The Universities Superannuation Scheme (USS) has seen its funding decline to 83%, equivalent to a £10bn (€12.7bn) deficit, despite outperforming its benchmark last year.

The UK’s largest pension fund saw its deficit continue to increase, with funding down by 6 percentage points since 2014, during which time assets increased by more than £8bn to £49.8bn.

However, neither the absolute deficit figure nor the funding ratio were as bad as reported in 2013, when USS calculated an £11.5bn shortfall – equivalent to 77% funding. 

A return of 1.6%, nearly 2.4 percentage points above its benchmark, was praised as “exceptional” by CIO Roger Gray, while emphasising the fund remained focused on delivering strong returns over the longer term.

“On a five-year basis,” the fund’s annual report said, “returns have also been very good, with 1.1% annualised outperformance contributing an additional £2.2bn above the scheme’s strategic benchmark.”

The report added that investments generated income of £1.2bn over the course of the last financial year, although some of the gains were undone by losses from its derivatives holdings and equity portfolio, resulting in net returns of around £700m.

Chief executive Bill Galvin also warned the UK’s vote to leave the European Union would have a “substantial” impact on the fund, specifically on the universities acting as its sponsors, due to the potential changes to free movement and EU research funding.

“As an institutional investor,” Galvin added, “we are invested in more than 100 countries worldwide, and we will need to review the implications of any proposed constitutional changes for areas such as tax, counterparty exposure and investor protection.

“There will be much contingency work to do as negotiations proceed.”

Galvin also highlighted that new governance structures in place since January last year, with trustees agreeing an appetite for risk, had allowed the fund to be more nimble.

He cited the acquisition of Moto Hospitality as one of the cases where USS had put the new flexibility to good use.

USS acquired Moto in October 2015 for an undisclosed sum, only to sell a 40% stake to CVC Capital a few months later.

The fund has also launched a defined contribution section, a move agreed as it seeks to control its deficit and cap pay accruing under its current defined benefit (DB) scheme. 

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