Some unlucky stocks picked?
Private – does that mean opaque rather than transparent?
Is this delivering value for money?
Con Keating doesn’t think so
The rosy funding statements are based on accounting and actuary reporting
Which is why poor investment performance has been ignored by most pensions folk
There are some good stories
Comparison with performance with others may not be liked but is it unfair?
Iain Clacher sees an improvement in the USS investment outlook and Chair Barker is of the same view.
A changing picture at USS for all parties
Pretty well off academic pensioners.
This is a much better story than ten years ago when the scheme was threatened with closure as a defined benefit arrangement.
The DC plan is primarily used to pay tax free cash for those with healthy DB pensions and contribution rates remain healthy by comparison with those paid to most pure DC members of other schemes. Con Keating is right to point out that USS has not yet achieved performance to give it anything to crow about and Iain Clacher’s optimism is yet to be born fruit!
It is however good to see USS open and proving the sceptics 10 years ago, very wrong.
The simple truth is that the USS DB Scheme did NOT have a deficit 10 years ago, it was purely the deficient measurement of liabilities that suggested that it was (“reckless prudence”).
Only time will tell whether it really has a £10bn surplus or whether that is now being overstated for the same reason. The extremely large hedging pool suggests that it will find it extremely difficult to get the excess returns required of the other assets, whether in private or public markets, to maintain a competitive overall return.
The big advantage that both the DC and DB sections of the USS have over many other pension schemes is that they are still fully open and therefore the flow of new contributions plus the cash dividends received (? from directly held investments) offset the benefits paid out and the significance of the realisable value of the assets is pushed into the longer term future. This is an important lesson to be learnt by many other pension schemes (and employers or providers) whether in DB or DC.
All pension schemes should publish their long term investment returns and not just set an artificial 5 year time horizon, after all the life span of an individual’s pension arrangements is probably around 70 years!
The apparent improvement in USS’s status is a function of the discount rate applied. In their annual report they state that a 5.7% discount rate results in a present value of liabilities of £66.4 billion. Their valuation rate is higher than this as they report liabilities of £62.9 billion. The spread over gilts that is claimed of 1.75% for deferreds and 0.57% for pensioners suggests a weighted rate of 1.4% or higher – with 20 year gilts at end March 2025 yielding 5.29% that would imply a discount rate of around 6.7%.
That would imply that USS needs to earn between 4.9% pa and 5.8% on its £73 billion of assets to meet its pension liabilities fully. It has earned 3.9% pa over the past decade; if that continues they will come up between 20% and 33% short.
I can’t help feeling this may be why they are keen to introduce conditional indexation .
That appears sensible.
In our fully open shared ambition scheme, we looked at our technical provisions valuation at March 2024 with assumed future inflation of 3.2% p.a. as representing best estimate with a 11% risk margin. This gave an estimate future investment return requirement of approximately 5.9% p.a. Looking at our long term achieved investment performances over 5, 10 and 15 years which were in the range of 7.2% to 8.8%, we felt that this was an appropriate threshold target for investment decisions. Most significantly until reassessed again in three years this would not vary with changes in the gilt yield and therefore banned all references to “gilts plus”.
We do however start with a cushion of an asset pool with a 2024 current market value 71% greater than that estimated to be required on this basis. This in part had been created by the operation of the shared ambition nature of our 20 year old scheme where effectively Conditional Indexation had applied. However unlike Conditional Indexation we are now distributing surplus to members through above inflation discretionary benefits and to the employer by a reduced funding rate.
I am talking about our shared ambition experiences (along with John Hamilton talking about Stagecoach’s) at a meeting of the East Midlands Group of Pensions UK on the 26th February if you are interested.
It was revealed last year that crisis-hit Thames Water was spending approximately £15 million a month on lawyers and other professional advisers, although a more recent report in The Times suggests this may now be averaging “only” £10m per month.
This high level of fees was/is part of a broader, costly restructuring process as the company attempts to manage a debt load of over £15 billions.
In a more recent six-month period, the firm spent £57m on advisers, including bankers, lawyers, and PR consultants.
Another report noted £67.6 million in legal fees relating to a £3 billions emergency creditor bailout.
Legal fees included charges of up to £1,400 per hour for senior solicitors.
Thames Water argued that these costs are necessary for restructuring and claimed that they will not be paid for by customers, but rather borne BY CREDITORS.
USS not only holds a reported 20% of the equity of Thames Water’s parent company but has also provided debt finance alongside other shareholders and lenders.
I agree, Henry, that USS remains “open” to both future DB accrual and DC benefits, but I’m less persuaded that members are being told the extent of the painful lessons being learned from investing in private equity and debt.