The UK's largest defined benefit scheme, the Universities Superannuation Scheme, saw its membership grew by more than 27,000 to 528,074 but noted rising inflation and the drive to net zero were still challenges to overcome.
The Universities Superannuation Scheme has published its annual report and accounts, covering the financial year to 31 March 2023, a year the scheme noted was "marked by significant volatility across financial markets".
USS also published its Task Force on Climate-related Financial Disclosures (TCFD) report where it noted it had reduced the carbon emissions intensity of its investments by 21 per cent since 2019, but "still has a long way to go to reach net zero".
USS membership grew by more than 27,000 to 528,074; this included 223,229 active members, 220,506 deferred members and 84,339 retired members.
According to the Pension Protection Fund, USS members account for almost a quarter of the fewer than one million people in the UK who are still actively paying into private DB schemes.
USS is in the 10 per cent of remaining DB schemes that are open to new members, the scheme is a hybrid scheme so around 168,000 members had supplementary defined contribution (DC) savings with the scheme at the end of March 2023.
Total assets under management were £75.5bn and the DB fund stood at £73.1bn, this was against estimated liabilities of £66.1bn, based on monitoring of the 2020 valuation.
The USS's DC assets came to £2.4bn, including £0.2bn of Prudential additional voluntary contributions (AVCs).
Economic volatility
With falls across all major asset classes, it was a tough year for investors, the scheme said.
It quoted supply disruptions from Covid-19 and political upheaval, both in the UK and globally with the war in Ukraine as contributing to inflationary pressures, volatility in financial markets, and rising interest rates – all of which led to the value of the scheme’s investments falling in the year.
Rising interest rates reduced the value of the scheme’s DB liabilities to a much greater extent. The scheme has significantly outperformed its DB liability proxy by 8.4 per cent per annum over the five years to March 2023, and by 5.5 per cent per annum over 10 years. This has driven a notable improvement in the scheme’s indicative funding position.
For the first time since 2008, USS is now reporting an estimated DB surplus of around £7bn which would make it 111 per cent funded on a technical provisions basis.
Investment performance
The USS Growth Fund, in the DC part of the scheme, averaged a return of 5.8 per cent p.a. over the five years to 31 March 2023, this was driven, primarily, by its allocation to private market assets.
Although the carbon emissions intensity of USS’s investments has reduced by 21 per cent since 2019, the scheme said it "still had a long way to go to reach net zero and will continue to actively engage with the companies it invests in to push for change".
Dame Kate Barker, chair of the USS Board, said: “Our latest report and accounts covers a year of major upheavals in the global economy and in the UK’s financial markets; a year in which policymakers’ efforts to tackle above-target inflation reversed more than a decade of declining interest rates.
“It was a tough year for investors. But our investments performed comparatively well and rising long-term interest rates reduced the value of our defined benefit liabilities at a rate that more than offset the fall in the value of our assets
Bill Galvin, group chief executive of USS said: “Through all the change and challenge of the past year, some things remained constant. I am pleased we maintained our high standards of service, with very good turnaround times on key processes driving positive feedback.
“Our strategic decision to manage more of the scheme’s investments in-house, at far less cost than the fees charged by commercial fund managers, also continues to be rewarded – with the latest independent analysis showing our investment management costs were £137m a year lower than the peer median.
“We will continue to work to demonstrate that all the decisions of the trustee are made in the interests of the members and beneficiaries of the scheme, and the priority the trustee needs to place on the security of the USS pension promise.”
