USS Investment update - Managing the impact of Covid-19
The last few weeks have witnessed the biggest stockmarket crash since 2008 and the difficult news keeps coming. Leisure industries are being hit hard and small businesses and more financially leveraged businesses will suffer. Following several years of relatively benign conditions, 2020 has changed that course in a dramatic way.
As a long-term investor, USS has had to navigate its way through shocks like this before and look to the other side. There is no crystal ball, of course, but instead there is a team of incredibly bright individuals – USS Investment Management - whose sole job it is to ensure that the Scheme is in a position to pay the pensions, as they fall due. We only have one client – USS – and so our focus is 100% on serving the interests of our members.
So what are we doing to ensure the long-term health of the scheme? To begin with we are not panicking – we are calmly navigating our way through this storm. We believe this will ultimately be a short to medium term shock (albeit a very severe one) but that this is not likely to last for a decade or more, in the way that the great financial crisis of 2008-9 did. Nevertheless, the impact over the coming months will be profound, as economic activity in many sectors of the economy will slow down significantly or stop, and this may well have an impact on expected returns over longer horizons. We will consider these issues carefully and without undue haste, as we work through the scheme valuation due at March 2020. As always, we will work closely with our sponsoring employers to ensure that current and future pension promises are secure, backed by our assets and their long term ability to fund the scheme.
That said, we are not just sitting on our hands. We are working hard to ensure that we have the cash and liquidity to survive the storm and are in a position to thrive once the wind and waves abate somewhat; we are seeking to take advantage of opportunities where they present themselves. This is particularly true in fixed income, which are lower risk assets that have a more secure return. The assets we hold here have performed very strongly in recent weeks (especially so in the USA), and have in general done better than UK Index-linked government bonds that many pension schemes invest in.
In recent days and weeks, we have also been optimising our fixed income assets, trading out of those that have performed best in order to buy other bonds that we think will perform better over the medium term.
We are also working closely with the management teams of the companies in which we hold an ownership interest, to help them as they manage through this difficult environment. As a UK-based pension scheme with around 40% of our assets held here, we are doing our bit to support the broader economy. These companies form part of our fast-growing portfolio of Private Market assets, and USS was an early investor in private companies that are very important economically. Indeed, we continue to look to invest more in private assets as we seek opportunities that will pay off over the long term.
We have a long-term investment strategy that is designed to ensure that we can pay pensions as they fall due, and we do this in a cost-effective manner. Our stakeholders (our members and their employers) want us to invest in a manner that over time will generate the sort of returns that will keep the scheme affordable. This involves a recognition that we will experience volatility in the performance of our asset portfolio from time to time. And this is one of those times. But we have the backing of some very strong institutions who stand behind and secure our members’ pensions, and we are of a size and sophistication that means that USS will survive and thrive, for our members’ benefit.
Simon Pilcher
USS Management CEO
Universities Superannuation Scheme Limited