Britain’s largest private pension fund, the University Superannuation Scheme has invested in Britain’s best known private utility – Thames Water, to disastrous effect.  In its 2024 report and accounts, Trustee Chair, Dame Kate Barker tells us

Following this assessment, at the end of March, there
were further material developments regarding the
scheme’s investment in Thames Water, which is part
of our large portfolio of private investments.
We have engaged extensively with Thames Water’s
regulator and management. That this effort has not
borne fruit is a great disappointment and frustration
to us all. I appreciate the concerns members will have.
Some would have wanted more information from us
than we provided as this issue developed. But it is not
possible, nor often in investors’ or members’ interests,
to provide regular public updates, particularly where
there are legal and regulatory constraints as well as
commercial sensitivities.

Notwithstanding the losses incurred on Thames Water,
our private markets team has delivered strong overall
performance since it was established in 2007. Our
diversified investment strategy means that no single
investment is of sufficient magnitude as to jeopardise
the scheme’s ability to pay its liabilities as they fall due.
Furthermore, monitoring of the DB funding position
reported an estimated surplus of £9.2bn at the end
of March 2024, an increase of £1.8bn since the 2023
valuation

The decision to invest in Thames Water was not a wise one but it may have been an easy one. USS were following in on due diligence from global peers , investing in a highly visible utility and should have been a part of the turnaround story for an organisation that benefited from a strong environmental lobby willing it on.

I need not go into the reality of what has happened. USS’ Thames Water investment, valued at nearly £1bn two years ago, was effectively written off. The full cost of the failed investment (including legal, admin & other fees) was not disclosed in the 120 page USS annual report,

Barker is of course right on all accounts. The USS private equity team will see its future actions “shaped” by the embarrassment of Thames Water and let’s hope it will make tougher decisions in future that yield members a handsome dividend and long term protection against inflation. That’s what a successful portfolio of private market investments can and should do. Simply ploughing its £80bn of investable wealth into large quoted global stocks will do little for USS members or for USS’ sponsor, effectively Britain’s graduate population.

Nor is it good enough to write Thames Water off as a basket case, it isn’t. It is a fully functioning business that has allowed itself to be played by Macquarie (principally) and other secondary banking houses who have taken advantage of its weak management and governance to laden it with £18bn of debt. Having stripped most of the value out of what once was the tax-payer’s, the tax-payer may well ask what Macquarie has to say for itself. If it wants to play in the financing of UK infrastructure, it needs to play nicely.

Thames Water itself, continues to act like it had no problems. The Trustees of its pension schemes carry on regardless of the covenant that supports them falling away. The operating company says it will run out of cash in 9 months but still the Trustees will not talk with capital backers, keen to support the covenant to stop contagion from Thames Water spreading to its pension scheme.

In pension matters, pension scheme members and their representatives  are right to be concerned that so little information is being published on the pension scheme’s strategy.

Will it, like USS, find itself writing off Thames Water? Without a sponsor , what would the Trustees’ plan B – be?

As for USS members, the FT reports one retiree with strong views

“But governments should not expect pension funds to engage in private equity investment in infrastructure. These investments are risky and opaque. The government can borrow at lower rates,”

This is not the conclusion that Government or the USS should take, though it is a predictable enough reaction from someone entitled to a defined benefit pension and the support of younger generations of academics and tax-payers.

Government should be encouraging USS to invest more in infrastructure and finance productivity in the country as a whole. It should however try to avoid further investments in badly managed, over-leveraged organisations that behave as if they had a crown guarantee. I’m talking about Thames Water and its own pension schemes.