Assessing the performance of our investment strategy

The Retirement Income Builder, the defined benefit (DB) part of USS, has performed well in recent years. At 31 March 2025, the scheme was in surplus — the value of the assets in this part of the scheme, at over £73bn, was around £10bn more than we estimated would be needed to cover the benefits that members have already accrued at that point in time.

Given this significant improvement from a few years ago, it is interesting to ask how this position has arisen and if the investments have performed as expected.

Answering this question is one of the responsibilities of my team and me. As Chief Risk Officer, I oversee risk-taking across the organisation and also provide assessments for the Investment Committee (a sub-committee of the USS Board) of how well our in-house investment management team has performed in running the scheme’s investments.

Protecting members’ pensions

When answering the question of how well our investment team has performed, a simple assumption would be that we would just look at the return that is generated. But this is only part of a much bigger picture. We actually have to consider all the objectives the trustee is asking the team to achieve.

The trustee is subject to important fiduciary duties which extend to how it sets the investment strategy for the scheme. Having set the investment strategy, the trustee delegates the implementation of it to USSIM. In her Views from USS article Investing for a purpose, published in July 2025, Dame Kate Barker, Chair of the USS Board, made an important point regarding the scheme’s DB fund:

Comparing the returns achieved by our diversified portfolio, which has multiple objectives, to a single asset, asset class or public market benchmark overlooks a fundamental point: our approach will look different to someone investing for a different purpose.

The DB fund has a different purpose to some other institutional investors (such as some endowments or pure defined contribution schemes) and is thus managed differently with a specific set of objectives and constraints.

Its primary objective is to provide USS members with a guaranteed inflation-linked income for life in retirement. So, we have to be sure the scheme will have enough money to meet its commitments to members (its liabilities) now and in the future.

We invest contributions from members and employers to fund those benefits and this brings with it two further objectives.

• We want to avoid the need for higher contribution rates and/or reductions to future benefits if we think we might not have enough money (i.e., if the market value of the scheme’s assets is lower than the present value of the liabilities). This means investing in a way that dampens volatility in the funding position.
• And, given our sponsoring employers effectively underwrite members’ pensions, we want to ensure we are not taking more investment risk than they can support. This means investing within the employers’ risk budget.

We periodically discuss our investment strategy with participating employers — at least as part of every actuarial valuation. See, for example, the scheme’s 2023 valuation.

Striking the right balance

We take investment risk in broadly two ways.

Firstly, through not fully hedging the DB liabilities. Hedging involves investing in assets like bonds that offer returns linked to UK interest rates and/or inflation, both of which impact the present value of the scheme’s DB liabilities. All else equal, as interest rates fall or inflation rises, the value of the scheme’s liabilities rise. So, the more we hedge, the more we dampen volatility in the funding position — and vice versa.

Secondly, by investing in growth assets, like stocks and credit, with the aim of generating returns to help pay benefits and so reduce the contributions needed to fund them. However, their value can fluctuate out of sync with the scheme’s liabilities (as above), which can drive volatility in the funding position in the short-term.

So, the balance we want to strike is generating investment returns, within our risk budget, whilst protecting the funding position of the scheme.

Within this, the trustee sets USSIM multiple objectives and constraints, including: how well the investments track the scheme’s liabilities; target levels of growth investments such as equities and real estate; measures of resilience to potential big market moves; and the integration of financially relevant environmental, social and governance factors such as climate change.

Setting the scales

It is for this reason that USSIM’s performance is measured and assessed using a range of different metrics which show how well these multiple objectives are being met. The trustee’s Investment Committee assesses overall performance against those objectives using a balanced scorecard.

For example, the metrics that are considered in the balanced scorecard assessment include measures of return on an absolute basis and also relative to the liabilities.

At 31 March 2025, the returns on the DB fund were down 1.4% over one year on an absolute basis and up 1.7% per annum (p.a.) over five years. But relative to the liabilities they were up 10.2% over one year and up 14.1% p.a. over five years — helped to a degree by rising interest rates.

Whilst the absolute returns may not have been as high as some equity markets, this is not what the investment team was asked to do.

The investment strategy for the DB fund is designed to build the income that is promised to members. The objectives therefore include a focus on tracking the scheme’s liabilities, seeking to ensure that the assets of the scheme are enough that we expect to be able to pay out the promised income.

The measures of performance relative to liabilities show that the assets of the scheme have outperformed the liabilities. This has led to the scheme being in surplus and, based on current values, well able to meet the promises of retirement income that have been built up. And the measure of this — how well-funded the DB part of the scheme is — is another metric that is used to assess performance.