The fund is both a defined benefit and defined contribution structure, with everyone going into the defined benefit, and anyone above the £70,000 threshold or will invest further savings in the DC part.
There is £75bn in the DB and £3bn in the DC, the latter is a unitised version of the former. They have 70 investment professionals working on the private markets team and last year the DB fund returned 1.9 per cent, while DC default growth fund returned 11 per cent.
Naomi Clark, head of investment product management at USS Investment Management, says: "In DB we really believe in illiquid assets, and we believe there are good risk-adjusted returns to investing in illiquid assets.
"Diversification is a big focus for us, we don't want to have one asset determining a portfolio's returns, so in 2020 we started adding illiquids into our DC section and now we have 20 per cent of our default funds allocated to illiquid assets."
Exposure to a large asset became apparent this year when in its recent annual report, USS revealed that its stake in Thames Water, was now of 'minimal' value, after being valued at £956mn two years ago; USS says its experience with the utility would shape its approach to investing in economically regulated assets in the future.
In the annual report, Simon Pilcher, chief executive of USS, said: “Our diversified investment portfolio means no single investment on its own can jeopardise our ability to pay members’ pensions when they are due.”
Thames Water aside, a frequent risk cited with illiquid assets is their very illiquidity; that a DC saver may want to move at any time, rather than wait until the mooted retirement age which is how DB schemes operate.
But Clark says that at USS, they have many new people joining the scheme, and there is plenty of new money coming in to buy the assets of those departing. A far bigger issue she says is valuation: "Private markets are hard to value, you do need good expertise."
Making the right judgements
Yasir Aziz, a partner in investment management and private equity at Deloitte and his team audit the private equity funds once the PE firms have determined the value of their investments. He says that fundamentally a judgement has to be made on the fair value of an asset based on factors such as cashflow projections.
Estimated fair values are scrutinised by investment valuation committees and Aziz's team, who will sense check it, and perform audit procedures on the valuations, such as checking the accuracy and completeness of data inputs and evaluating judgements made by the valuer.
