The Universities Superannuation Scheme (USS) has described its experience of investing in Thames Water as “deeply disappointing” and is warning that the experience will “influence our future approach to investing both in economically regulated assets and more broadly.”

The warning comes in the latest annual report and accounts for USS for the year ending 31^st March 2024 for USS published today – USS was set up in 1974 as the principal pension scheme for universities and other higher education institutions in the UK.

Design and implementation of investment strategy for USS is delegated to a wholly-owned subsidiary – USS Investment Management Limited (USSIM).

"This has not been a successful investment.... this has been deeply disappointing"

Commenting in the report, Simon Pilcher Chief Executive Officer of USSIM, said:

“Despite our very best efforts, it is clear this has not been a successful investment. While poor performance of a single asset should be considered in terms of our overall performance ... this has been deeply disappointing,

“We have taken time to consider the implications for our investment decision making, asset oversight, and our wider investments in economically regulated sectors.”

The report highlights the fact that on the final trading day of the financial year, all nine shareholders of the company, including USS, announced they would not be investing new equity into the company because the necessary conditions for further funding were not in place at that time.

Simon Pilcher commented:

“Thames Water itself also announced that, based on the feedback provided by its regulator Ofwat at that point, the regulatory arrangements they expected would apply to the company made its business plan uninvestible.

“This was despite extensive engagement with the regulator and commitments from investors that they would not take any money out of the business for at least a further six years.”

Since USS first invested in Thames in 2017, any profits that might otherwise have been used to pay shareholder dividends were reinvested into the business, nor has USS received any dividends or payments of interest on any shareholder loans.

USS is continuing to consider the implications of the Thames Water situation; “an outcome like this has led to serious reflection” he explained.

He cautioned:

“Economically regulated assets should be a good fit for long-term patient investors like USS, particularly where, as with infrastructure, they require long-term investment to address historical challenges. That is, though, dependent on similarly long-term, consistent regulation that recognises the need for that investment and that strikes a fair balance between risk and returns over the long term.

“While our overall experience of investing in private markets has been beneficial, we seek to learn the lessons of all our investments – whatever the outcome. Our experience with Thames Water will influence our future approach to investing both in economically regulated assets and more broadly.”

USS holds a total stake of around 20% - following its initial investment in 2017, it bought a further 8% in the the UK’s largest water company in 2021.

In its annual report and accounts for the year ended 31^st March 2024 published today, Simon Pilcher says:

“At the date of writing, we remain a shareholder but the future outlook for the company is unclear and the value of our holding at 31 March 2024 was minimal. ....We deeply regret having arrived at such a position.”