What does the securities lending programme at USS offer to clients? How has the pension fund had to adapt its programme to keep up with the evolving securities lending sector?
We only have one client. USS Investment Management Limited (USSIM) is the principal investment manager and adviser for the largest pension scheme for universities and higher education institutions in the UK, and we manage a vast majority of the scheme’s assets internally. We are a lender of securities to generate revenue as a return in order to pay pensions, but we also borrow money to provide liquidity for the pension scheme over time. We have both sides of the engagement with securities lending.
On the cash management side of our business, we manage the UK’s largest private pension scheme by assets and have a big in-house team. Relative to in-house investment managers of other defined benefit pension schemes in the UK, we are relatively sophisticated.
At USS we borrow in dollars and euros, as well as in sterling, so we can optimise our funding requirements for cash across those different currencies. This is quite different from a normal, standard defined benefit (DB) pension scheme. USS also borrows in the equity space as well as against government bonds, providing diversification in terms of asset class.
On the other side of the balance sheet — where we lend securities to make money as a return for members — we run a relatively broad lending programme where we utilise both our custodians. Like many clients, they utilise their custodian to lend on their behalf. We do that in a number of ways.
For example, we will lend most things overnight, but we also term-lend for additional revenue. For instance, we will lend securities — particularly government bonds (US Treasuries) — for 35 days or 95 days to help banks with regulatory requirements such as net stable funding ratio (NSFR), leverage ratio, or supplementary leverage ratio. That can be relatively lucrative for us.
We work closely with our custodian for those services and have regular dialogue with them. They will come to us with ideas, and we will decide whether or not they are sensible for us to do in terms of risk versus reward. For instance, in 2025, securities lending in Saudi Arabia became more mainstream, so we took advantage of that to generate additional revenue for our client by lending Saudi Arabia equity.
From a beneficial owners perspective, what key trends in market activity have you noted over the past 12 months in securities lending and collateral management?
As our client is a pension scheme, we have a very long term investment horizon. While we have to consider market conditions and changes, we do not make knee-jerk reactions to anything. So I would not say there is anything particular over the last 12 months that has changed the way we work, apart from Saudi Arabia — that was not something you could lend historically, the market changed and it became lendable. The big focus on the horizon would be changes to US policy on things like repo and whether those things all become cleared.
In your experience, what are your thoughts on collateral tokenisation? How can firms manage their collateral more efficiently?
Collateral tokenisation is something that the industry is starting to adopt. It is not something that we have embraced at this point but we are watching with interest.
How to manage collateral efficiently is a very important topic of conversation, particularly around the liability-driven investment (LDI) crisis in 2022 or the dash for cash at the start of the pandemic in 2020. It is something we spend a lot of time thinking about, and how we manage those things efficiently is important. Part of that is how you set up your legal documents; the collateralisation eligibility on those legal documents under things like the Uncleared Margin Rules (UMR), but also in your bilateral agreements; being in touch with firms like LCH about what haircuts are and how you can be efficient with those. But also, having control of your demand side as well as your supply side of collateral is key.
We can use the pension scheme exemption from having to clear, and that means we can process transactions over-the-counter (OTC) or clear transactions as appropriate. There are some trade-offs there about liquidity versus flexibility of collateral management. It is very important to think about both sides of the balance sheet. We spend a lot of time making sure that we have good diversification there, so that we have requirements to post cash versus posting securities. I joined in 2020 and built a team to do that internally, working with the risk team and the asset allocation team so that they understand the constraints. So when things like 2022 happen, it is very easy to react, because everyone knows what to expect in those circumstances and what is going to be needed.
You put in place a whole series of things to manage those risks and it is not often that you get the opportunity to crash test them in such a dramatic way, so quickly after you have put them in place. It was personally rewarding — but also for the team and for our trustees — we were able to cope with those dramatic market moves relatively comfortably.
What benefits do securities lending programmes provide for beneficial owners? How have you seen these programmes change during your career in the industry?
The generation of return is useful. It is not a game changer, relative to how much we have in equities and how much we could make when equities go up, but it is a diversified source of return that is not correlated to any other asset class. And so from that point of view, it is very beneficial. The ability for us to borrow cash in multiple currencies and against multiple types of securities provides a significant diversification benefit and strengthens our risk management.
How has it evolved? At the margin, it has evolved a bit, but not that much really. If you look at what pension schemes were doing 10 or 15 years ago, it is not dramatically different to how it is now. Tokenisation would potentially be quite a change in the way these things work.
How integral are pension funds within the securities lending and collateral management industry? How has the role of pension funds evolved?
Speaking to peers, we all value securities lending as a revenue stream and our bit within the financial services framework or infrastructure is key. If nobody was lending securities and it did not exist, financial markets would be less efficient and less liquid, and consequently more risky in some senses. But it has not changed that much and I am not sure it will change a great deal over the next 10 or 15 years, apart from some things like tokenisation, which might be a game changer in the speed of which things move.
Looking ahead, what priorities will be core for USS over the next year?
In the context of securities lending, it is very steady as it goes and it works well for us. We will continue to review and respond, where appropriate, to market conditions changing in a gradual way over the long term. Changes in US legislation would be a biggie, clearly, as will the evolution of tokenisation.
About Universities Superannuation Scheme
Universities Superannuation Scheme (USS) is the pension scheme itself. It is set up under a trust and is governed by a trust deed and rules.
Universities Superannuation Scheme Limited — the trustee of USS. As the trustee, it ensures USS (the scheme) is run in line with the trust deed and rules, as well as all relevant law and regulations.
USS Investment Management Limited (USSIM) — a subsidiary of Universities Superannuation Scheme Limited. It is the principal investment manager and adviser to the scheme, looking after the investment and management of the scheme’s assets.
Image: Ben Clissold 
