The Universities Superannuation Scheme (USS) is by some way the largest pension fund in the UK. It’s also one of the most sophisticated, with a dedicated private markets investing team in place since 2007, encompassing private credit, structured investing, fund allocations, co-investments, and direct investments in some of the UK’s highest profile infrastructure assets — Heathrow Airport, Moto service stations, and, notoriously, Thames Water.

The UK’s pension landscape, though, is facing a major shakeup, with local authority schemes set to be combined into megafunds modelled on the Canadian and Australian super funds — a set-up already in place at USS, which oversees about £80bn for more than half a million customers from the higher education sector. USS’s private assets total around £26bn, with about 70% invested directly and the remainder through third party asset managers.

9fin caught up with Ben Levenstein, who runs the private assets unit, to seek his views on the remodelling of the sector, distil some tips for the forthcoming megafunds, and understand how the UK can reach for growth.

USS, right now, is unique among British pension funds. The market splits into defined benefit (funds which pay out a set amount to members on retirement) and defined contribution (which expose members to market movements).

Many defined benefit schemes sponsored by traditional corporations are closed to new members, and they are increasingly subject to buyouts from the insurance sector, through the BPA (bulk purchase annuity) market, which transfers their liabilities to a life insurance company.

These transactions have been rapidly accelerating since UK rates started to rise in 2022; the rising risk-free rate raises the discount rate on pension liabilities, and brought many funds back into surplus, which is a necessary condition for a buyout. Corporate treasurers have preferred to shed these liabilities, which complicate M&A and compromise corporate flexibility, while life insurers spy opportunities to reinvest assets in higher-returning private assets.

Forever is a long time

The structure of a defined benefit pension scheme, whether inside an insurer or otherwise, points towards certain kinds of investment. Liabilities are all in sterling, and linked to inflation, while the time horizon for investment can be very long.

“We believe our cost of capital is most advantaged when we can acquire inflation, and it's very difficult to acquire inflation,” said Levenstein. “Frankly, there's not many options out there in the listed market, for example. So the more that we can find the right sorts of inflation, particularly CPI orientated inflation, the more competitive we can become.”