Big UK pension scheme under pressure over Thames Water stake

One of the UK’s biggest pension funds is under pressure from its members to explain its decision to invest in Thames Water, the troubled utility facing the threat of renationalisation.

The Universities Superannuation Scheme owns a 20 per cent stake in Thames Water that is in effect worthless after Omers, the Canadian pension fund that is the utility’s largest shareholder, wrote down the value of its stake to zero two weeks ago.

This has prompted anger among the university staff who are members of USS and keen to protect the value of their retirement scheme.

“We have asked (USS) about the original decision-making process [to invest in Thames Water] but they won’t tell us anything except that the decision went through their normal checks process,” said a spokesperson for UCU, the University and College Union, which represents USS members.

“We will continue to push on this . . . but I suspect we will get the same defensive sidestepping response.”

Thames Water, Britain’s largest water utility with 16mn customers, is struggling with an £18bn debt pile and has enough cash to last until next May.

The government is on standby for a temporary renationalisation under its special administration regime process. Thames Water’s nine shareholders, including USS and Omers, have already declared the company is “uninvestable” and that they are willing to withdraw from the business and take an estimated £5bn loss.

Bernard Casey, a retired pensions economist and academic and member of USS, estimates the pension fund will be forced to write off around £1bn or about 1.3 per cent of its £75.5bn of assets. 

“USS was not exercising financial or environmental oversight despite having people on the board and in stark contradiction to what it proclaims,” he said.

Although USS currently has a surplus of around £7.4bn, Casey said it could easily go into deficit again, in which case it would require extra contributions from universities, a number of which are cash-strapped.

USS, which manages pensions for more than 500,000 current and retired university workers, first invested in Thames Water in 2017 after its previous owners, led by Australian asset manager Macquarie, sold out.

It bought a further 8 per cent stake in 2021, bringing its total holding to just under 20 per cent. This was despite mounting problems at Thames Water, including a £20mn fine for sewage pollution in 2017.

USS had already slashed the value of its stake in Thames Water by almost two-thirds to £364mn for the year ending March 2023, down from £956mn the year before.

The pension fund declined to say whether it had taken a further writedown on its Thames Water holding.

Its decision to invest in Thames Water had been consistent with its fiduciary, commercial, legal and regulatory responsibilities, USS said, adding that decisions relating to the scheme’s investments were “reserved for the trustee”.

“We recognise that stakeholders, like members and employers, will have an interest and questions and — when able and where appropriate — we have provided updates to that end.”

Thames Water is waiting for a draft ruling from regulator Ofwat in July on how much it will be allowed to increase bills, before it attempts to raise fresh equity from new and existing shareholders. 

The regulator is also drawing up plans for a special “recovery scheme” that would be applicable to some water providers. This could involve reduced regulatory penalties in exchange for more frequent reporting and oversight. The scheme is aimed at avoiding temporary renationalisation and making the business more attractive to investors.