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USS Pension Fund

Updated: Mar 16, 2023

Pension Funds UK – An Overview

What are pension funds in the UK?

Pension funds are financial intermediaries which offer social insurance by providing income to the insured people following their retirement. Often, they also provide death and disability benefits. Pension schemes are important cornerstones of European households’ income during retirement.

There are two main types of occupational schemes established by employers: defined benefit (DB) - pensions based on years of service and final pay, or on career average revalued earnings – and defined-contribution (DC) - pensions based on contributions and the investment returns they generate. Employers now have the duty to enroll workers into a pension. To this end, the UK has established the National Employment Savings Trust (NEST), a DC scheme that employers may use to fulfill their obligation. Personal pensions, created in 1988, offer a private mean of saving for retirement to those without access to an occupational scheme or to those who change jobs frequently. Personal pensions are largely DC schemes as described above. The government provides tax relief – up to a limit – on contributions to private pensions. When they are taken in retirement, individuals have the option to take up to 25% of the fund as a tax-free lump sum, with the rest taxed at their marginal rate.

Liabilities and Assets

The liabilities of these pension funds consist mainly of the reserves that pension funds have put aside to fulfill their future payment obligations toward policyholders. Liabilities also include pension funds’ equity, loans received, and other financial obligations. The assets show the investments of the paid premiums and other liabilities. They also show the claims that pension funds might have against other parties such as reinsurance firms. Such claims arise when a pension fund pays part of the premium payments associated with the pension policies it holds to a reinsurance company to transfer part of the risks of these policies. Similarly, pension funds’ claims against other parties like employers are recorded as an asset.

Asset Exposure

From an asset exposure perspective, the pension funds market in the United Kingdom is mostly invested in bonds (debt and other fixed-income securities account for 63,0% of total Investments), followed by equities and other variable-yield securities that also constitute a substantial part of the investments (32,8%). Within the bond categories, the pension funds market is primarily exposed to sovereign securities (43,2%) with the remainder in financial debt (19,2%), both categories for which the United Kingdom is ranked first in the EU.

“The largest pension funds in England were in a tight spot over derivatives. “

But what does it mean?

These financial products serve to hedge against currency risks, commodity risks, etc. For example, energy companies use them to protect themselves from falling gas prices. Here, however, the problem arises, because what they use to protect themselves, may turn out to be what hits them the hardest. In fact, when the price of gas rose, they found themselves having to replenish their positions with enormous amounts of money. Due to the rise in interest rates, pension funds have come to a similar situation, to the point of requiring the intervention of the BoE.

In the last week of September, the Bank of England intervened with a two-week purchase program of £65bn in the UK long-dated bond market to save several pension funds close to collapse. There was a massive sell-off of UK government bonds (gilts), followed by an intervention of the central bank’s Financial Policy Committee: this drop in bond values has caused panic for Britain’s £1.5 trillion in so-called liability-driven investment funds (LDIs). Long-dated gilts account for around two-thirds of LDI holdings. Many LDIs belong to final salary pension plans that provide an annual income after retirement, based on the worker's past salary. Different LDI funds were near to falling into negative net asset value, and it would be possible that they could have started the process of winding up the morning after: in that case, many gilts may be sold on the market, causing widespread financial instability. After this announcement, the 30-year gilt yield fell more than 100 basis points, and pension funds “faced rolling “margin calls” as the value of the bonds they had pledged as collateral collapsed. The funds then moved to sell other long-dated bonds they held to cover the cash demands, which in turn led to further selling pressure in the bond market in a self-reinforcing downward spiral”.

Pension funds and inflation

“A knee jerk reaction to sell out and go into cash is not a good idea; pensions are a long-term investment, and if you hold too much in cash, your pension is likely to be eroded”, says Helen Morrissey, a pension expert who works at Hargreaves Lansdown.

For the past 30 years, the defined benefit scheme’s members have been protected from inflation increases, reevaluating benefits proportionally to inflation (generally pensionable salary growth overcome inflation growth in the long term); DB pension obligations are influenced by the payments made from the plan and the hypothesis on the balance sheet reserving/funding valuations; for this reason, now the level of inflation is eroding this past protection, and trustees of DB Schemes should review the effects on their members. Perhaps trustees of DB Schemes will consider the idea of discretionary increases, but it is really difficult for the ones who operate in a deficit. “When setting early retirement factors, legislation requires trustees to be "reasonably satisfied" that the total value of an early retirement benefit is at least equal to the total value of the member's normal retirement benefit. Trustees are likely to need to consider adjusting early retirement factors ahead of normal review dates, to ensure they remain "reasonably satisfied" this is the case. “

However, UK DB Scheme deficits against the long-term financial goals decreased during these months: employers may use this development to slow down and be more cautious.

Members of these funds could see their pension pot (and their purchasing power for retirement annuities) decreasing while they approach retirement. Members who pour a fixed amount of money would be protected from high inflation, while the salary increases with inflation; it is not the case of many workers, especially the ones in the public sector. For this reason, people may review their investment plans, considering different investment options.

