USS strikes £300m deal with with affordable housing investors

The deal between USS and Reit Residential Secure Income, which invests in affordable shared ownership, retirement and local authority housing, is touted as the first standalone investment-grade financing for shared ownership housing, an arrangement designed to help first-time buyers onto the housing market.

The long-term secured debt facility provided by USS will afford Resi the funds it needs to grow its shared ownership portfolio, according to the latter. Resi will initially draw down £34m of the facility, which will be secured against the company’s 166-unit shared ownership portfolio in London’s Totteridge and Clapham Park. 

Shared ownership “has proven highly defensive throughout the COVID-19 crisis”, according to an ReIS statement, and represents a move by USS to improve its risk-adjusted returns.

It is undeniable that events have not moved in our favour

Bill Gowling, Universities Superannuation Scheme

A blog post about the decision published on Wednesday by USS head of private credit Ben Levenstein read: “As a long-term investor, USS Investment Management has invested in property for many years due to the steady returns we can achieve which help pay members’ pensions as they fall due.” 

He argued that the arrangement was a way of providing attractive returns while hedging against future uncertainty arising from interest rate or inflation movements.

“For ReSI, USS is an ideal investor as we are able to make a multi-decade commitment that allows the team to manage their business more effectively to meet their long-term requirement to develop social housing and then manage tenants,” he wrote. 

“For USS, we now have an agreement in place that is linked to inflation and gives us an attractive return as well as making a positive social impact.”

Commenting separately on the deal, Eamon Ray, senior director, USS Investment Management, said: “This facility is an exciting opportunity to create a significant scale portfolio of affordable homes, delivering long-dated inflation-linked cashflows to USS with asset and cash flow backing.”

Market conditions pose significant challenges for USS

While deals such as that struck with Reis will undoubtedly be welcome, new figures from the USS trustee’s Financial Management Plan Monitoring report showed long-term trends, coupled with the impact of Covid-19, have had a significant impact on its funding.

The scheme’s technical provisions deficit of £19bn in May was £3.8bn more than the equivalent figure in April this year, while its self-sufficiency deficit of £34.3bn was up £3.6bn over the same period. 

Additionally, though its asset value showed an increase of £1.9bn, the scheme’s future service cost likewise saw a 2.5 per cent increase over April’s 36.7 per cent, sitting now at 39.2 per cent.

As of March 2018 – the last valuation date – the technical provision deficit, self-sufficiency deficit and future service cost figures were £3.7bn, £20.8bn and 28.7 per cent respectively.

A combination of Covid-19 and unwelcome long-term trends was cited by USS group chief executive Bill Galvin as a reason why the FMP reports “do not make for easy reading”.

“It is undeniable that events have not moved in our favour,” Mr Galvin wrote. 

“Some of the short-term risks we were focused on – given their importance to having continued confidence in our long-term projections – have started to crystallise.”

Mr Galvin pointed out that these figures are a result of long-term trends and influences, too, such as better life expectancy, greater regulatory burdens, volatile financial markets and low ‘real’ interest rates, meaning “the promise of an inflation-protected income for life in retirement” is becoming “more expensive”.

“Current market conditions are adding to these challenges,” he said.

'Difficult decisions' must be made

Previous attempts at correcting long-term funding issues for USS have been met with fierce opposition, not least from the University and College Union, which has staged industrial action on a number of occasions to combat what it argued were unacceptable rises in contributions for USS members.

UCU has said that its USS members have seen the value of their retirement benefits fall, all while the cost of their pension has risen and their pay has been held back. USS's final salary benefits were replaced with career average revalued earnings pensions in 2011, and member contributions have increased to 9.6 per cent last year from 6.5 per cent of salary in 2011, with a rise to 11 per cent anticipated.

A spokesperson for UCU told Pensions Expert: “We are currently involved in discussions around the assumptions and methodology for the valuation. We hope for a strong covenant to allow for a long-term view of USS that recognises the underlying strength of the higher education sector and ensures USS remains an attractive scheme for current and future members.”

In his update, Mr Galvin wrote: “While the security of our members’ pensions in good times and in bad is our over-riding concern, as trustee, we appreciate that affordability is a key issue for members and employers alike.

“We are ready to work with you and our other stakeholders, UUK and UCU, to address these challenges. We must make sure the scheme is in the strongest possible position to deliver secure financial futures for our members and their families,” he continued.

“It appears likely, however, that the JNC will face some difficult decisions in the autumn and over the course of the 2020 valuation.”

Asked what those difficult decisions might entail and whether anything – for instance further increases in employee contributions – had been ruled out, a USS spokesperson told Pensions Expert no decisions had yet been made.

"USS (as trustee) determines the overall contribution rate required to fund the benefits promised to its members – that is, pensions already promised (which are protected by law) and the price of making new promises. That will be established in autumn, following our consultation with UUK," they said.

"Our Joint Negotiating Committee decides what pensions are promised to our members, and how the contributions required to fund them are split between employers and members. It will consider both points based on our conclusions in the autumn."