1 Response to Should USS invest for growth or lock down its assets?

1. Anonymous says:

   September 26, 2026 at 7.32

   One of the problems the USS faces is the use of Gilt yields as the basis of its valuations and targets.

   It makes no sense setting a (Gilts plus 2.9%) target for liabilities stretching 70 years into the future based on the most volatile variable (20 year Gilt yields have varied from 0.6%. to 9.37% over the past 35 years and even intra-day variability frequently reaches 0.2%).

   In a much smaller scheme fully open DB scheme we have set a fixed long term investment target of 5.9% p.a. This was the effective whole scheme discount rate at the 31st March 2024 Technical Provision valuation. This target is used for investment decisions and also setting contribution rates and variable benefits (our defined inflation exposure is limited to pensions in payment). In setting the target we considered multiple factors including the scheme investment performance over differing periods over the past 15 years (the data to hand and which normalised at over 7% p.a.), the yields and trends of yields of current and potential investments, and some comparative scheme performance (e.g. CAPAData default 5yr returns 30 years pre-retirement – now c6%). We will formally review the target after the 2027 valuation, but while we may notch it up a bit we are unlikely to move it substantially because the yield on Gilts and bonds is now so much higher than the dividend yield on quoted equities (c. 3% on the FT100, 1.5% on the MSCI World) meaning projected future capital gains are dominate valuations of quoted and private investments.

   The Trustee now requests investment consultants and managers “decompose” projected investment performance of existing and prospective investments into three components:
   1. Current cash yield (annual interest or dividend payments flowing into a cash or liquidity account under the Trustee’s control)
   2. Growth (annual expected growth in the current cash yield)
   3. Revaluation (the expected capital gain from the investment not arising from 1 and 2)

   • A justification for the Revaluation element should be provided against some suggested measures. Timeframes relevant to the revaluation return should also be clarified. The Trustee also expects that any particular investment may have more than one element to its projected investment return and will consider its contribution to the overall portfolio.

   Using that analysis we have established a three portfolio approach, matching against the “armadillo” chart of future projected benefit payments on a buy and maintain basis:

   Cash Yielding Portfolio
   • Assets which generate short term cash flows into the Trustee’s bank account to cover the pension benefits paid out during the year.
   • A Cash Yield Target (£M p.a.) set which is designed to match cash requirements for the next N (?3) years
   • To avoid need for asset sales (no liquidity risk for the Scheme)
   • To permit new contributions to be invested in the Future Impact Portfolio

   Future Impact Portfolio
   • Assets purchased with current contributions targeting benefit payments in the 20 to 60 year time horizon.
   • Sustainability Issues key
   • Liquidity not an issue so allows Closed End funds and Private Capital
   • Long Term Yield targeted

   Buffer Assets Portfolio
   • Assets invested for return which will be called upon from time to time (every 3 years?) to top up the Cash Yielding Portfolio as benefit outflow increases.
   • Existing Growth Assets (66% of total assets)
   • Long term Yield targeted
   • Liquidity important but flexibility in timing of transfers to Cash Yielding Portfolio mitigates and minimises significance of “Value at Risk”

   This approach is designed to insulate the Scheme from volatile valuation assumptions over the long term and also make meaningless some of the so called risk measures e.g. volatile gilt yields when income flows are already secured, no required asset realisations within a three year time frame mean no 1 year Value at Risk etc.

   Peter Cameron Brown

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