Universities Superannuation Scheme Limited (USS) has published its annual Report and Accounts for 2015/16, a period in which the trustee has continued its transformational investment in both the asset management business and in pensions administration systems.
Bill Galvin, Group Chief Executive Officer, said:
“Through a period of falling interest rates and universal challenges for pension scheme funding, the trustee has looked to manage the scheme sustainably and for the long term. The scheme’s investments have contributed substantially to this goal by significantly outperforming benchmarks over one, two and five years. New technology has enabled the efficient delivery of the new, hybrid benefit structure ensuring USS can continue to deliver secure and good value pensions to the higher education sector, within the risk parameters agreed with our stakeholders.
“We are in the process of implementing the most significant changes to the scheme in 40 years. The changes to the benefit arrangements are substantial and the most visible to our members, but behind the scenes we have also changed our pension administration system, and many of our operating processes so that we are able to deliver the very best service to employers and members. We are carrying out this work in close collaboration with, and incredible support from, our sponsoring employers and we are grateful for their support through this unprecedented period of transformation.”
The changes have been phased in, with the first phase implemented on 1 April 2016 bringing in the Retirement Income Builder, a new defined benefit section available to all members, replacing the previous arrangements for future pension benefits. In October the second phase of the changes will see the introduction of the new Investment Builder, a new defined contribution section of the scheme.
The annual Report and Accounts show that in the year to 31 March 2016, USS’s total assets rose to £49.8 billion*, helped by investments outperforming the scheme’s benchmarks by 2.38%. This outperformance contributed an additional £1.1 billion to the scheme during the year. However, the estimated value of the scheme’s liabilities has also increased from £57.3 billion to £59.8 billion. This has decreased the funding level from 86% in 2015 to 83% reflecting an implied deficit of £10 billion.
Roger Gray, Chief Investment Officer, said:
“USS is a long term investor and is able to see through shorter term market fluctuations; whilst this year’s performance was exceptional, we remain focused on our ability to deliver strong returns over longer periods. On a five-year basis, returns have also been very good, with 1.1% annualised outperformance contributing an additional £2.2 billion above the scheme’s strategic benchmark.
“Our in-house active management delivers an integrated, aligned and high performing investment solution for our stakeholders. During the year, we have further developed our direct investment capabilities, particularly in private markets and public credit, with personnel added in both areas. Our team continues to invest across traditional and alternative assets as demonstrated in last year’s acquisition of Moto, the UK’s largest motorway service operator, and an investment spanning property, infrastructure and retail business. We continue to seek investment opportunities which can deliver returns to meet the scheme’s long term inflation-linked liabilities.”
USS, like most pension schemes with a defined benefit element, is facing a challenging funding environment, the further decline in long-term interest rates, and the continued uncertainty in the financial markets continues to impact liability values. Despite the exceptionally good performance relative to returns across investment markets, asset values have not kept pace with the rise in the value of the liabilities. The trustee monitors the funding position carefully, and remains in close contact with the scheme’s stakeholders – the employer and member representatives - so that there is appropriate transparency and oversight of both management of the scheme, and the impacts of the financial environment on funding levels.
The change in funding position from 86% in March 2015 to 83% at March 2016 is within the boundaries the trustee set for possible variations. The stakeholders, supported by the trustee, receive regular updates on the funding level and will formally review the preliminary results of the valuation in 2017.
Bill Galvin, Group Chief Executive Officer, said:
“USS is backed by 370 sponsoring employers in the higher education sector, which includes the UK’s oldest and most prestigious universities. The trustee’s view is that the employers’ collective ability to provide financial support for the scheme remains robust so it can maintain a long term view of funding, taking measured investment risks through the economic cycle to deliver valuable pension benefits at an acceptable cost. We are dedicated to the sponsoring employers and our members; we will continue to focus on working with them to deliver secure, valuable, retirement savings options which are tailored to their needs.”
USS’s funding position is formally reviewed once every three years, in the form of a triennial valuation. The next valuation is due as at 31 March 2017. Work has already begun to prepare for that valuation, with a review of the financial support available from the sponsoring employers. This work is being carried out in close collaboration with the scheme’s sponsors.
Total operating costs have increased in the year, and a number of exceptional costs have also been reported. Costs have been driven by an increased headcount to support implementation of the changes, the development of direct investment capabilities and an increase in variable incentives earned in the year as a result of the reported outperformance.
* Assets under management as at 31 March 2016 totalled £49.8 billion. The total assets under management as at 30 June 2016 increased to £52.9 billion.