UK Pension Fund USS Considers Sharp Alt Asset Increase

LONDON (Reuters) – Britain’s second-largest pension scheme is mulling a sharp boost in alternative assets such as private equity and commodities and plans to more than double the size of its investment team covering the sector.

The Universities Superannuation Scheme (USS) Chief Investment Officer Peter Moon said the scheme already has 8 percent of its portfolio in alternative investments and has committed another 16 percent. It could boost exposure to as much as 30 percent in the medium term against a previously stated target of 20 percent, he said.

Due to its relatively young membership, the scheme has so far used its strong cash inflows to embrace a risk-tolerant attitude to investments. That includes diversification into alternative investments like hedge fund replication strategies, private equity and commodities.

“What we are doing with the alternative basket is to look for equity-type returns that diversify our risk or are more suitable to pay pensions when they are due,” Moon said.

USS, the second-largest UK pension fund behind the BT Pension Scheme, employs eight alternative investment specialists and is looking to increase that to 20, with recruitment costs already accounted for in the scheme’s budget, Moon told Reuters on Tuesday.

He said the scheme will take advantage of the credit crunch which has forced banks and other financial institutions to make thousands of experts redundant.

At the end of March USS had just over 29 billion pounds ($43.64 billion) in assets under management. Moon said the scheme has since been affected by the crisis but declined to elaborate.

USS incorporates its alternatives exposure within a broader allocation of 82 percent to equities, 9 percent to bonds, 6 percent to property and 3 percent to cash.

Assets for the boosted alternative portfolio could be shifted away from equities but some of its new member contributions would also be used, Moon said.

The proposed increase to alternatives exposure rests on a study commissioned to assess risk pressures and due to be completed by March. If it shows a need for more hedging to offset risk, Moon said the fund may have to shun higher-risk alternatives.

By Cecilia Valente