USS allow DC members to access private markets assets

swindiff

Wondering if someone with more knowledge on USS investments than me think it would be worth switching some of my funds or start investing into these "default lifestyle" funds now. I currently have investments in the Emerging Markets, Global Equity and Sharia Funds.

USS becomes one of first UK pension schemes to enable defined contribution members to access private markets assets
Universities Superannuation Scheme – the UK’s largest private pension scheme by way of assets – has become one of the first schemes of its kind to enable members of its Defined Contribution (DC) “Investment Builder” funds to enjoy the benefits of its “private markets” investments.

From next month, around 85,000 DC members will see the investment remit of their funds in the Default Lifestyle Option expanded to include an allocation to private markets – the fastest-growing part of the USS investment portfolio – which have hitherto only been available in the Defined Benefit section. The move comes as funds invested in DC have exceeded £1 billion.

Private markets refer to companies or assets that are privately held rather than traded on a public exchange, such as the stock market. For USS, this means around 320 assets including infrastructure, property, private debt and private equity. These assets include a substantial investment in on- and offshore windfarms and major stakes in critical UK infrastructure such as Heathrow, Thames Water and NATS, the air traffic control business.

The private markets portfolio is run by a dedicated team in the Scheme’s investment management subsidiary, USS Investment Management Limited. The Private Markets Group was first established in 2007 and has nearly 50 people employed specifically to run this portfolio, which is now worth over £17 billion. The business has built up a strong skillset in investing and then stewarding these assets – bringing its size and scale to bear for the benefit of members. The five year performance of the private markets* part of the USS pension scheme has been very strong.

Private market assets have been difficult to provide to DC members in the UK because they are not traded daily and incur high charges. Having in-house investment capabilities through its investment management subsidiary, USS has developed a solution which is anticipated to enhance the return profile of the Default Lifestyle Option with no increase in cost to members or to their employers.

A Government consultation in February 2019 examined how to encourage DC pension schemes to invest more in long-term or “illiquid” assets, and this demonstrates that organisations with the scale and capabilities of USS can provide access for members to these investments at reasonable cost.

Bill Galvin, USS Group Chief Executive, said:

“I’m delighted to be announcing this initiative today which not only gives our members access to a range of private market assets where USS’s approach has led the pension fund market, but also highlights the innovative ways in which we continually look to enhance our offering to members.

“We have always been clear that any DC investments must be within stringent cost boundaries that demonstrate value-for-money to our members and employers. This exciting development is being done at no additional cost to them, in line with our overall investment philosophy.”

bluenose1

I saw that email and wondered the same myself.
I continue to put the maximum into my DC pot, though have changed all mine to be invested in the cautious growth fund, for no other reason that the return looked ok and I want to be relatively cautious.
Worst case scenario I intend to leave in 16 months at 55. Best case scenario going sooner if redundancy is offered as part of a big reorganisation that is currently going on.
Spent ages on spreadsheets working out how best to take my pensions.

kinger101

It would be better to ask yourself what you intended to do with the DC pot, including when you plan to take it.

Maybe you want a bridging fund for early retirement. Or maybe it's a bit extra on top of the DB scheme. In which case, you might want to factor in your own attitude to risk in light of the fixed DB income which will provide some safety net.

https://www.uss.co.uk/~/media/document-libraries/uss/investments/uss-default-lifestyle-option-sip-2019.pdf

Also worth bearing in mind USS will base this on default retirement age of 65 rather than when you plan to retire.

MarkCarnage

I don't have specific knowledge of the USS private markets portfolio - nor is the exact nature of it detailed above in relation to the DC offering. I do have some experience of building up a significant illiquids/private assets portfolio for another very large UK fund though.

It's good in my view that they have taken this step, and addressed the cost of access challenge. However, the illiquidity aspect will still be there. There will also be very considerable differences between different assets within the Private Markets portfolio. Some are likely to be private debt funds with relatively short lives, and where coupon flows form the bulk of total return, others may be significantly longer in maturity and with heavy dependence on the exit value. It would be interesting to understand the make up of what's being included in the DC offering, and what liquidity terms are being offered. It sounds like there is going to be an allocation within the overall strategy of the existing DC Lifestyle fund range rather than a standalone fund?

I wonder also if there is likely to be any internal market between the DB and DC funds established to assist liquidity?

swindiff

My plan is to use the DC fund to bridge from 60 when I plan to retire, to 67 when my state pension kicks in, I am currently 49. Contributing at my current rate the DC fund along with the DB lump sum which is 3 x annual DB pension should be a fair bit more than 25% of the overall pot. So one option using the modellers is to increase the DB pension with the surplus over the 25% and take the 25% tax free for the 7 year gap. This does give the nice problem of what to do with the 7 years of cash while I spend it over that time. Another option which I don't know if its possible with the USS DC pot is to leave it invested and draw it down as and when I need it. I would need to enquire about this nearer the time I guess. So I have 10 years growth still in the DC pot and would like to maximise that as much as possible.

kinger101

For the bridging option from 60, the lifestyle option will have you at 100% moderate growth fund rather than 50/50 Cautious Fund/Cash Fund as it assumes the retirement is 65. If you wanted to ramp down risk (and potential growth) at the same rate as USS suggests, you'd need to DIY this from 50 (next year). On the other hand, I personally think that final 50/50 mix is too cautious for a drawdown scheme.

It would be good to work out how much you need in the DC pot at 60 to bridge those 7 years, how much you'll contribute, then model the rate of return above inflation needed to hit that. Does it look realistic?

swindiff

I am already DIY, being invested in the global equities, emerging markets and sharia funds. These have all performed well and better than the lifestyle funds. What I was wondering given this new information was if the lifestyle funds are now likely to do relatively better. I would like £20k a year so a total of £140k for that 7 year gap. My DB lump sum is projected to be about £53k and assuming 5% growth the DC fund should be around £150k at 60. Given the figures the modeller shows that I could get all that £140k tax free. The remaining 60k ish can be reverse commuted to increase my DB pension. I don't actually know if this would the the most tax/growth efficient way of taking the money or not.

kinger101

The lifestyle element can only run for 10 year windows*, but on average, it will underperform the funds you've highlighted. I'm not sure about the Sharia fund but the other two are equity funds. But the purpose of the lifestyling is to reduce volatilty during the this 10 years by gradually moving into bonds and cash (or perhaps gilts) So although on average they might not perform as well, you're less likely to do badly as well.

*Until then, it's 100% USS Growth Fund.

swindiff

They all started off at a unit price of £1 in October 2016. Emerging Markets is currently around £1.40, Global equity is around £1.50 and Sharia around £1.63. So all averaging very good returns over the 3+ years they have been running.

PJM_62

I have set my USS 'Target' retirement age to 55 and chosen the Do It For Me lifestyle funds option in the DC pot.
I figured that was a good way of matching what I am doing with VLS funds in my ISA.