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One of the UK’s biggest pension funds has warned that dramatic losses on its investment in Thames Water will shape its approach to other regulated utilities, in a blow to the new Labour government’s drive to attract more institutional investment into British infrastructure.
The Universities Superannuation Scheme, which manages pensions for more than 500,000 current and retired university staff, confirmed on Thursday that it had in effect written off the value of its 20 per cent stake in Britain’s largest water utility.
In accounts filed for the year to March 2024, the USS said the value of its investment was “minimal”. Two years ago it valued the stake at £956mn.
Thames Water, which serves about 16mn households, is struggling under the weight of more than £18bn of debt and seeking to avoid being taken over by the government’s special administration regime — a form of temporary renationalisation.
Its nine shareholders, which include USS, Canadian pension fund Omers and several sovereign wealth funds, are refusing to put much-needed equity into the business after declaring it “uninvestable” in March.
Simon Pilcher, chief executive of USS investment management, the fund’s investment arm, said in its annual report that it was clear that Thames Water “had not been a successful investment”.
“Our experience with Thames Water will influence our future approach to investing both in economically regulated assets and more broadly,” he added.
The comments come as Sir Keir Starmer’s government seeks to encourage pension funds to invest in public infrastructure as part of a wider push to boost economic growth.
Rachel Reeves on Saturday announced a review of Britain’s pensions system, in part to try to boost how much money funds allocated to domestic venture capital and infrastructure.
An investment shift by defined contribution schemes of just 1 per cent could deliver £8bn of “new productive investment” into the UK economy, the chancellor said.
But Pilcher indicated that the USS would keep a closer watch on the regulatory process in the UK.
“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,” he said.
“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,” he added.
USS has £77.9bn of assets under management including stakes in Heathrow airport, the National Air Traffic Service, the UK’s air traffic control provider, as well as wind farms and gas networks worldwide.
The fund’s report comes a day after US credit rating agency Moody’s downgraded Thames Water’s debt to junk status, potentially putting the company in breach of regulator Ofwat’s licence conditions and making it more difficult for it to raise debt.
The utility needs to refinance £1bn of borrowings by the end of the year, as well as raising £750mn of equity by next year and £2.5bn by 2030.
Omers, Thames Water’s largest shareholder, had already written down the value of its stake to zero, while Queensland Investment Corporation, which owns about 5 per cent of the company, also wrote off its stake this week.
Thames Water’s shareholders said in March they were willing to withdraw from the business and take an estimated £5bn loss. USS said on Thursday its position was unchanged.
Thames Water was contacted for comment. The company is planning to try to raise new debt and equity this year.
USS said in the report that the value of the scheme’s defined benefit fund increased by £1.7bn in the year to March, taking it to £74.8bn. The fund’s surplus increased by an estimated £1.8bn to £9.2bn.
Bernard Casey, a retired pensions economist and USS member, said: “USS has failed to exercise oversight on the financial engineering and environmental performance at Thames Water and that is a scandal.”
“But governments should not expect pension funds to engage in private equity investment in infrastructure. These investments are risky and opaque. The government can borrow at lower rates,” he said.
USS 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.
The increased investment came despite mounting problems at Thames Water, including a £20mn fine for sewage pollution in 2017.