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. This is the third year of assessing USSIM’s performance against the scorecard.

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

Our scorecards allow the Investment Committee to assess the investment and advisory performance of our in house investment manager, USSIM, independently and holistically. It covers six important categories:

Investment return
Investment risk
Active management
Portfolio resilience
Responsible investment
Advice and support

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

The metrics within it are calculated or overseen by the performance and investment risk teams who are independent from the investment team. They are provided to the Investment Committee, who assess the performance of USSIM against the scorecard each year.

In 2024, the Committee concluded on a score of Average to Good for the Retirement Income Builder. It noted USSIM’s high-quality investment advice, significant progress on responsible investment activity, and strong improvement of the scheme’s funding levels. While there were no areas of the scorecard where the committee felt that USSIM was underperforming, it did not believe that performance in the active management category was at the level achieved in the other five categories.

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

You can also view a plain text version in the accordion below

1. Investment return

a. Realised return:

i. Versus required return of Liability Proxy +1.8%

ii. Versus 30 year best-estimate VIS expected returns relative to Liability Proxy

b. Funding measures:

i. Probability of TP full-funding (by 2032) (KRI)

ii. Evolution of TP funding

iii. Evolution of SS funding

2. Investment risk

a. Deficit risk:

i. Probability of actual reliance being greater than affordable risk capacity in 3 years’ time

ii. Self-sufficiency hedge ratios

iii. Asset liability volatility and VaR95

b. Other liability hedging attributes:

i. The allocation to assets with sensitivity to long-term inflation Effectiveness of hedging (ex-post)

3. Active management

a. Asset allocation:

i. Implemented Portfolio return versus market comparators within risk tolerance

b. Public markets:

i. Aggregate alpha

ii. Aggregate ex-post information ratio of internal and external actively managed mandates

iii. USSIM assessments informed by mandate balanced scorecards

c. Private markets:

i. Aggregate alpha

ii. USSIM assessments informed by mandate balanced scorecards

4. Portfolio Resilience

a. Liquidity (KRIs):

i. Cash adequacy over a 1 week horizon

ii. Collateral adequacy over a 3 month horizon

iii. Ability to replenish collateral over a 6 month period

b. Counterparty risk (KRI):

i. Probability of losing 0.5% of Scheme NAV from any single counterparty default in a 12 month period (assuming a 50% loss given default)

5. Responsibility investment

a. Climate risk management:

i. USSIM assessment against its objectives/KPIs

ii. An assessment by the Risk team of how USSIM is delivering vs the Trustee’s net zero ambition (KRI)

iii. An assessment by the Risk team of how USSIM is delivering on managing physical risk (KRI)

b. ESG integration:

i. USSIM assessment against its objectives/KPIs

ii. An assessment by the Risk team of how USSIM is integrating ESG factors (including reporting and stewardship) (KRI)

6. Advice and support

a. USSIM advice:

i. The IC survey helps to assess the performance of USSIM’s advisory capabilities

ii. A qualitative assessment by the IC based on the advice delivered throughout the year

b. Support provided by USSIM:

i. Support to USS non-executive bodies and other stakeholders delivered through the year

Below you’ll find an analysis of some of the metrics within the scorecard that contributed to this rating. All the data is for the year to 31 December 2023.

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 the Liability Proxy and the funding improvements were both strong. While the latter was materially assisted by gilt yields changes, USSIM managed these impacts well.

The DB 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 115%
  Technical provisions is a measure of the scheme’s DB liabilities. It’s the value of assets we seek to hold to fund our liabilities. It considers 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’s funding position has improved further over the year.
- Self-sufficiency funding ratio is 105%
  Self-sufficiency reflects the value of assets required to pay, with a high probability, all the benefits members have built up so far while demonstrating a high funding ratio (more than 90%). This would be using a low-risk investment strategy without any further contributions. This funding ratio compares the value of assets we hold with this self-sufficiency amount. This funding ratio also improved 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 50%
The inflation hedge ratio is 51%
Interest rate and inflation risks are the most significant financial risks to the scheme's liabilities and funding ratio. The liability hedge ratios quoted above are for the self-sufficiency liability as described in category one.

The self-sufficiency Value at Risk (VaR) is £14.2bn
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 comparators.

These market comparators are intended to be alternative theoretical investment strategies that are investible. However, they may not always be within the risk appetite set by the trustee. We also use market indices to assess the performance of USSIM’s actively managed mandates.

The committee felt that USSIM’s performance in this category was not at the level achieved in other scorecard categories.

While the Committee recognised the significant effort expended in managing the minority of under-performing investments, in particular Thames Water, it acknowledged that this, and USSIM’s strategic foreign currency positioning, had a negative impact on scheme performance, with the scheme’s private market returns less than peers.

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 metrics below that we use to assess these risks were all rated green as they were within our agreed thresholds:

• Probability of running out of cash in one week

• Probability of running out of collateral in 12 months

• Probability of losing 0.5% of scheme NAV from any single counterparty default in a 12-month period (assuming a 50% loss given default)

5. Responsible investment

In this category, we assess USSIM’s climate risk management and its integration of wider environmental, social and governance (ESG) risks into its investment decision-making.

The scorecard 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:

Made significant progress on responsible investment, with a new policy and strategy
Collaborated with the University of Oxford on the viability of a transition aligned portfolio approach and the Cambridge Universal Ownership Initiative on Anti-Microbial Resistance
Continued collaboration with the University of Exeter on innovative climate scenarios, physical risk and transition risk factors

6. Advice and support

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

USSIM provides investment advice to the Investment Committee on a range of issues. USSIM also provides support to USS bodies and its stakeholders. The Investment Committee meets regularly to consider investment issues on behalf of the trustee.

It agreed that USSIM provided high quality investment advice, particularly to support stakeholder engagement to agree the Valuation Investment Strategy from the 2023 valuation and the Statement of Investment Principles.

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.

Further information

View our Report and Accounts for more information on our investment performance.

Report and Accounts

Retirement Income Builder investment performance

Assessing the investment performance of the Retirement Income Builder

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

The metrics used in the DB investment balanced scorecard

1. Investment return

2. Investment risk

3. Active management

4. Portfolio resilience

5. Responsible investment

6. Advice and support

Further information