Universities Superannuation Scheme (USS) has seen its assets under management drop 16% to £75.5bn, according to its latest annual report.

The defined benefit (DB) fund stood at £73.1bn against estimated liabilities of £66.1bn, based on monitoring its 2020 valuation. Its defined contribution (DC) assets meanwhile totalled £2.4bn, including £200m of Prudential Additional Voluntary Contributions.

USS said that with falls across all major asset classes, 2022 was a “tough year” for investors.

It attributed the drop in the value of the scheme’s investment to supply disruptions caused by the COVID-19 pandemic and political upheaval, both in the UK and globally with the war in Ukraine.

It said that these factors have contributed to inflationary pressures, volatility in financial markets, and rising interest rates “all of which led to the value of the scheme’s investments falling this year”.

However, it added that the rising rates reduced the value of the scheme’s DB liabilities.

The scheme’s DB liability proxy was outperformed by 8.4% per annum over five years to March 2023, and by 5.5% per annum over 10 years.

This, it said, was driven by a “notable” improvement in the scheme’s indicative funding position.

It said that for the “first time since 2008” the scheme reported a DB surplus of £7bn, making it 111% funded.

The current surplus is based on monitoring of its 2020 valuation, and the trustee is working closely with stakeholders and the joint negotiating committee to complete the 2023 valuation with the aim of introducing any benefit and contribution changes proposed by the committee by April 2024.

Kate Barker, chair of the USS board, said: “It was a tough year for investors. But our investments performed comparatively well and rising long-term interest rates reduced the value of our defined benefit liabilities at a rate that more than offset the fall in the value of our assets.”

Barker added that against a “backdrop of pressures” caused by the rising cost of living, it is good to point to the prospect of an improved funding position.

She continued: “The trustee’s updated funding proposals for the 2023 valuation could lead to lower contribution rates than are being paid today – and a significant surplus.”

Bill Galvin, USS group chief executive officer, added: “Our strategic decision to manage more of the scheme’s investments in house, at far less cost than the fees charged by commercial fund managers, also continues to be rewarded – with the latest independent analysis showing our investment management costs were £137m a year lower than the peer median.

“We will continue to work to demonstrate that all the decisions of the trustee are made in the interests of the members and beneficiaries of the scheme, and the priority the trustee needs to place on the security of the USS pension promise.”

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