Few readers of ³ÉÈËVRÊÓƵ are likely to get so far as to look at articles in the bottom corner of the ¡°companies and markets¡± section of the Financial Times, and even if they do, they are unlikely to have noticed one announcing that the Universities Superannuation Scheme (the pension fund for the ¡°old¡± universities) was . Certainly, the Universities and College Union, which was busy getting its next round of strikes off the ground, seems to have missed it. Yet the change has potentially profound implications for USS as a ¡°responsible investor¡±.

USS is proud of its record for responsible and sustainable investment. In 2019, it won a prize as one of the founders of the Global Real Estate Sustainability Benchmark for ¡°¡±. Its website is peppered with the term ¡°responsible¡±. And under its defined contribution (DC) or ¡°investment builder¡± plan, which is for participants earning above the limits of the defined benefit (DB) plan, for those who are making additional voluntary contributions, and those who want to obtain an employer top-up for investing an additional 1 per cent, it offers ¡°ethical¡± funds.

USS¡¯ responsible strategy has been featured at numerous events for observers of the asset allocation industry. At a Financial Times conference in May last year entitled ¡°Investing for a good Europe: mainstreaming ESG¡±, it explained how it could fulfil its responsibility remit precisely because it was an ¡°active investor¡±.?

Unlike many pension funds that outsource asset management, much of what USS did was ¡°in house¡±. It restricted its listed investments (shares) to relatively few companies ¨C perhaps 120 ¨C and it bought these shares and held them for an average of four to five years. Not only did it not turn its holdings over as rapidly as do many asset managers, it screened them ¨C from the ¡°bottom up¡±. Thus, it could assess whether candidates for investment met both its own ESG objectives and those set externally, for example aligning with the UN¡¯s Sustainable Development Goals (SDGs).

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However, the developed markets equity team now looks as if it is going. Instead of developed markets, the fund will rely upon ¡°quantitative investments¡±. What the term means is not entirely clear. It suggests ¡°passive investing¡± or ¡°index tracking¡± ¨C the very opposite of ¡°active investing¡± but is claimed by many to yield at least as good returns and at a fraction of the cost. In general, a quantitative strategy involves reliance on mathematical computations and number crunching to identify trading opportunities. It conjures up the concept of algorithmic trading and high-frequency trading ¨C made famous in Michael Lewis¡¯ book Flash Boys.

Quantitative responsibility

Can this be combined with trying to be responsible in the way that USS has in the past? The FT article, and the press release that USS belatedly put out eight days later, suggested that some of the active investment team might move to the responsible investment group. But what is the responsible investment group itself going to do?

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Some indications can be found by examining what other ¡°responsible¡± pension funds are up to ¨C especially two funds with which USS has close contact, the Dutch providers APG and PGGM. These two, which look after funds covering much of the public and quasi-public sector (civil servants, education sector and health sector employees) also pride themselves in their pursuit of ¡°sustainability¡±. ?

Late last year, APG and PGGM announced they were going live with an ESG that would help asset owners meet the SDGs. This platform, they proclaim, is driven by artificial intelligence, and it enables investors to scan company publications by reference to key terms ¨C which terms, how they are used, and whether their use is changing. It can now track 10,000 listed companies. Even if the objective is sustainability, this looks like another case of algorithmic trading. It is only insofar as someone still makes decisions ¨C to invest or not on what the platform says ¨C that there is still a role for ¡°stock pickers¡±.

Of course, it must not be forgotten that pension funds still have a fiduciary duty to perform. As USS, APG and PGGM recognise, every investment must still meet risk-return goals. ¡°There isn¡¯t a trade-off between sustainable and financial goals,¡± Claudia Kruse, APG managing director told IPE last November.

Under a DB plan, the prime object is to get the best pension for the members. This cannot be sacrificed to ¡°sustainability¡± and certainly not to ¡°ethics¡±.

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And does it matter, anyway? When USS surveyed its members prior to the introduction of the new DC component, it found that just under half of them had a deep interest in there being ethical funds into which they could invest.?

But, a couple of years or so down the line, only one in seven of those participating in such plans had actually chosen an ethical fund. So, what do the striking academics really want from their pension ¨C beyond more for less?

Bernard H. Casey is a retired USS member. He now runs Social Economic Research, a consultancy based in Frankfurt and London.