The Universities Superannuation Scheme’s (USS) aim to remove the role of strategic and detailed asset allocation from trustees’ responsibilities is nearing completion, as its internal manager looks to more delegated responsibilities.
USS Investment Management (USSIM) was formed in 2011 and currently manages a range of in-house investments for the UK’s largest pension fund.
USS, with £41.6bn (€51.2bn) in assets, has been looking to amend its investment governance structure to shift more execution to experts and away from its trustee board.
Speaking at a National Association of Pension Funds (NAPF) conference on governance, USS chief executive Bill Galvin said the fund had taken some investment governance ideas from Canadian and New Zealand pension funds.
In conjunction with its 374 sponsoring employers, the trustees designed a reference investment portfolio, which Galvin said was a very simple construct delivering risk/return characteristics to meet benefit payments.
“The reference portfolio is what is owned by the trustee board, and the implemented portfolio [will be] delegated to our investment management subsidiary, which, within the risk budget, tries to beat the anticipated returns at lower risk,” he told delegates.
“What we have been working really hard on is delegation to the right level of the organisation, where experts are making decisions within clearly defined parameters.”
He said the trustees’ investment sub-committee still owned the detailed strategic allocation but added that this would be passed on to USSIM, with the committee taking charge of the reference portfolio,
“The critical thing is complete transparency about decision-making in the in-house asset manager, and that is overseen by the investment committee,” he said. “But the decisions are delegated.”
Galvin became chief executive of USS in August 2013 after heading up the UK’s Pensions Regulator (TPR) from May 2010.
He criticised the current legal requirements for UK pension trustees as “inadequate” and said the Trustee Toolkit – TPR’s qualification to sit on a trustee board – was fairly minimal in the context of EU legislation for fit and proper persons.
The USS chief also questioned whether UK’s trustee boards had the range of capabilities required to run pension schemes in today’s environment.
He said schemes’ focus for member and employer representation on trustee boards was a strange concept, and needed to be reinforced to focus more on capability, similar to some non-UK models.
Without insight into member needs, Galvin said he found ”the issue of representation really challenging”.
“It must be very difficult for someone put on a trustee board [to assume] they will represent members. How do you do that? How do you know? Do you assume what you want is what they want?”
Galvin praised the Ontario Teachers’ fund, where trustee members all fit a jointly agreed job description between trade unions and sponsors.
He said, with the growth of master trusts such as the National Employment Savings Trust (NEST), where the trustee board is similar to Ontario, the idea could become more common.
Galvin also praised the secondary Ontario body that manages negotiations over benefit structure and decisions that impact stakeholders.
USS members, trade unions and employers have reached a stalemate in reforms to the benefit structure of the scheme.
An employer move to change USS from final salary to career average has been met with opposition.