The way in which the research pot is shared between universities will be fundamentally changed from 2009, allowing the best work to be identified wherever it is found.
The next research assessment exercise, which will inform the distribution of some £8 billion, will replace the existing grades with quality profiles designed to halt the game-playing by which universities try to maximise financial gain.
The change means that pockets of excellence will be immediately obvious and will be financially rewarded, reducing the risk of the poaching of staff by bigger and better-funded departments.
The results of the next exercise will be published in December 2008, the funding councils announced this week.
Sir Howard Newby, chief executive of the Higher Education Funding Council for England, said the approach would provide "a fairer and more accurate way of assessing and funding research quality".
He said: "The use of quality profiles will reduce the tactical element in preparing submissions. The incentive will be for institutions to include all their good researchers rather than aiming for a particular grade.
"The new method will also benefit institutions with comparatively small pockets of excellence within a larger research unit, as the true scale and strength of their best work will be more visible."
The existing seven grades - which range from 1, the lowest, to 5*, which signifies international excellence in more than half the work submitted, will be replaced by four starred grades and one unclassified grade. The proportion of work receiving each grade will be used to establish a quality profile for each submission.
But Rama Thirunamachandran, director of research at Hefce, said that the assessment judged work not people.
He said: "In the exercise, for example, where there are four people submitted from the classics department at the University of Poppleton and the quality profile shows 25 per cent 4*, 25 per cent 3*, 25 per cent 2* and 25 per cent 1*, it doesn't necessarily follow that each person belongs to one category. It is quite possible that each person might have contributed one piece of work to each category."
The financial weight of each grade has yet to be decided. While the same RAE will be conducted in England, Scotland, Wales and Northern Ireland, the financial consequences could vary between countries as they do at present.
For example, after the 2001 RAE, Hefce revised the financial weight of each grade to fit its budget, fully funding the best but cutting cash for the rest.
A spokeswoman for Universities UK welcomed the new RAE but said: "It is essential for the funding for the different levels to be reasonably predictable so that higher education institutions can invest and plan within a stable financial framework. UUK therefore remains concerned about the funding of the RAE continuing to be open to retrospective manipulation.
"We are gravely concerned about increasing levels of research concentration and have consistently highlighted the critical importance of an appropriate balance between funding top-rated departments to support excellence, protecting areas of research excellence across the sector and encouraging new and developing research."
Pressure group Save British Science also welcomed the new RAE but warned that it was a mistake not to tell universities in advance how their ratings would be converted to financial rewards.
Hefce has estimated it will cost £10 million to run the 2008 RAE in direct costs incurred by the funding bodies. Indirect costs sustained by universities are likely to bring the bill to £45 million.
How will the new RAE work?
- A continuously graded quality profile based on the proportion of work achieving each of four "starred" quality levels will form the result for each submission, replacing the seven-point scale
- Results will be published in December 2008. Census date will be October 31 2007. Closing date for submissions will be November 30 2007. The exercise will be repeated every six years
- Assessment will be by expert peer review conducted by some 70 discipline-based sub-panels with 15 to 20 main panels
- There will be no different assessment routes, no separate assessment of research competence and no mid-point monitoring as proposed. Universities will decide whose work to submit.