USS ‘de-risking’ implies a huge, wasteful shift from growth assets to bonds

In their response to First Actuarial, USS reveals that the Test 1 mandated shift from growth assets to bonds would lower expected real returns from 4.03% to 2.56%. Since USS does not spell out exactly how they will rebalance their portfolio in order to depress returns by the desired amount, I have constructed the linked spreadsheet to show how this might be done. I managed to get real returns down from 4.03% to 2.56% by increasing the proportion invested in index-linked gilts by about 40 percentage points (up from 25% to about 65% of the fund) and decreasing the allocation into equities by about the same amount (down from 62.5% to about 23%). There are other ways to get real returns down from 4.03% to 2.56%. But they all also involve a huge shift from growth assets (equities and property) to bonds and/or cash. Try your own hand at this by changing the figures in column j of the spreadsheet. As First Actuarial and, more recently, Warwick’s VC have argued, this is no way to fund a DB pension scheme. There is, moreover, an alternative to such costly de-risking, which pools risk among scheme members without increasing risk to employers.

Update 2 May 2021: USS figures released in March 2020 confirm my above estimate of the extent of the de-risking called for by Test 1: