rate of Exchequer contributions was set at the level of 24.0% of the pensionable salaries of MPs and office holders with effect from 1 April 2003.

  7.17  As shown in the Valuation Statement at paragraph 7.2, a further shortfall of assets relative to liabilities has arisen since the previous actuarial valuation. The shortfall is now assessed as £49.5 million. It is appropriate that Exchequer contributions should remain at a higher level than the Standard Contribution Rate in order to amortise the deficit. Taking into account the strong covenant provided by the scheme's sponsor (the Government of the United Kingdom), amortising the deficit over a 15-year period reflects a balanced approach to funding. Amortising the deficit over that period results in an addition of 8.7% to the Exchequer share of the Standard Contribution Rate. The contribution rate to be paid by the Exchequer can therefore be determined as 26.8% of pensionable salaries for 15 years from 1 April 2006.

  7.18  The change to the recommended rate of Exchequer contributions—from 24.0% to 26.8% of scheme payroll—is the combined effect of a change to the Exchequer's share of the Standard Contribution Rate and a change to the additional contributions needed to make up the deficit of the scheme's assets to its liabilities. The table below summarises the main factors that account for the change to the recommended rate of Exchequer contributions.

  7.19  Sensitivity to Variations in Assumptions. The results obtained in the valuation are highly dependent on the demographic and financial assumptions made. The two most important assumptions are for the returns that will be earned on the scheme's investments over the long term future, and for the longevity of scheme members and their surviving dependants. The sensitivity of the valuation results to changes in these assumptions can be demonstrated by showing the results that would have been obtained if the valuation had been performed with alternative values for those assumptions. The variant investment return and longevity assumptions illustrated below fall within the ranges of plausible assumptions that could have been adopted for the valuation.

  7.20  For the purposes of the valuation I have assumed that the scheme's investments will produce returns of 3.5% a year above the level of price inflation over the long term. The results that would have been obtained using investment yield assumptions of 1% p.a. more than or less than the 3.5% p.a. valuation assumption are summarised in the table below.

* The variant investment yield assumptions are also reflected in the other financial assumptions. For example, an assumption of a 4.5% p.a. yield net of price inflation is taken to imply a yield net of general earnings inflation of 3% p.a., equity dividend growth of 1.5% a year above price inflation, and a gross discount rate of 7.5% p.a.

  7.21  The assumptions made for the longevity of scheme members and their dependants are described at paragraph 6.3 above. The sensitivity of the valuation result to a change in the longevity assumptions of around three years is illustrated in the table below. For comparison, the observed life expectancy for UK males increased by around three years between 1980 and 2000.