The latest report and accounts for USS are out

They show how the scheme is doing under a number of measures. As Toby Nangle says on BlueSky, “this is always helpful“.

When I started writing about USS , 7 years ago, there was a real possibility that this great scheme would be closed for future accrual, locked down in bonds to be an albatross around university’s necks and a source of constant strife between teachers and their finance departments.

Now the scheme is in surplus and its DC section achieving outstanding results for its retirement savers.

Undoubtedly, the rosy picture that these numbers paint today will at some future point return to a point where liabilities are less than assets on all bases. Then we should remember that funding is not constant and that time corrects markets to long-term rates of return.

Those who called for scheme closure and a switch to DC for all future benefits should be remembered at this point. Accountability works two ways. When hard times come a calling in the future, we should hold our nerve,

Holding our nerve

We should remember that the assets within the scheme include a substantial holding of Thames Water’s equity. The Scheme’s CIO, Simon Pilcher comments

Despite our very best efforts, it is clear this has not been a successful investment. While poor performance of a single
asset should be considered in terms of our overall
performance, as I will discuss below, this has been
deeply disappointing, and we recognise the concern it
will have caused our members

I cannot find a line in the financial statements that tells us what USS values its equity holding in Thames Water (Kemble) at. If it is at much more than nothing, I would be surprised. Marked to market , the equity has no buyer and no value.

And this too is a lesson. The scale of USS has enabled it to make this disastrous mistake without putting scheme benefits at risk.

Rewarded like a hedge fund?

In many respects , USS is the well run scheme it should be and it should reward those who manage it at the market rate. However, I am beginning to wonder if the benchmark for rewarding its staff is now the hedge fund rather than the pension scheme. We learn that

 Excluding the release of the pension deficit recovery
liability, pension management costs increased by
£4m (9%), while total investment management costs,
including embedded fees increased by £12m (5%).
Personnel costs (excluding group functions) have
increased by £17m (20%), primarily arising from inflation
and increased headcount as we continue to strengthen
our internal investment management capability.

The deficit recovery liability was £20m which seems to have been absorbed into staff costs, especially senior management costs which increased from £54m to £64m over the year, an eye-watering 18% pay rise.

This pension scheme now employs nearly 250 people earning over £100,000 and 6 earning over one million pounds a year.

These are hedge fund rewards, but are any of these executives bearing any risk themselves?

The scheme is doing well but there seems nothing in the reward structure that reflects that over the year nearly £1bn was written off the scheme’s assets because of the failure of Thames Water. Thames Water was – originally – marked into the accounts at £956m.

(note this is  a correction on a misquoted £5bn previously- thanks to reader Jon)

Setting the bar

USS is our largest occupational pension, it manages money for many employers and does so with a well managed DC and DB section. It has achieved the economies of scale needed to make it a force in the land and indeed it is just that.

It is doing the things the Government wants pension schemes to do and while it makes a mess of things from time to time, generally it is a success story. Nevertheless it does its work with “other people’s money”.

Though USS is setting the bar, it is also establishing pay awards for senior staff which seem to me excessive.  It needs to do more to justify these pay levels if UCU and UUK are not to ask why that money might not be better spent reducing employer and employee contributions.