There would be various methods to control the situation: allocating in the portfolio inflation-linked bonds, for example, euro-inflation-linked bonds for Euro-denominated plans; another one of these could be incentive exercises, that involve: “an enhanced transfer value (ETV) exercise, where members are offered an uplift to their benefits, in return for transferring a cash sum for their DB pension to another (usually defined contribution) pension scheme; or a pension increase exchange (PIE) exercise, where members give up certain future non-statutory increases to their benefits, in return for a higher initial pension.” Sponsoring employers should suggest the personal option analyzing the situation of every member, searching to offer the best solution long before retirement.

“Buy-ins are another de-risking option, increasingly used as a way of reducing funding risk. This essentially involves the trustees’ securing benefits under an insurance policy that covers a specified proportion of a scheme's liabilities. A premium is paid to an insurer in exchange for guaranteeing that proportion of the scheme's liabilities. This can be used to de-risk scheme liabilities in uncertain times.”

Analyzing another pension plan, in Defined Contributions plans (DC), retirees and near-retirees are the most sensitive groups to inflation, because of the fixed income which is not able to overtake this variation of prices; a considerable solution could be contributing with a percentage of the salary, or a fixed amount, to fight the effects of inflation in pension fund savings: it will take to an increase of pension contributions in line with salary growth, which will likely be higher than the inflation’s levels in the future.

However, according to researchers, 98% of pension schemes have taken steps to protect against inflation, switching investments to commodities, inflation-linked bonds as we have suggested before (53% of managers are planning to increase allocations on this asset), and infrastructures.



Analyzing the pension fund’s reports and balance sheets can make us understand better the performance, if it is gaining new clients or losing old ones, and the health of the fund. We will take into consideration the previous performance for the last five years and try to see if it is worth investing in it.

Revenues & Costs

Total Contributions

The main form of income for USS is the fee applied to the contributions received from employers and employees for the employee pensions. All around the UK the fee normally applied is 2% and so also for the USS. Looking at the table below we can see that in the last five years the contributions have been increasing and therefore also the revenues; we can notice in particular that the growth in 2020 has been the highest, because of the pandemic.

Moving to the costs, as seen in the table, USS spends most of its financial resources on personnel and investment management. While 2019 has seen the biggest increase in costs during these five years, 2021 closed with a variation of -9.19% of the total costs, this may be due to the pandemic that caused some personnel cuts along with investment management cuts.


Balance Sheet

From the 5-year analysis of the Balance sheet, we can clearly see that the Net Working Capital (NWC) has improved in the first three years: in 2017 and in 2018 it was negative, while in the following three years it has been positive, with its peak in 2019. In this analysis, the focus is on the NWC because it is ideal to have a positive net working capital, as this signifies that the financial obligations are met and that there can be investments in other operational requirements.

Fixed assets

As we can see from the tables and graphs, the number of total assets has decreased during the 5-year span: in particular, the major role in the drop of the total assets is played by the intangible fixed assets, while the value of tangible assets has decreased until the 2020 but has seen a big increase in 2021. Intangible fixed assets are divided into two categories, patents and licenses, and internally generated development costs. On the other hand, tangible fixed costs have four categories: alterations to rented premises, computer equipment, office equipment, and leasehold improvements.

INVESTMENTS (Market Value)

From the analysis of the 2021 Investments’ composition, we can see that most of them consist of bonds (almost 50%), with equities following at second place with almost 25%. The third biggest part is made up of pool investment vehicles: these are large portfolios of investment products funded by numerous investors; these products can be stocks, bonds, and other securities or assets. Investors of these products realize their returns in the form of dividends or interest distributions and/or price appreciation as the investment's per-share price rises due to market volatility.


Due to the current situation with high inflation, a pension fund may be one of the most rational choices when we talk about investments. But there are still some risks that need to be taken into account.

Credit Risk

First of all is the credit risk, the one where one party to a financial instrument causes the other party a financial loss by failing to discharge an obligation; This one is divided into direct or indirect risks depending on the instrument you invested in; the first one is where investment in bonds and cash are, looking at the table below we can see that the investment in bonds has been increasing in the last five years and with this also the credit risks, however, USS, states that the arising credit risk on bonds is managed through investment in developed-market government instruments where the risk is minimal, and for corporate and emerging-market bonds an individual mandate sets out the maximum permissible exposure to maintain the overall credit quality of the portfolio. Talking about cash, the risk is mitigated by holding with a financial institution that is at least investment grade credit rated. On the other hand, indirect credit risk is composed only of pooled investment vehicles, and the credit risk is mitigated by underlying assets of the pooled arrangements being ring-fenced from the pooled investment manager, provisions to automatically dissolve the funds in the event of insolvency of the manager.

Currency Risk

Secondly, the scheme is subjected to currency risk because some of the investments are denominated in foreign currencies. The currency exposures are monitored and mitigated through a currency hedging policy. The main exposures in USD, Euro, Yen, and Hong Kong Dollar.

Interest Rate Risk

Lastly due to the inclusion of public and private credit and swaps in the scheme, investments are subject to interest rate risk. These investments provide an offsetting exposure to the interest risk which is inherent to the scheme’s liabilities. This serves to mitigate the risk across the scheme as a whole.

DB & DC Pensions

The graph shows that most of the pension fund consists of DB pensions, while a very small part is made up of DC pensions. The latest ones have almost doubled in 2018 from 2017 and have remained stable ever since. On the other hand, DB pensions, after 2018 have always increased, with a big leap between 2019 and 2020.


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