The UK’s Universities Superannuation Scheme (USS) has reported a £9.2bn (€10.9bn) defined benefit (DB) surplus.
This is the first time the scheme has formally reported a surplus since 2008. Its 2023 actuarial valuation revealed a surplus of £7.4bn which led to the scheme reducing member contributions from 9.8% to 6.1% and employer contribution from 21.6% to 14.5% as of 1 January 2024.
The scheme also restored benefits to pre-April 2022 levels, with a one-off uplift applied to benefits earned between 1 April 2022 and 31 March 2024.
Key figures
Total assets under management increased to £77.9bn. The value of DB assets increased to £74.8bn during the year (from £73.1bn during the actuarial valuation 2023) and the value of placed liabilities decreased slightly to £65.6m during the year from £65.7bn. Defined contribution (DC) assets totalled £3.1bn.
USS membership grew by more than 26,000 to 554,251 (232,360 active, 233,938 deferred, 87,953 retired).
The value of the DB fund increased by £1.7bn over the year to 31 March 2024 and the scheme funding ratio now sits at 114% (up from 111%).
USS said that equity markets across the globe “performed strongly” over the period despite ongoing inflation concerns. And while credit markets displayed a positive performance over the year, the rising interest rate environment proved to be a drag on government bonds.
The estimated value of USS’s DB liabilities continued to fall materially, improving its funding position. The scheme outperformed its DB liability proxy by 10.8% per annum over the five years to March 2024, and by 5.6% per annum over 10 years.
Compared with the prior year, USS said this was a more favourable period for DC investments across the industry, with returns being positive across the board.
The scheme’s DC funds recorded strong returns over the 12 months to 31 March 2024. Most of the ‘Let Me Do It’ (self-select) funds matched or outperformed their respective benchmarks over the period, it said.
By managing most of its investments in house, USS said it saved money compared with the expense of external management. According to the latest independent analysis by CEM Benchmarking, the scheme’s annual investment management costs were the equivalent of £121m, or 35% a year lower than the median global peer pension fund.
Thames Water
Simon Pilcher, chief executive officer of USS IM, acknowledged the publicity around USS’s investment in Thames Water over the last year.
In January 2024, USS slashed the value of its stake in Thames Water by almost two thirds after the utilities company admitted that it did not have enough money to make debt repayments.
The scheme first invested in Thames Water in 2017 and holds a stake worth just under 20% in Thames Water’s parent company Kemble Water, through its subsidiary Church Water Investment.
Pilcher said that “it is clear this has not been a successful investment”.
He said that while poor performance of a single asset should be considered in terms of the scheme’s overall performance, this has been “deeply disappointing, and we recognise the concern it will have caused our members”.
Pilcher said that USS has taken the time to “consider the implications” for its investment decision-making, asset oversight, and its wider investment in economically regulated sectors.
He added that regarding Thames Water, all nine shareholders of the company, including USS, announced they would not be investing new equity into the company.
“This was because the necessary conditions for further funding were not in place at that time. Thames Water itself also announced that, based on the feedback provided by its regulator Ofwat at that point, the regulatory arrangements they expected would apply to the company made its business plan un-investable,” he explained.
He added that this was despite extensive engagement with the regulator and commitments from investors that they would not take any money out of the business for at least a further six years.
He noted: “Since we first invested in 2017, any profits that might otherwise have been used to pay shareholder dividends were reinvested into the business. We have not received any dividends or payments of interest on any shareholder loans. We will continue to co-operate in the next steps that flow from the end of March announcements.”
Pilcher said the future outlook for Thames Water was “unclear” and the value of USS holdings as at 31 March “was minimal” in the context of the DB part of the scheme with £74.8bn in total assets.
He added that USS’s experience with Thames Water will influence its future approach to investing both in economically regulated assets and more broadly.
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