The £68 billion ($88.9 billion) Universities Superannuation Scheme (USS), the UK’s largest private pension, will begin allowing members of its defined contribution funds to invest in private market assets beginning in February.
About 85,000 defined contribution members will have the investment remit of their funds in the “Default Lifestyle Option” expanded to include an allocation to private markets. The USS said this is the fastest-growing part of its investment portfolio. Private market investments previously have been available only to members of the pension’s defined benefit section. The USS’ Default Lifestyle Option is the default arrangement for its defined contribution members.
The pension’s private markets investments include 320 assets in infrastructure, property, private debt, and private equity. They include a “substantial investment” in on- and-offshore wind farms and major stakes in UK infrastructure such as Heathrow Airport, Thames Water, and NATS Holdings, the UK’s main air navigation service provider.
“We have always been clear that any DC investments must be within stringent cost boundaries that demonstrate value-for-money to our members and employers,” Bill Galvin, USS Group’s chief executive, said in a statement. “This exciting development is being done at no additional cost to them, in line with our overall investment philosophy.”
The private markets portfolio is run by a dedicated team in the USS’ investment management subsidiary, USS Investment Management Limited. The USS’ Private Markets Group was established in 2007 and has nearly 50 people employed specifically to run the portfolio, which is now worth more than £17 billion.
“The business has built up a strong skill set in investing and then stewarding these assets – bringing its size and scale to bear for the benefit of members,” said USS in a release. “The five-year performance of the private markets part of the USS pension scheme has been very strong.”
Private market assets have been difficult to provide to defined contribution members because they are not traded daily and incur high charges, the USS said. It cited a government consultation from last February that examined how to encourage defined contribution pension plans in the UK to invest more in illiquid assets.
In the foreword of that consultation, Guy Opperman, the UK’s Minister for Pensions and Financial Inclusion, wrote that “pension schemes ought to be thinking about the assets which help diversify and improve returns to beneficiaries. ” He said, “these same assets also drive new investment in important sectors of the economy – smaller and medium firms, housing, green energy projects and other infrastructure.”
The USS said the diversification opportunities provided by private market assets also reduce the expected risk. Besides providing long-term returns, investing in private market assets has a “knock-on effect” on the wider economy.
“By putting money into companies or property, we can help power our economy and benefit the UK infrastructure,” said USS. “We can also make a positive difference by influencing how a company is managed or developed, or act as stewards to address risks or issues and drive positive change.”
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