Retirement Income Builder investment performance

Assessing the investment performance of the Retirement Income Builder

An investment balanced scorecard was introduced for the Retirement Income Builder, the defined benefit (DB) part of USS, in July 2022, and for the Investment Builder, the defined contribution (DC) part in January 2023.

A balanced scorecard tracks quantitative and qualitative performance. It provides a structured approach to bring together performance across different categories or strands.

Our scorecard allows our Investment Committee to independently and holistically assess the investment and advisory performance of our in-house investment manager, USSIM.

The scorecard covers six important categories:

Investment return
Investment risk
Active management
Portfolio resilience
Responsible Investment
Investment advice

The output from the scorecard is a rating on a sliding scale of Very Good, Good, Average, Poor and Very Poor.

The metrics within it are calculated or overseen by the independent performance and investment risk function. They’re also provided to the Investment Committee, who independently assess USSIM’s performance. The Investment Committee then assesses the performance of USSIM against the scorecard each year.

In 2022, it gave a score of Better than Good (between Good and Very Good) for the Retirement Income Builder. The committee called out USSIM’s positive handling of the turbulence seen in the gilt market, strong active management, the good performance of our private market assets, strong investment advice, the improved funding position, and the way risk was managed overall.

Below are the metrics used in the DB investment balanced scorecard:

Below you’ll find an analysis of some of the metrics within the scorecard that contributed to this score of Better than Good. Most of the data is to 31 December 2022. We’re not providing this for the Investment Builder yet, but we intend to include this next year.

1. Investment return

In this category, we look at the return of our DB assets versus a range of different return targets and how the funding level evolves.

We believe that USSIM’s performance should be assessed against a range of factors. So, we look at various metrics like how our assets have performed in relation to our liabilities (the benefits promised to members). These metrics include our technical provisions and self-sufficiency funding ratios on the 2020 valuation monitoring basis, which both improved during the year.

The committee agreed that DB returns relative to comparators and the funding improvements were strong. While the latter was materially assisted by gilt yields changes, USSIM managed these impacts well.

- Chart data as at 31 March 2023
- The fund is the Retirement Income Builder fund
- The Liability Proxy is an investible representation of the scheme’s liabilities, built from gilts. This allows us to track the performance of our liabilities alongside movements in interest rates.
- The technical provisions funding ratio is 108%
  Technical provisions is a measure of the scheme’s DB liabilities. It’s the value of assets we seek to hold in order to fund our liabilities. It takes into account our investment strategy and the support provided by the covenant of the employers. The funding ratio compares the value of assets we currently hold with this technical provisions amount. The scheme ended the year in a much better funding position than it has been for some time.
- Self-sufficiency funding ratio is 94%
  Self-sufficiency reflects the value of assets required to pay, with a high probability, all the benefits members have built up so far. This would be using a low-risk investment strategy without any further contributions, while retaining a high funding ratio. This funding ratio compares the value of assets we hold with this self-sufficiency amount. This funding ratio also improved significantly over the year.

2. Investment risk

In this category, we look at several investment risk metrics to measure the scheme’s asset versus liability risk.

Different investment assets will carry different types and levels of risk. Metrics in this category focus on what might happen if our investment portfolio underperforms expectations and how they might perform in relation to movement in our liabilities.

Projected downside reliance
A 1-in-20 downside measure of how much reliance the scheme may need to place on employers, as a percentage of payroll. A downside is a negative movement of an economy or market. This is observed quarterly and, over the year, remained within appetite.

The interest rate hedge ratio is 48%
The inflation hedge ratio is 44%
Interest rate and inflation risks are the most significant financial risks to the scheme's liabilities and funding ratio. Hedge ratios increased in the year reducing the impact of these risks in the future in line with the trustee’s requirements.

The self-sufficiency Value at Risk (VaR) is £17.5bn
This looks at how much the self-sufficiency deficit – the excess of self-sufficiency liabilities over scheme assets – could grow (with a 95% confidence level) over the next year if markets move against us. Over the year, this metric remained within appetite.

3. Active management

In this category, we assess USSIM’s asset allocation and actively managed mandates by comparing the return of the Retirement Income Builder to a suite of market comparator benchmarks.

These comparator benchmarks are intended to be alternative theoretical investment strategies that reflect market best practice and are investible. However, they may not always be within the risk appetite set by the trustee.

The Retirement Income Builder outperformed five of 10 market comparator benchmarks.

Of the five comparator benchmarks that might have outperformed the Retirement Income Builder, all but one were outside of USS’s agreed risk appetite during the year. These included the Valuation Investment Strategy – the theoretical, but investible, asset allocation developed for the purposes of the actuarial valuation.

The three scorecard categories below are more qualitative assessments. We have therefore provided some commentary on how USSIM has been measured.

4. Portfolio resilience

In this category, we assess the investment portfolio’s resilience to liquidity and counterparty events.

For liquidity we look at the probability of the scheme running out of cash or collateral. For counterparty events we consider the probability of a material loss from a counterparty default, i.e. if someone else involved in the investment doesn’t fulfil their obligations.

We therefore assess how cash, collateral and counterparty risks have been managed. The importance of this was particularly highlighted by the ‘mini-budget LDI crisis’ of September 2022, when liquidity was not a major problem for us. The Investment Committee called out USSIM’s positive handling of the turbulence seen in the gilt market.

5. Responsible investment

In this category, we assess USSIM’s progress towards our Net Zero ambition and its integration of wider Environmental, Social and Governance (ESG) risks into its investment decision-making.

The scorecard therefore provides a framework for integrating financially material ESG factors into our governance. While these issues have always been important in the assessment of USSIM’s performance, they are now factored in, in a more systematic way under the investment balanced scorecard approach.

The Investment Committee noted that USSIM had:

embedded financially material ESG factors into portfolio management processes and decision making

made good inroads into our Net Zero ambition

was recognised as a leader in terms of Responsible Investment. See our Stewardship Code report and TCFD report.

6. Investment advice

In this category, we assess the quality of the investment advice provided by USSIM.

USSIM provides investment advice to the Investment Committee on a range of issues. The committee meets regularly to consider investment issues on behalf of the trustee.

It agreed that the investment advice provided to the trustee over the year was of exceptional quality, particularly around the design of the new Investment Framework and the investment balanced scorecards for DB and DC. This was supported by an independent review of the balanced scorecard approach. Other strong pieces of advice included investment implications of Russia’s invasion of Ukraine, responding to the gilt market volatility of September 2022, and climate scenario analysis to support our Net Zero ambition.

When the above metrics are assessed, they’re also considered against several counterfactuals. These counterfactuals illustrate the impact of different investment decisions and were considered when assessing USSIM’s performance.

For more information on our investment performance, see our Report and Accounts.