The Universities Superannuation Scheme (USS), one of the largest principal private pension plans for higher education institutions in the UK, reported an investment return of 20.1% for the fiscal year ending March 31.
However, while the plan’s assets rose to £60 billion from £49.8 billion, the liabilities increased from £59.8 billion to £72.6 billion, leading to an increase in its deficit. The USS said the main reason for the growth in deficit is the large drop in long-term interest rates during the year.
Despite the 20.1% returns, the fund still lagged the 22.7% appreciation recorded by the reference portfolio, as well as the 20.5% rise in the gilts proxy for the plan’s liabilities. As a result, the pension underperformed the reference portfolio by 2.05%
BBC News reported that the USS deficit soared to £17.5 billion, making it the largest deficit of any UK pension fund. However, the USS argued that this was misleading.
“Members may have seen a larger deficit reported in the media recently of £17.5 billion,” said USS Chief Executive Bill Galvin in a letter to plan members. “That calculation is based on accounting rules and is not the figure that drives the benefit and contribution decisions for the scheme.”
Galvin said that figure assumes the pension’s assets are wholly invested in AA rated company loans. The “assets are invested in a diversified portfolio of equities and infrastructure, as well as government and corporate debt,” he said, adding that the “investment strategy is to look to participate in the growth of the global economy to contribute to the cost of pension provision, but only to the extent that our sponsoring employers can make up the difference if growth is lower than anticipated.”
The USS said that the pension’s funding levels remained stable at 83% in the year, and that they continue to be lower than the 89% level judged at the last formal valuation in 2014. It also said that its 2017 valuation is “underway with a full review of all assumptions,” and added that “initial analysis points to expected future investment returns being lower across all asset classes.”
The pension also boasted that its returns come at a much lower cost than its peers—as much as £34 million less expensive per year, in part because it actively manages more than 70% of its assets in-house, rather than paying external management fees.