The UK’s biggest pension scheme wants savers for the new pensions it is introducing to benefit from two philosophies in which it has faith – do-it-yourself and diversification.
The Universities Superannuation Scheme does more DIY than any other UK scheme – 70% of its £49 billion in assets are run by its in-house investment team. It also diversifies more than many schemes beyond the conventional equities and bonds mix, making less liquid longer-term private investments.
But it is unusual to apply these approaches to the products USS is introducing in October – they are defined contribution pensions.
Like many UK schemes, USS has a heavy deficit from the guaranteed payments its defined benefit pensioners enjoy, so is introducing DC pensions, in which the final payment is not guaranteed but depends on the market performance of a member’s savings.
But within a year, assets in the new DC funds will start to be run by the USS investment team that runs the DB funds, according to Howard Brindle, the chief operating officer of USS.
Brindle is unworried by the conventional wisdom that DC funds should stick to more liquid investments.
Naming two long-term assets, a UK motorway services group and a US container terminal, in which the USS in-house team has invested, Brindle said: “We truly believe that when we buy the Moto service stations or Port in Virginia it offers value in the long term. If we can find a way to offer that to DC members, and give them the same benefits of the broad diversification and the active management of the allocation, we think they will have value for money.”
The new DC section, called the USS Investment Builder, is part of a hybrid system USS set up to deal with its DB deficit. At the end of March 2013, the fund was 77% funded, according to its accounts, improving to 86% by that date in 2015.
From October 1, any USS members who earn more than £55,000 will find that pension contributions on salary above this level do not entitle them to any further DB pension; rather, they go into a DC pot.
Over the past five years, not only have assets at USS overtaken those of the BT pension fund, the scheme has become one of the largest in-house institutional investors. If successful in this DC venture, USS will be one of the first schemes in the UK to have DB and DC managed under a single trust. Despite an increase in the number of DB pension funds building up in-house investment teams, practically none has so far branched out into providing in-house investment options to their DC funds.
Brindle has been instrumental in developing the in-house capability at USS.
When he joined in March 2012, he was faced with the largest spreadsheet he had ever seen and was surprised at how small the team was. But this was no ordinary spreadsheet. It contained data on the entire fund’s holdings and used a complex system of macros to calculate exposures. His entire team could have fitted into a Mini.
It was quite a change for Brindle. Before joining USS, the first pension fund he had worked for, he was head of Emea transfer agency operations at JP Morgan, and chief administration officer of Lehman Brothers Asset Management, which collapsed with the bank in 2008.
Although USS is the UK’s largest pension scheme, he found it needed a simpler set-up than an asset manager, because it had to look after just one pool of assets. At an asset management business, there would be multiple pools of capital in segregated client accounts that had to be overseen separately. But the USS chief investment officer, Roger Gray, wanted to branch out beyond the conventional pensions mix into illiquid, private and direct investments – and that meant change.
Brindle said: “Over the past four years, we’ve been on a journey. When I started, we had mostly equities, fixed income and property. We had a few hedge fund stakes, but not many. Roger had the ambition for a fully diversified portfolio – public and private, multiple asset classes, geographies, instruments – and we didn’t have an operating platform at the time that would support it.”
Brindle and his team have created an internal operations system that allows its investment team freedom and speed to react to opportunities in the market. The platform, which Brindle claims is “something Google would have come up with” has won admiration from other pension funds building an in-house team, who have asked if they can take a it on a test-drive.
He said: “What you can achieve with one or two really good systems people is tremendously powerful. We started with a blank sheet and have moved on in a nimble way – we’re actually at the forefront of what pension funds do.”
Brindle’s next challenge is to make the necessary changes to allow these myriad investment choices available to DC members of the USS scheme.
While the DC assets at USS, which Brindle estimates will grow by around £200 million to £300 million a year, will initially be dwarfed by the DB fund, the scheme could soon become one of the largest in the country.
Initially, these DC assets will be invested through funds run by third party managers, the names of which are yet to be announced, but Brindle wants at least some of the DC assets to be invested by the in-house team within 12 months. A system of unitisation will be implemented to show clearly what is owned by either the DB or DC funds.
He said: “Because of the reasonably small scale at the start, we won’t [offer our own investments] on day one, but I am hopeful that, in 2017, we will have some USS Investment Management products within the default funds. Within a year and a half of DC launch, we hope to have a fuller spectrum, including private markets, available to DC members.”
Looking ahead, Brindle said: “We need to consider drawdown much sooner – we must let people keep their money in the scheme once they retire. We want to be the pension service of choice for the higher education sector and help members make the right choices. This is my personal view and anything USS does is a long way down the road yet.”