Innovating our DC offering for our members

USS is a hybrid pension scheme, which means we have both a defined benefit (DB) part – the Retirement Income Builder – and a defined contribution (DC) part – the Investment Builder. For us, building a truly innovative DC product is a vital part of our goal to give members the best possible investment options and access to forward-thinking investment strategies that’ll positively impact the final value of their DC savings when they come to take them.

I wanted to share a little background on the Investment Builder to start with – all members can save an Investment Builder pot. Members pay into it automatically if they earn above the salary threshold, but they can also make additional contributions or transfer other pension savings in. Member’s money is invested into funds and the final value of their savings will be based on how much has been paid in and how those investments have performed. Members can choose how they want to invest, whether that’s letting us manage their investments for them or choosing from our range of funds themselves. They can also choose to invest their savings ethically if they wish.

Since the Investment Builder was first introduced in 2016, we’ve been hard at work developing, innovating, and improving our DC investment product for the benefit of our members. We now have over 150,000 active members with Investment Builder savings, which totals £2.8bn in assets (to December 2023). With numbers like those, it’s easy to see why it's so important to strive to be one-step-ahead with our DC investment strategy.

So, what have we done to push for improved retirement outcomes for our members? Well, recently we’ve taken forward three main areas of innovation to support this. After all, everything we do has their best financial interests at heart.

Adding illiquid, or private market, assets

We’ve gone further than any other UK DC scheme in including private market assets (those that aren’t traded publicly, like property, private companies or debt, and infrastructure) into our default investment strategy – the one for those who’d like us to manage their investments for them. We first introduced private markets to DC in January 2020, and by 2023, they made up around 20% of our default growth funds. Even our ethical growth funds have 7% allocated to private markets (like renewables and natural capital), which we believe is really market leading.

We’ve added these assets to DC at no cost to most of our members – in most cases, members don't pay fees on their DC savings because their employer subsidises the admin and management costs. We believe that diversifying our DC investments in this way reduces investment risk and will hopefully improve long-term returns for our members’ retirement savings. Not only this, but private markets allow us to invest more in sustainable assets, like wind and solar power, that align to our ambition to be net zero for our investments by 2050.

But this was no mean feat – private assets were historically difficult to add to DC as they’re not valued daily and can incur high charges. Our in-house investment team were able to re-design our approach to valuing these assets to relieve that challenge, and the work we already were doing in private markets for DB helped to ease the cost.

Investing responsibly

We’re a long-term, responsible investor with a legal duty to invest in the best financial interests of our members and beneficiaries, so we can help our members’ build their DC savings long into the future.

We believe climate change is a significant financial risk and that a low carbon world will likely be a more financially stable world. That’s why we’ve set an ambition for our investments to be net zero by 2050, if not before. Some of our more recent responsible investment activities in DC include:

• A new Climate Aware Global Developed Markets equity fund that tracks a bespoke climate tilted benchmark. The fund will initially reduce greenhouse gas emissions compared to the broad equity market by at least 30%, and by 7% each following year.
• Following a pioneering survey with the University of Maastricht on our members’ preferences around ethical funds, we revised our Investment Builder (DC) Ethical Guidelines to better align them with the views of our members, making sure their views were at the heart of how the DC ethical funds operate.
• When we own shares in a company, it usually means we have the right to vote on how that company is run, which is a powerful stewardship tool. We introduced a new Stewardship and Voting Policy that reflected our members’ best financial interests and we’re able to vote on all the stock in our DC default funds in line with this policy.

Introducing foreign exchange (FX) overlays

A recent milestone was the introduction of a foreign exchange (FX) overlay to our default investment strategy last year. We invest our members’ money right across the world, from forestry in Australia to solar farms in Spain, which means investments are held in currencies other than Sterling. Our FX overlay is a new strategy that helps us to manage different currencies and reduce currency-specific risks when investing globally. For example, if the value of Sterling rises, then investment returns from assets in another currency could be negatively impacted. However, if Sterling were to fall then the return on an investment that’s in another currency may look better. It’s all about risk management and ensuring we’ve got the currency exposures we’re comfortable with.

FX overlays are already an important and normal risk management tool in DB portfolios. Our new approach of looking at this across our entire portfolio, to include DC, is the first of its kind in the UK DC Master Trust market, making it a unique advantage for our members. It gives us greater control over our exposure to different currencies, improved risk/return outcomes for our members, and reduced in-house costs.

What’s coming next?

In the year ahead we’ll be introducing a sustainable thematic mandate to our DC ethical growth funds and Ethical Equity Fund as part of our ambitious responsible investment objectives. This mandate will look to deliver long-term, stable returns for our members from sustainable opportunities that aim to deliver a demonstrable impact in relevant markets. This means we’ll be looking to invest in companies that provide good financial outcomes for members with the hope of driving real world change across challenges like alternative energy, transport solutions, and sustainable food and agriculture. Watch this space for some examples of the companies we’ll be investing in and the change they’re making.

I hope this gives you a flavour of how we’ve managed to continually innovate our DC offering for the long-term benefit of our members, while also achieving good investment performance for our members – in 2023, 13 out of our 14 DC funds met or outperformed their benchmarks. Our dedicated investment team are hard at work looking for the next opportunities to make the Investment Builder even better for our members.

You can find more on investment performance in My USS or our Quarterly Investment Reports.