2nd Largest UK Pension Shifting Investment Powers Away From Trustees, Towards Experts

board room chair

The Universities Superannuation Scheme (USS) is making some major governance changes, as a plan is well underway to shift investment responsibilities away from trustees and towards experts.

Investment decisions that were previously made by trustees – such as strategic asset allocation – will now be the responsibility of investment staff.

However, trustees will still oversee the process.

From Investments & Pensions Europe:

The Universities Superannuation Scheme’s (USS) aim to remove the role of strategic asset allocation from trustees’ responsibilities is nearing completion, as its internal manager looks to more delegated responsibilities.


USS, with £41.6bn (€51.2bn) in assets, has been looking to amend its investment governance structure to shift more execution to experts and away from its trustee board.

Speaking at a National Association of Pension Funds (NAPF) conference on governance, USS chief executive Bill Galvin said the fund had taken some investment governance ideas from Canadian and New Zealand pension funds.


“What we have been working really hard on is delegation to the right level of the organisation, where experts are making decisions within clearly defined parameters.”

He said the trustees’ investment sub-committee still owned the detailed strategic allocation but added that this would be passed on to USSIM, with the committee taking charge of the reference portfolio,

“The critical thing is complete transparency about decision-making in the in-house asset manager, and that is overseen by the investment committee,” he said. “But the decisions are delegated.”

USS chief executive Bill Galvin also vocally wondered whether UK trustee boards could adequately run pension systems. From IPE:

He criticised the current legal requirements for UK pension trustees as “inadequate” and said the Trustee Toolkit – TPR’s qualification to sit on a trustee board – was fairly minimal in the context of EU legislation for fit and proper persons.

The USS chief also questioned whether UK’s trustee boards had the range of capabilities required to run pension schemes in today’s environment.

He said schemes’ focus for member and employer representation on trustee boards was a strange concept, whereas other international models focused more on capability.

“I find the issue of representation really challenging,” he said.

“It must be very difficult for someone put on a trustee board [to assume] they will represent members. How do you do that? How do you know? Do you assume what you want is what they want?”

Galvin praised the Ontario Teachers’ fund, where trustee members all fit a jointly agreed job description between trade unions and sponsors.

The Universities Superannuation Scheme covers employees at many UK universities. It manages $63 billion in assets.

Some Pension Funds Want Longer Private Equity Deals; Funds Bypassing PE Firms To Avoid Fees

flying one hundred dollar billsPrivate equity investments typically operate on a five-year timeline. But some pension funds are talking with private equity firms about longer-term deals. And at least one pension fund is cutting out the middleman and buying companies outright to avoid fees.

Reported by the Wall Street Journal:

Canada Pension Plan Investment Board is “open to conversations” with private-equity firms about partnerships to buy and hold companies for longer than the traditional five-year investment period, said Neal Costello, a London-based manager at the C$227 billion ($203 billion) pension fund.

Blackstone Group LP and Carlyle Group LP are among private-equity firms exploring how they can do longer-term deals with investors such as CPP and sovereign-wealth funds, people familiar with the firms have said.

Such deals could represent a major shift in the private-equity industry. The firms may use their own balance sheets rather than their funds to buy large companies with investors, people have said.


Large institutional investors are balking at paying expensive private-equity fund fees, and they are seeking to hold investments for longer. CPP is already buying companies outright, in addition to investing in private-equity funds and taking direct stakes alongside those funds. Earlier this year, it bought insurance company Wilton Re for $1.8 billion.

“That’s a very long-term asset,” Mr. Costello said Thursday at a conference in London organized by the British Private Equity and Venture Capital Association. “We can look at a 20-year investment period.”

Universities Superannuation Scheme, a London-based pension manager of £42 billion ($67.6 billion), would also consider longer-term deals in partnership with private-equity firms, according to Mike Powell, head of the private markets group at USS Investment Management.

“If we find good assets, we want to hold on to them as long as we can,” Mr. Powell said in an interview at the conference.

USS has already bypassed private equity and other fund managers entirely: It owns direct stakes in London’s Heathrow Airport and NATS, the U.K.’s air traffic service. Investing directly in infrastructure projects and companies is a way of avoiding paying high fees to fund managers, Mr. Powell said.

One problem that arises with a longer timeline is the issue of fees; most pension funds would balk at the additional expenses that accompany PE partnerships longer than five years. From the WSJ:

An obstacle to doing longer term deals with private-equity firms is figuring out how to pay the deal makers for such transactions, Mr. Powell said. Private-equity firms typically charge an annual fee of between 1% and 2% and keep 20% of profits when they sell a company, a model that won’t work if assets are held for many years.

“How do we remunerate them over the long term?” Mr. Powell said. “That’s up to Carlyle and Blackstone to come up with the answer.”

Ontario Municipal Employees Retirement System, a Canadian pension manager, has stopped investing in private-equity funds to avoid paying their fees, Mark Redman, the European head of its private-equity group said at the conference. The pension fund is buying companies directly instead.

The switch will benefit the pensions of the Canadian workers such as firefighters and policemen by saving them money, Mr. Redman said.

“The amount of fees that we were paying out for a fund, 2 and 20 [percentage points] and everything that goes with that, was a huge amount of value that we were losing to the fund,” Mr. Redman said. “If we could deliver top quartile returns and we weren’t hemorrhaging quite so much in terms of fees and carry that would mean that we would be able to meet the pension promise.”

Pension funds might have some leverage here — Pension360 has previously covered how PE firms want more opacity in their dealings with pension funds. The firms have been upset about the amount of private equity information disclosed by pension funds as part of public records requests.


Photo by 401kcalculator.org

UK’s Largest Pension Fund Foresees “Difficult” Year


The UK’s Universities Superannuation Scheme (USS), the country’s largest pension fund, is preparing for the possibility that its unfunded liabilities could be larger than reported, and its financial condition more serious than its 85 percent funding ratio might suggest. From Financial News:

USS pays out £100 million worth of pensions a month, and its team of fund managers and traders in London undertake £1 billion worth of transactions every day. The team beat its targets last year, producing a 7.9% return against benchmark performance of 6.5%, according to its annual report to March 31, 2014, published late Wednesday.

Despite all this, the pension fund is struggling financially. It is currently undertaking a full formal valuation of its assets and liabilities as of 31 March 2014, a lengthy and complex process which it is expected to complete by the end of the year.

The pension scheme has provided an interim estimate of its funding level at the same date – 85%, implying a deficit of around £7 billion. This is a fall from the deficit reported at 31 March 2013 – £11.5 billion – reflecting a recovery in markets in the meantime.

However, USS’s trustees cautioned that the final figure might be “materially” different to £7 billion, and could be larger.

Administrators of the fund, along with labor groups and other parties, are already planning various cutbacks and cost-saving measures to head off the potential news of higher-than-believed liabilities. Reported by Financial News:

The main proposals are to close the old final-salary section of the scheme to its existing members – it was closed to new joiners in 2011 – and to introduce a new cap on the pensions that can be built up under the new career-average benefits section.

At the same time a new defined-contribution section, offering pensions that aren’t guaranteed, would be opened so that any members earning more than the cap can put their extra savings into it.

According to Universities UK’s July proposal: “This threshold has not yet been set but, depending on affordability, Universities UK’s aim is to maximise the number of scheme members who will fall below the salary threshold.”

The Universities Superannuation Scheme became the largest pension fund in the country this year after its assets grew to £41.6 billion.