USS calls for more flexibility in calculating scheme sustainability
UK – Pension funds should be granted more flexibility under accounting rules to assess their internal solvency, the Universities Superannuation Scheme (USS) has argued.
Giving evidence on the Kay Review on long-term investment in front of the Business, Innovation and Skills (BIS) select committee, the chief executive of USS Investment Management Roger Gray was asked by MP Adrian Bailey if he thought the shift away from equity and towards de-risking could have been prevented by a "better" regulatory environment, more aware of the needs of long-term investors.
Gray replied by noting that it was an "important consideration" to look at issues other than deficits and overall returns – referring to a pension fund's ability to cover ongoing costs through investment, for example.
"Movements in the direction of allowing pension funds to look very carefully at 'these are our assets, these are our liabilities – we believe we are doing alright against them, although the markets don't necessarily agree on a snapshot basis' seems to me to be an important dimension of flexibility to get into the system," he told the parliamentary committee.
However, in response to chairman Bailey's question, he added: "All that having been said, the world is a very complicated place, and there is real risk out there."
His comments come shortly after a report by Brighton Rock's Con Keating and several academics called for the creation of a discount rate based around a fund's internal growth rate.
Gray said pension funds were suffering in the wake of the financial crisis and that amending the regulatory framework could not change the fact pension funds needed to pay their beneficiaries.
"Indeed, there are lots of good reasons pension funds have to de-risk, not just regulatory ones," he said. "Probably at the margin some of the regulatory practices have indeed conduced, or would in future conduce, to behaviours that aren't optimal for the long term."
Giving evidence prior to Gray, lobby group FairPensions also warned that the launch of an Investor Forum – one of the main proposals in John Kay's final report, published last year – was at risk of failure.
Christine Berry, the organisation's head of policy and research, said a number of questions remained around how the Forum could be effective and insisted that it would need to include representatives of asset owners and asset managers.
"It would need to be not just another vehicle run and dominated by the trade associations – which would be very similar to vehicles we already have," she said.
Berry added: "It's not completely clear at this point whether it will ever get off the ground, and that's something worth bearing in mind when making a wider judgement about the extent to which some of the more voluntary elements of the Kay package are likely to be successful in the medium term."
She said the notion behind the Forum was to allow greater collective action by shareholders otherwise geographically dispersed or with too small a stake to otherwise have an impact.
But she said this did not mean it would equate to a "silver bullet" solution for all problems facing the industry.
She said the questions surrounding asset manager incentives, as well as "excessive" diversification, would nonetheless remain – likely referring to comments by Governance for Owners executive partner Simon Wong earlier in the session that saw him question whether investment diversification required investors to hold shares in seven hundred UK companies.
"The investor forum would be a useful thing if it happens and happens in the right way," Berry said. "It's not going to be the silver bullet that fixes all the problems in the market."