The Â£21.7 billion ($35 billion) Universities Superannuation Scheme (USS) is facing the prospect of having to initiate a recovery plan after a 25 per cent fall in its assets in the financial year ending March 2009 caused its funded status to drop by almost 30 per cent.
The London-based fund’s assets fell from Â£29.1 billion in March 2008 to Â£21.7 billion in March 2009, according to its members’ annual report 2008/09.
The 25.4 per cent decline, which included the money purchase AVC assets managed by Prudential, followed a 27 per cent drop in the fund’s investments in 2008, as the global financial crisis caused stock markets to fall to the levels of five years ago.
Martin Harris, chairman of USS, told members that with the fall in global investment markets, the actuary had estimated the funding level had fallen from 103 per cent to 74 per cent at 31 March 2009.
By the end of August, the funding level had recovered to 80 per cent, due to increases in the value of USS’Â investments, however Harris said the trustee board was “fully aware of the funding pressures facing the scheme”Â.
“USS is a long-term investor and the fund continues to enjoy a positive cashflow with the aggregate of contributions and investment income exceeding benefit payments, something that is expected to continue for many years,” he said.
“Nevertheless, short-term falls in the funding level, which result in the scheme being underfunded on the new scheme-specific funding basis, increase the likelihood that the board will, at some point, have to initiate a recovery plan, which might require additional contributions to fund a scheme deficit.”
USS reported a return of 3.1 per cent per annum over the past five years and 2.3 per cent over 10 years, against benchmark returns of 4 per cent and 3.3 per cent respectively.
The fund’s asset allocation includes 38 per cent overseas equities, 32 per cent UK equities, 10 per cent fixed interest, 9 per cent alternative investments, 6 per cent property, and 5 per cent cash and other assets.
Alternative assets currently represent Â£1.98 billion, or 9.3 per cent of the total fund, but USS said it aimed to increase this over the medium term to 20 per cent.
The fund plans to invest across private equity, absolute returns and commodities. In August USS appointed UBS Global
Asset Management – Fund Services to provide hedge fund of funds administration services after implementing an absolute return strategies program.
At the beginning of September the fund appointed Roger Gray as its new chief investment officer, replacing Peter Moon who is retiring after 17 years.