Watchdog to question USS pension fund, a Thames Water investor, about stake

The UK’s largest Pension Scheme is facing questions from the regulator about its investment in Thames Water – the troubled utility.

According to sources familiar with the matter, a meeting between The Pensions Regulator, and the £90bn Universities Superannuation scheme, one of the biggest investors in Thames Water, with a 20% stake, could happen this week.

The meeting is long overdue, but questions about the USS’s share in the water monopoly are on the agenda.

The regulator intervened days after it was revealed that the UK Government is working on contingency planning for a temporary nationalisation. Thames Water has a £16bn in debt and is looking to inject at least another PS1bn from its investors. This includes British and international pension funds such as USS which has more than 500,000 subscribers and is sponsored by some of the UK’s most prestigious “red brick” universities.

TPR is required by law to oversee the management of pension schemes, which includes their investment decisions.

USS is undergoing a formal evaluation of its financial situation.

John Ralfe is an independent pensions expert. He said, “I suspect that the regulator will want a check on whether the Thames Water holding impacts the scheme’s financial position.”

The Pensions Regulator stated: “We have regular contact with trustees but we do not comment on this discussion.”

The USS has declined to comment.

The USS stated last week that it did not anticipate events surrounding Thames Water having a “material effect on the funding situation or contribution rates resulting from the 2023 valuation nor on the security for members’ promised pensions”.

The interest of the regulator comes just days before Jeremy Hunt – UK chancellor – is expected to announce a wide range of plans encouraging pension schemes such as USS to invest more money in areas that will stimulate economic growth.

The UK public and private pension funds, which together manage assets worth about £3tn, are eager to increase their investments in areas that may be riskier but offer higher returns, such as infrastructure, private equity, and early-stage, unlisted companies. They are considered riskier than publicly-traded assets because they have more complexity and less transparency in terms of fees and charges.

Last week, the USS indicated its conditional support for Thames Water, an independent company. It said it supported the long-term strategy of Thames Water and its turnaround plan.

It said: “We are still of the opinion that with an appropriate regulatory framework, the long-term objectives of repairing UK infrastructure, and paying pensions for our members, are strongly aligned.”

USS became an investor for the first time in Thames Water in 2017. Attracted by the chance to support long-term investments needs of the company, USS invested in the business in 2017.

In 2021 the pension fund purchased an additional 8.8 percent stake, bringing their total holdings to close to 20 percent. In its latest annual report, USS stated that investments in “long term, stable, predictable and inflation-linked assets” are “key” for fulfilling its primary obligation to pay pensions to its members.

USS did not disclose the financial details of the transaction, but it was made months before USS had to cut benefits for tens and thousands of members due to a £14bn shortfall.

The chief executive of Ofwat, the regulator of Thames Water, told a House of Lords Committee on Tuesday that Thames Water needs billions of extra pounds in cash. This is at a moment when investors are “resisting” putting more money into this sector.