Universities Superannuation Scheme is now one of the biggest pension schemes in the UK in assets under management (AuM) – with a value of £60.5bn, according to its latest annual Report and Accounts.
In the last financial year, investment returns of more than 20% saw the value of its assets grow by £10.2bn*.
The investment team at USS Investment Management, the wholly-owned investment management subsidiary, outperformed its strategic, rolling five-year benchmark by 0.5%** – contributing £1.1bn of added value to the fund over that time, net of costs.
The cost-effective move to bring more investment talent in-house at USS Investment Management, where it improves expected returns after management costs, continues to yield results: 73% of assets are now managed internally (2016: 69%); investment costs per AuM are now 32 basis points (bps) – 7bps lower than 15/16 and 15bps lower than 13/14.
Roger Gray, Chief Investment Officer, said:
“The scheme’s assets generated very high absolute returns over the past year.
“We underperformed against the strategic benchmark for the year. Our performance over the long-term has continued to be strong, and we are confident that the breadth and diversity of assets and capabilities deployed for the scheme will continue to pay off over longer periods.
“The strategy of bringing more investment management in-house, where cost effective, has also continued to produce value for money for members and has helped us to contribute more than £1bn in added value to the scheme, relative to the five-year rolling benchmark.
“The investment outlook is being dampened as low government bond yields have, to varying degrees across asset classes, fed in high market valuations. This ‘reduced returns’ outlook is an important consideration for pension schemes, like USS, that offer defined benefits.”
On the administrative side of the scheme, the trustee has delivered the most challenging change programme the scheme has ever experienced in its 41-year history, successfully and within a very tight timescale
- In April 2016, the Retirement Income Builder was launched: a career average defined benefit (DB) pension for all active members.
- Six months later, a £55,000 salary threshold was introduced to the Retirement Income Builder and a new defined contribution (DC) offer – the Investment Builder – was launched.
- The new DC offer, based on extensive member research and industry best practice, was automatically applied to any member contributions above the new DB threshold but was also open to all members as an optional extra, giving greater choice and flexibility.
- A new online portal was created and a dedicated service engagement team was established – both offering distinct ways of supporting members and employers through the scheme’s changes and beyond.
Delivering all of these transformations involved building greater capabilities and moving to an entirely new IT platform, one capable of supporting the new hybrid model and of progressively improving the administrative arrangements for employers and members alike.
Bill Galvin, Group Chief Executive Officer, said:
"This has been a year of important milestones for USS.
“The move to a hybrid model – offering more options and greater flexibility for how members can plan for their retirement – has involved the transformation of our administrative and IT platforms and the development of new products and support services.
“A great deal of research has gone into making sure that USS is a scheme that works for members from payslip to portfolio to pension. So it’s pleasing that members continue to rate the service highly – but we can, and will, improve.
“Our ambition is to be the sector’s pension scheme of choice - to maximise the benefits of scale, mutuality and specialisation in our investment solutions and administrative services, so that our members have the best possible arrangements for their retirement.
“Historically low gilt yields and reduced expectations for future investment returns present challenges, which we are working with stakeholders to resolve.
“We don’t yet know the outcome of the 2017 valuation but I have no doubt that USS will continue to provide high quality pension arrangements tailored to the needs of the sector.”
Professor Sir David Eastwood, Chair of the USS Board, said:
"It has been a remarkable year, coloured by global events that have signalled change and brought uncertainty.
“Initiated by our sponsors after the 2014 valuation, USS itself has been through a period of unprecedented change. This has been as challenging for our sponsoring employers and members as for the trustee company, and the transformation that has been achieved is a testimony to the professionalism and commitment of everyone involved.
“We have met many challenges this year, and I have no doubt there will be more to come, but we can look to the future with confidence in the capability within USS to serve the sector it was created by, and for.”
*£10.2bn growth is principally £1.5bn investment income and £8.5bn increased market value; Defined contribution investments of £0.5bn take the total value of scheme assets to £60.5bn.
**The scheme’s investments underperformed against the one-year strategic reference portfolio benchmark for 16/17 by 2.05% due to underweights in index-linked gilts and US equities.