UK university pension fund head defends investment strategy

The head of the UK university sector’s £60bn pension fund has defended its investment strategy after revealing that an extra £480m to £560m a year is needed to maintain the current level of benefits.

The Universities Superannuation Scheme (USS) has around 400,000 members, including academics at some of the UK’s most prestigious universities. But the fund has triggered an increasingly bitter row with its membership over its latest ask for an extra half a billion a year in cash contributions.

Dr Ben Goldacre, an Oxford university academic and popular science writer, has accused the USS of using “dogdy assumptions we wouldn’t tolerate in research”, as he and his colleagues face contribution hikes or fresh cuts to their benefits just three years after benefit curbs were announced in 2014.

As the latest row threatens to spill over into industrial action, Bill Galvin, group chief of the USS, has defended the fund’s performance, telling the Financial Times in a recent interview that the fund had generated average returns of more than 12 per cent a year over the past five years.

“Over the past five years, the active investments have outperformed, with the value of that at around £1.1bn,” said Mr Galvin, a former chief executive of the Pensions Regulator.

“So the funding position would be much worse if the investment team hadn’t outperformed,” he said. “It’s done pretty well”.

The USS said it measured this performance against internal benchmarks.

Mr Galvin said damped expectations for future returns are creating the current funding “challenge”.

“The challenge now is the cost of pensions going forward because we’re having to invest now in a market in which assets look very expensive, and the prospects for future returns from those, we believe, have substantially reduced,” he said.

USS has proposed lowering its assumptions for future asset growth, calculating more cash contributions are needed to service future pension costs — which it estimates have risen by 35 per cent since the scheme’s last actuarial valuation in 2014.

The USS proposals would see combined contributions from both employers and employees rise from the current 26 per cent of salary to between 32 and 33 per cent, or about £480m-£560m a year, based on current payroll for the sector.

But the USS is under fire from academic unions for being too cautious with its investment strategy.

The £60bn “defined benefit” fund is still open to new joiners, but management plans to reduce the fund’s holdings of growth assets from 60 per cent to 40 per cent, and raise its fixed income allocation from 40 per cent to 60 per cent, over the next two decades.

Mr Galvin said equity returns were “likely to be higher than these fixed-income assets” but added: “It’s not guaranteed, and it’s not guaranteed over any period”.

He said the investment approach for the scheme was constrained by a “risk budget” previously agreed with employers.

“It’s a very carefully calibrated risk budget in the context of saying to the employers: If we get this wrong, you’re the ones that will have to put your hands in your pocket,” he said.

“So let’s calibrate this investment strategy in a way such that it can’t go too wrong,” he added.

But that approach is fuelling anger among the University and College Union, the trade body for academics, which has argued that contribution rises can be avoided through a change in investment tack.

The USS’s own calculations suggest the scheme is in £8bn surplus when measured on a “best estimate” basis, compared with a £5.2bn shortfall, when measured on a “technical provision” basis, or a valuation based on the scheme’s actual assets.

But Mr Galvin says the fund has gotten to a point “where getting the assumptions wrong becomes too big a risk for the employers to take.”

He added: “We’re being simultaneously and very loudly criticised on both sides. There are [also] people over here saying: ‘It’s ridiculous the amount you’ve got invested in equities . . . it’s irresponsible and you should have invested in bonds a long time ago.’”

Mr Galvin insists a consultation over proposed increases in contributions is being as “run as transparently as possible”.

A petition calling on USS to show the workings behind its assumptions has attracted more than 1600 signatures.

“It’s difficult for members, it’s difficult for the employers,” said Mr Galvin. “But it’s our duty to play out these challenges and to expect that the sector will understand and respond to them. And it’s a dialogue. We’re expecting the employers to come back with views.”

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