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USS’s Roger Gray: ‘stakeholders are in strife’
Investment chief of UK’s biggest private pension fund on managing £73bn academic workers’ savings
Mr Gray says the scheme's shortfall is due to the trustee board’s conservative view of the markets © Tony Healey

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Roger Gray’s career as chief investment officer of the Universities Superannuation Scheme is bookended by twin crises for Britain’s biggest private sector pension plan.

For a decade he has been entrusted with the retirement savings of 440,000 current and former academic workers. Taking over an investment portfolio that had been ravaged by the financial crisis, Mr Gray helped it grow from £26bn to £73bn. But as he steps down from his role this month, USS is grappling with a huge funding shortfall and a contentious rise in member contributions — a situation some have blamed on the scheme’s investment performance.

Mr Gray strongly denies this. He says USS’s current plight is more down to the trustee board’s conservative view of the markets. “You try your best in investments — what you think is the right thing to do might not give you the results you expect,” he says. “We could have done a lot worse.”

Last month USS announced its funding hole had nearly doubled to £6.6bn, meaning close to 200,000 active members are at risk of being forced to make even higher monthly contributions to the plan. Relations between USS, its membership and the more than 350 institutions that employ them are already fraught following two years of negotiations and strikes over the scheme’s benefits.

Mr Gray says the enlarged shortfall is not to do with historic investment performance, but is a result of the scheme’s trustees assuming a lower rate of future returns due to extraordinarily low gilt yields. As at the end of August, USS’s investment portfolio outperformed its benchmark over three, five, seven and 10 years. In the five years to the end of 2018 — the most recent available data — adviser Mercer ranks USS in the top quarter of performers among large UK pension funds.

“I do feel for the fact that the stakeholders are in strife — it’s not something I would have hoped for,” Mr Gray says during our meeting at USS’s London offices on Threadneedle Street, a block away from the Bank of England. “But I’m pretty sure this will pass.”

Mr Gray has a scholarly demeanour and would not seem out of place in a musty university lecture hall, debating economics with USS’s academic members. His clipped English accent was perfected at Winchester College boys’ school and belies the fact he was born in Chicago to Midwestern parents. “It was quite a liability to be short, skinny, red-haired and have an American accent in a British boarding school,” he recalls. “The easiest thing to get rid of was not the red hair or the skinny. Short, I managed eventually to get rid of, so the accent changed and it hasn’t really reverted since.”

He studied philosophy, politics and economics at Oxford — a course known as the “prime minister’s degree” for the number of alumni who have gone on to hold senior positions in the UK government. He also pursued his interest in music, playing the oboe. After Oxford he studied for a PhD in economics at Harvard.

His first job after university was at Rothschild Asset Management, where he soon rose to head of the fixed income and currency teams. The business was eventually sold to Insight Investment, the UK’s second largest fund manager, while Mr Gray took on chief investment officer roles at UBS Asset Management in Switzerland and at Hermes Fund Managers, the fund management offshoot of the BT Pension Scheme.

On September 1 2009 Mr Gray turned up for his first day as chief investment officer at USS, at a time when he says “you could still smell the smoke from the financial crisis”. The investment portfolio was 80 per cent invested in equities and private assets, with 10 per cent in property and 10 per cent in government bonds — a mix Mr Gray describes as “a bit redolent of the UK pension industry in the 1990s rather than where it had moved”. The fund had been particularly badly hit by the financial crisis, losing 27 per cent in 2008 alone.

Mr Gray set about overhauling the portfolio, making it more diverse and giving it a greater focus on emerging markets and private assets. He also reduced the weighting to the UK, which accounted for half the equities when he arrived.

He says his biggest regret is not buying more index-linked gilts and making a bigger push into liability-driven investing, which aims for a greater match between returns and pension payments, but adds “clairvoyance would have been extraordinarily rewarding over recent years”.

To avoid falling into the same trap of many other pension funds that have made costly ventures into private equity, USS increasingly favours direct investments to skirt paying exorbitant fees to managers. The scheme holds several large stakes in core parts of the UK economy, including an 11 per cent position in Thames Water, the utility that serves Greater London and large parts of south England, a 42 per cent stake in Nats Holdings, the UK’s air traffic controller, and a 10 per cent investment in Heathrow Airport Holdings, which runs the world’s second-busiest airport.

Other investors in UK infrastructure have been alarmed about the prospect of the Labour party entering government and embarking on a wholesale nationalisation drive. But Mr Gray is less anxious, having had reassuring meetings with politicians from both main political parties. “Before we made the investments, this was a known risk. The fact we made them suggests we found some solace in thinking through the process,” he adds.

Pay at USS has been a point of controversy throughout Mr Gray’s tenure, with academics who earn a national average of £49,000 a year criticising significantly larger awards at the scheme. USS did not divulge Mr Gray’s pay for this article, but the scheme’s annual report shows two executives each received up to £1.8m last year — one of whom is understood to be Mr Gray.

After three years at USS, Mr Gray split the investment management part of the fund into a separate investment subsidiary, with its own specialist board of executive and non-executive directors. “That was an important step for the overseeing of the capabilities and the controls in the investment business,” he says.

The set-up replicated the formation of his former employer Hermes out of the BT Pension Scheme. Last year, BTPS sold off a 60 per cent stake in Hermes to US fund manager Federated Investors in a deal that valued the manager at £410m. Hermes had spent much of the previous five years attracting more external clients.

When asked whether USS Investment Management could take a similar path, he does not rule it out in the long term. “We’ve looked at that in recent years and it hasn’t looked like a compelling case for us, but it could happen in the future,” he says.

The timing of Mr Gray’s departure has been long planned. When he does so at the end of the month, he will be replaced by Simon Pilcher, the former head of fixed income at M&G Investments. Mr Gray does not have any confirmed plans after leaving USS, but is considering a couple of part-time roles.

One thing is for sure — after a decade in one of the most heavily scrutinised roles in UK investment management, he will not be seeking out drama. “I’m looking forward to doing some writing, a lot of reading and also some music,” he says.
CV

Born May 1957, Illinois

Total pay Not disclosed

Education

1975-78 Philosophy, politics and economics MA, Oxford university

1978-82 Economics PhD studies and teaching, Harvard University

Career

1983-97 Rothschild Asset Management, CIO

1997-01 UBS Asset Management, global head of asset allocation and currency

2001-06 Independent institutional adviser

2006-09 Hermes Fund Managers, CIO

2009 to present USS, CIO

2012 to present USS Investment Management, CEO
Universities Superannuation Scheme

Established 1974

Assets £73bn

Employees 510

Headquarters London and Liverpool

Ownership Not-for-profit trustee



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