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A photograph of Professor Rau

Research by Professor Raghavendra Rau of the Cambridge Judge Business School tests USS assumptions on returns against the historical record since 1900. His modelling, based on historical data, suggests USS would have enough money to meet pensions payments even under very difficult market conditions.

Professor Rau, pictured, who is Sir Evelyn de Rothschild Professor of Finance at the University of Cambridge and an expert in financial markets, has taken the assumptions about real returns used by USS in the 2020 valuation and compared them to actual market performance in the twentieth century. 

You can watch Professor Rau discussing this research, together with a presentation by Professor James Sefton of Imperial College London of his and Professor David Miles's recent research on USS, in this recording of an open meeting held on 18 November 2021.

His research shows that even if the conditions of the worst period of the twentieth century for returns (starting in 1906 and covering the two world wars and the Great Depression) recurred, a portfolio comparable to USS’s as at March 2021 would generate more than enough income to cover all the scheme’s liabilities and in fact a £30bn surplus on top of that. 

Professor Rau’s modelling suggests that for a scheme as well funded as USS, even if the worst historic market conditions repeat themselves there should be no need for additional payments to support existing liabilities as proposed under the 2020 valuation. Even if asset performance is worse than expected over short periods, historical data suggests that the value of the USS portfolio should grow reliably over the longer term and that the scheme should not be depleted before the recovery occurs, allowing members to reap the benefits in the shape of either (or both) lower contributions or higher pensions. 

The paper acknowledges that the current UK regulatory environment may require USS to run less risk in its investment strategy but supports the idea that risk- and reward-sharing could be a viable way to do this. Under such an arrangement, rather than “de-risking” its portfolio to one that generates extremely low returns, USS could share some of the risk of a growth-seeking portfolio with members. Members would take the risk of seeing a reduction in their pension if market performance was bad, but would also reap the reward of significantly better pensions if market performance was good. Professor Rau’s historical data suggests that this would very likely be an advantageous arrangement for members, allowing them to benefit if the historical trend of positive real returns over the long term continues.