September 23, 2014

USS Pensions: Reply to Private Eye

The current edition of Private Eye contains a highly misleading report about the universities' USS pension scheme (Gray-vy train, Eye no. 1375, 19 September-2 October 2014).

The report draws attention to the salary of the fund's chief investment officer, Roger Gray (up last year to £900k from the previous year's £600k) and suggests it is unjustified given the reported funding deficit leading to probable cuts in benefits to members.

It says:"While academic eyebrows will be raised over a pay packet more than 20 times as much as many of theirs, they might also question those running the scheme and responsible for the dubious investment policy."

This is actually a load of tripe (as the Eye might say). Last year the scheme's investment portfolio earned a respectable 7.6% return. (uss_warns_of_substantial_deficit_as_fund_returns_76_news_ipe.pdf.) It is the opposite of the truth to call that a dubious investment policy. Too often investors' bonuses are unrelated to performance but in this case Mr Gray's increase is actually based on good performance.

The article repeats criticisms of the USS investment policy that are familiar to anyone who has been following the debate. The deficit is actually a result of a controversial accounting methodology that treats the scheme as if it is one for employees of a small private company rather than the whole pre-92 Higher Education sector.

If the USS is regarded in the same way as other public sector schemes such as the Teachers Pension Scheme, on a pay-as-you-go basis, measuring its health in terms of its income and expenditure, it is actually in good shape: its income from its investment portfolio was over £1billion according to last year's accounts and with increasing membership.

Whether or not its investment strategy is wrong depends on which of these two views is taken. If it is a scheme for an important part of the UK education sector it wll have a very long (or indefinite) time horizon and will best be invested in equities to get the higher return over the long term. But if universities are seen as firms operating in the market place - and could go bust at any moment - then equities are too risky.

It is not clear that USS's investment strategy is wrong.

- 2 comments by 1 or more people Not publicly viewable

  1. David Stewart

    Hi Dennis,

    While I agree with you that the content of the private eye article you cite is most definitely inaccurate and misleading I think it still worth asking the question why Mr Gray should receive a 50% pay rise in one year. Unless of course he has increased the investment returns by 50% in the same year. Otherwise it is fair to say that his pay rise is unrelated to his performance. It would be interesting to the figures.

    26 Sep 2014, 10:00

  2. Dennis Leech


    I agree.

    What you say should happen is an ideal: pay aligned with absolute performance. In practice that is not how it works. The pay of investment managers is linked to benchmarks where all that matters is relative performance. So if the whole industry does badly but a manager does less badly – for example his performance is in the top quartile – then he will be remunerated.

    In Gray’s case the fund got a return on investment of 7.9 percent last year which was 1.4 percent about the relevant benchmark.

    The key point that I want to stress is that the USS investments are not badly managed despite all the rubbish that has been written about it.


    27 Sep 2014, 19:57

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