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The UK’s largest pension scheme is to face questions from the regulator over its investment in Thames Water, the troubled utility.
A meeting between The Pensions Regulator and the £90bn Universities Superannuation Scheme, which is one of the largest investors in Thames Water with a 20 per cent stake, will happen as early as this week, according to people familiar with the situation.
While the meeting has been long anticipated, questions around the USS’s stake in the water monopoly will be on the agenda, they added.
The regulator’s intervention comes days after the revelation that the UK government is working on contingency plans for a possible temporary nationalisation of Thames Water, which has a £16bn debt pile and is seeking at least a further £1bn capital injection from its investors. These include British and international pension funds, including USS, which serves more than 500,000 members and whose sponsoring employers include some of the UK’s most prestigious “red brick” universities.
TPR has a statutory duty to ensure that schemes are well run, including around their investment decisions, so that pensions can be paid.
The USS is currently in the process of undertaking a formal check of its financial position, known as a valuation.
“I suspect the regulator will want to check whether the Thames Water holding will impact the scheme’s funding position,” said John Ralfe, an independent pensions expert.
The Pensions Regulator said: “We are in regular contact with the trustee but do not comment on these discussions.”
The USS declined to comment.
Last week, the USS said it did not expect events surrounding Thames Water to have a “material impact on the funding position or contribution rates coming out of the 2023 valuation, nor on the security of members’ promised pensions”.
The regulator’s interest also comes days before Jeremy Hunt, the UK chancellor, is due to unveil wide-ranging plans to encourage pension schemes, such as USS, to direct more cash into areas that will boost economic growth.
Ministers are keen for the UK’s public and private sector pensions, which combine to manage about £3tn in assets, to invest more widely in riskier, but potentially higher returning, areas such as early-stage unlisted companies, infrastructure and private equity. These are seen as riskier than publicly traded assets, because of their complexity and lack of transparency over fees and charges.
The USS signalled its conditional support last week for Thames Water, a private company, saying it had given its backing to the company’s turnround plan, and supported its long-term strategy.
“We remain of the view that, with an appropriate regulatory environment, the long-term objective of repairing important UK infrastructure and paying pensions to our members are in strong alignment,” it said.
USS first became an investor in Thames Water in 2017, attracted by the opportunity to support the long-term investment needs of the business.
In 2021, the pension fund bought a further 8.8 per cent stake, bringing its total holding to near 20 per cent. In its most recent annual report, the USS said investments in “long-term, stable, predictable, regulated and inflation- linked assets” were “key” to fulfilling its primary duty to pay the pensions promised to members.
The financial details of the 2021 transaction were not disclosed by USS, but the deal came months before benefit cuts were imposed on tens of thousands of USS members, because of a £14bn funding shortfall.
On Tuesday, the chief executive of the regulator Ofwat told a House of Lords committee that Thames Water needed billions of pounds more in cash at a time when there is “huge resistance” from investors to put more money into the sector.