Lindsey Matthews, chief risk officer at the Universities Superannuation Scheme (USS), explains why and how the largest pension fund in the UK takes a bespoke approach to assessing performance.
When assessing pension scheme performance, the familiar question ‘what does good look like?’ is particularly apt.
Having spent many years evaluating investment performance in asset management, I am clear on one principle: performance must be judged against objectives.
For an investment manager running a mandate or fund, the objective may be relatively simple: outperform a specified benchmark. That makes assessment, if not achievement, straightforward. Even then, implicit objectives may matter, such as performance relative to peers.
Pension trustees face a more complex task. Defined benefit (DB) schemes have several stated and implicit objectives, and success cannot be judged through a single lens. As many schemes have moved from deficit to surplus, those objectives are also evolving.
Why a bespoke approach matters
A DB scheme promises members a guaranteed, often inflation-linked, income in retirement regardless of market performance. Its central objective is therefore to ensure that pensions can be paid, within a clear regulatory framework. The objectives for managing its assets are very different from those of a simple investment mandate.
“Strong equity returns might create additional surplus and look like an unequivocal success. But the picture is more nuanced if they also increase funding volatility, delay progress towards a low-risk target, or weaken confidence in benefit security.”
Lindsey Matthews, USS
Strong equity returns might create additional surplus and look like an unequivocal success. But the picture is more nuanced if they also increase funding volatility, delay progress towards a low-risk target, or weaken confidence in benefit security.
Conversely, a liability-driven investment strategy may look unimpressive on absolute return measures. Yet if its purpose is to protect the funding level and preserve strategic options, judging it by absolute returns misses the point.
Context matters too. A strategy suitable for a closed scheme approaching its endgame may be entirely unsuitable for an open scheme with no endgame in sight. Investment objectives – and therefore the returns sought – will vary substantially. Comparing returns without comparing objectives obscures more than it reveals.
That distinction is not always obvious to members.
It is tempting to compare two large pension funds, or a DB fund with a savings account, and draw conclusions from headline returns. But apparently similar organisations may have fundamentally different liabilities, time horizons and constraints. Easy headlines can then damage confidence in the security of members’ benefits.
This is not an argument against performance measurement. It is an argument for better performance measurement.
USS’s unique take on performance assessment
At USS, we serve employers of different shapes and sizes across higher education. Following a decade of deficits, rising contributions and benefit changes, stability was their central priority at the 2023 valuation.
That meant focusing on the funding position, measuring performance relative to liabilities, and managing the interest rate and inflation risks embedded in those liabilities through effective hedging.
At the same time, USS is an open DB scheme. Generating long-term growth remains important to its sustainability. Our task is therefore to strike the right balance between risk and expected return for USS’s particular circumstances.
Over the past five years – a period spanning the economic rebound from Covid-19, the war in Ukraine, and the 2022 mini-Budget – our growth assets grew, our hedging assets hedged, and the scheme moved from deficit to a substantial surplus.
A comparison of absolute returns with another DB scheme, a defined contribution scheme, or a market index would not capture that story.
That is why USS assesses investment performance through a balanced scorecard that covers several objectives, rather than a single figure or benchmark.
Performance, transparency and accountability matter. Members and employers deserve confidence that their scheme is delivering value.
But meaningful accountability requires us to ask not simply what return the scheme made but whether it achieved the outcomes it was designed to deliver. Only then can we answer the real question: what does good performance look like?
Lindsey Matthews is chief risk officer at the Universities Superannuation Scheme.
