While USS has written down £600m from the value of its investment in Thames Water, we should not be over-worried about the future of USS the pension fund or the pensions it pays to its members.
These things happen and when they do , organisations take a hard look at their investment, risk management and governance structures to make it less likely that they happen again.
Put in the context of a pension fund that should – with positive cashflows- be pushing £100bn this year, the loss represents considerably less than 1% of the accumulated money in the pot.
The worse thing that USS and pensions in general should do , is to consider that it should not invest for growth by taking stakes in stocks like Thames Water.
The best thing that we can do is to ask why USS felt it right to take such a large stake in Thames Water, having a place on its parent’s board and putting itself a hostage to the company’s performance. This kind of role is usually associated with the likes of Jim Ratcliffe as he seeks to turn around the performance of Manchester United. Does the investment team at USS really think it has the team of a Radcliffe – who is its Dave Brailsford for instance, what is its track record in managing the huge risks that Thames Water is facing?
Thames Water itself , does not point to USS as anything other than a “supporter”, a financial backer as it tries to turn its fortunes around. The patient capital that USS commits to that cause is potentially redemptive, especially compared to the debt that previous owners have saddled Thames Water with.
McQuarrie, who seem to have been the prime architect of Thames Water’s current problems, are not only getting a free ride from the media, but are actively promoting themselves as infrastructure manages to the next rung down of funds to USS. They are regulars on the LGPS conference circuit, questions around their role as owners of Thames Water are conspicuously absent at the sessions I’ve attended. The one question I saw answered on the subject , met with disapproving looks from the conference organiser.
Need to be public about the losses and the wins
It’s no secret that USS are big-payers, their investment team are paid not to go to hedge fund managers but they should also be judged, as we judge the management of hedge funds and private equity, on results.
The results of their investments in Thames Water have so far been spectacularly awful and the losses represent a lot of contributions from ordinary members of the scheme who expect better.
Accountability includes sharing the downside as well as the upside and I hope that USS will share how it deals with these losses as well as promoting itself for its successes.
To date, it has been very shy about its losses and its statement yesterday to the Financial Times appears to have been reactive to the FT picking up on the accounts of the entity set up by USS to manage its Thames Water holdings.
Money it can afford to lose
This blog is not saying that USS should not be a provider of patient capital to Thames Water many other infrastructure companies, it should, it is and long may it continue to be.
Even the huge bet it took by buying a 20% stake in the company was money that USS can afford to lose, certainly in accounting terms. In 20 or 30 years time when the USS fund is being rewarded for this investment the mispricing of its purchase price will be considered inconsequential.
Lessons it must learn
The lesson is not for USS to stop investing its capital in the equity of private companies.
The most important lesson, is to face the current predicament created by its mistake in buying into the company at the wrong price, not properly understanding the risks that Thames Water were taking and so – not negotiating a price for the stake that reflected the state of the equity it was purchasing.
This is clearly set out by EDHEC in a report published yesterday, which is the subject of a concurrent blog.
To suppose that, under such great scrutiny as USS is, it could get away with hiding this colossal screw -up is naïve in the extreme. So long as USS continues to operate in a clandestine way, it will find itself found out by excellent journalists such as Jo Cumbo and by commentators such as Con Keating , Iain Clacher and the many new pension experts within USS’ membership.
The first lesson for USS is not to be so bloody arrogant. The second lesson is to make sure it doesn’t make the same mistakes again.
Gosh.. more lessons to be learned at the expense of the members.
Someone was asleep at the wheel are they still employed?
The holding in Thames was USS’s largest single investment – at its highest valuation over 1% of scheme assets – the loss of nearly £600 million should be compared with assets at end September 2023 of £68.8 billion.
It is not as if USS has a stellar investment track record – At the beginning of 2021 it reported assets of £89.3 billion and contributions since then have exceeded pensions paid by several billion pounds.