USS – you’ve never had it so good/bad – (delete as necessary)

For more than five years, members of USS have been asking for transparency in the scheme’s reporting. Compare how the scheme sees itself against how others see it in this blog.

How USS sees itself and how others see it.

I have just read an article that relates the views of Simon Pilcher on the success of USS’ investment strategy in the 12 months to September 2022.

The Universities Superannuation Scheme, USS, trustees of the largest private pension scheme in the UK, withstood September’s turmoil in the government bond market for five key reasons. Speaking at USS’s 2022 Institutions’ Meeting, Simon Pilcher, chief executive of USS Investment Management, said the asset manager uses less leverage than most other UK pension funds.

The five key reasons for USS’s success are then expanded on

At end of September, the Valuation Investment Strategy had 16 per cent in leverage.

Pilcher said USS has also been protected because of diversification. In an important seam to strategy, USS buys US government bonds to hedge inflation and interest rate risk, no relying exclusively on UK government bonds. In a third pillar, the asset manager was also supported by its allocation to private markets which protected the downside and have less volatility than public markets.

A strategy that reduced the portfolio’s exposure to sterling also helped protect the pension fund. The investment team had observed for a while that sterling tends to perform badly in volatile markets. Fearing volatility, strategy centred around increasing the non-UK element of the portfolio, said Pilcher, adding that the team had also ensured plentiful stocks of cash and collateral in preparation for market volatility as yields rose through the year. When this was turbo charged in September, the scheme was prepared.

Finally, Pilcher credited USS’s governance for the scheme’s fortitude during September’s market turmoil. This enabled the investment team to act quickly at a time fast decision-making was critical to protect the downside and exploit opportunities.

I have also read this in the Mail on Sunday, which is reporting on the fund’s performance over that period

The value of Britain’s biggest pension fund has plunged by £20 billion, more than a fifth of its entire value, after turmoil in financial markets pummelled its investments.

The Universities Superannuation Scheme (USS) looks after the pensions of 460,000 higher education workers, past and present.

It is one of few remaining defined benefit (DB) schemes still open to new joiners – paying a pension based on a member’s final salary.

Continuing to my theme that value for money is based on outcomes rather than qualitative assessments, I am inclined towards the latter .

Latest figures from the USS show its assets plunged from £92.2 billion to £72.6 billion in the nine months to the end of September – the biggest fall in absolute terms reported so far by any workplace pension scheme.

It seems bonkers that a successful investment strategy can deliver such staggering losses.

We are told that at end of September, the (USS) Valuation Investment Strategy had 16 per cent in leverage.

No doubt we will be reminded that liabilities fell faster than assets but if the liabilities were only 16% leveraged  why did the assets take such a hit – if all the collateral was in place, then where was the write-down from the “fire-sale”?

People have poured scorn on Iain Clacher and  Con Keating’s estimate of a £500 bn drain in the value of UK’s DB asset value, but if one scheme of the 5200 in the PPF’s Purple Book can deliver a nearly £20bn asset fall, that number sounds reasonable.

If , as is reported of  Simon Pilcher , your remuneration is over £2m per year, you have to work hard to justify your job’s value. But surely members of USS are going to ask how things went so well and so badly at the same time?

About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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6 Responses to USS – you’ve never had it so good/bad – (delete as necessary)

  1. emigreeu says:

    The “scorn” is not directed at the individuals best guess at £500bn but at the inability ( reluctance) of the schemes to give an accurate figure.

    VFM? How many executives at the USS have 7 figure salaries? It is reported to be 5 is this a common feature of DB ?

  2. Cornelius Keating says:

    Actually if USS’s reported decline of 21.3%, which is slightly better than the PPF estimate of 22.5% were repeated across all schemes the total losses would be around £400 billion. USS is unique in that it is the only scheme employing LDI, which we have seen reporting results, which claims to have bettered that PPF figure. There is a wide range of results – schemes not using LDI, seen to cluster in the -10% to -15% range (these tend to be rather small schemes) and those employing LDI, which are mainly large schemes, report values in the range -26% to – 31%. The Bank of England reported -30% for its scheme. Some small schemes have reported catastrophic losses of 40% or more.

    We are concerned by the reference to private investments – the prices of private secondaries were down 15% to 20% over the year. There’s more than a touch of Insight pricing in the “downside protection and lower volatility” of private assets. We understand that requests from the JNC for the detail of the end June and end September valuations of the asset portfolio have gone unmet. Good governance??

    USS was 16% leveraged not 16% hedged – earlier in the year, they reported interest rate hedging of 40% and inflation hedging slightly higher than that. The 16% also seems to refer to cash borrowing by the fund – their use of derivatives could increase that markedly. This borrowing increases the riskiness of the fund as was noted in many of the responses to their request in March to increase scheme leverage. That seems hardly consistent with the ‘we saw it coming’ line.

  3. Dennis Leech says:

    What happened to the liabilities when gilt rates rose? That depends on whether one is talking about the accounting liabilities (according to the discounted present value formula, a paper number) or the actual £pensions commitments that have to be paid in the future. The increase in gilt rates immediately reduced the accounting liabilities even though the £pensions were unchanged. Surely we should be talking about real pensions not notional accounting figures that can have only limited relevance for the USS.

  4. John Mather says:

    No problem, just increase performance to 26% this month and restore the position. OR ask for an increase in contributions.

    What an argument for collective schemes, the majority finish up in the rescue fund

    No wonder Cambridge and Oxford Colleges would prefer to stop belonging to this club as they have real assets and Kirby University might not be so well funded

    Maybe the Bursers should run the fund

  5. jnamdoc says:

    At the WPC hearing, a very senior (soon to be departed from that post) executive (while not actually disputing the £400bn losses) gave assurance that the losses were “just a point in time valuation thing” and it just depends when one looks at these things, and he thought some would already have reversed. That’s potentially true for those schemes that had nil or lower levels of hedging where they’ll have benefitted from the significant rise in asset values since Sept ( FTSE breaching 8000), but not for those schemes that had to firesale equities and others ‘liquids’ to cover the losses to make payments to the banks. Those schemes and UK PLC was materially weakened by the strategy. The big big winners were of course the financial institutions that were rescued and no doubt they too along with the foreign buyers also benefitted from being able to snap up the nations pension assets during the firesale.

    • jnamdoc says:

      to be clear – should have said ‘TPR Executive’.
      When he said it, I did think what is the point of all of these Valuations we have – are they all not just point in time things🤷🏻?

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