USS pension fund investor Thames Water will be questioned by the watchdog over the stock

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Britain’s largest pension scheme will face questions from regulators over its investment in Thames Water, the troubled utility.

A meeting between the Pension Regulator and the £90 billion University Superannuation Scheme, which is one of the largest investors in Thames Water with a 20 per cent stake, will occur as early as this week, according to people familiar with the situation.

While the meeting had been long anticipated, questions around USS’ stake in the water monopoly would be high on the agenda, they added.

The regulator’s intervention came days after revelations that the British government was working on a contingency plan for the possible temporary nationalization of Thames Water, which has piled up £16 billion in debt and is seeking at least a further £1 billion capital injection from its investors. This includes UK and international pension funds, including USS, which serves more than 500,000 members and sponsoring employers including some of the UK’s most prestigious “red brick” universities.

TPR has a legal obligation to ensure that the scheme is run properly, including around its investment decisions, so that pensions can be paid.

USS is currently in the process of conducting a formal examination of its financial position, known as a valuation.

“I suspect regulators want to examine whether holding Thames Water will impact the funding position of the scheme,” said John Ralfe, an independent pensions expert.

The Pensions Regulator said: “We are in regular contact with trustees but do not comment on these discussions.”

USS declined to comment.

Last week, USS said it did not expect the events surrounding Thames Water to have “a material impact on the funding position or the level of contributions coming out of the 2023 appraisal, or on the security of members’ promised retirement.”

Regulators’ interest is also emerging days before Jeremy Hunt, the chancellor of the UK, will unveil far-reaching plans to push pension schemes, such as the USS, to direct more cash to areas that will boost economic growth.

Ministers are keen on UK public and private sector pensions, which combine to manage around £3tn of assets, to invest more broadly in riskier, but potentially higher return areas, such as early stage unlisted companies, infrastructure and private equity . It is seen as riskier than publicly traded assets, due to its complexity and lack of transparency over fees and costs.

USS signaled conditional support last week for Thames Water, a private company, saying it has given its backing to the company’s turnaround plan, and supports its long-term strategy.

“We remain of the view that, given the appropriate regulatory environment, the long-term goals of repairing critical UK infrastructure and paying pensions to our members are in strong alignment,” he said.

USS first became an investor in Thames Water in 2017, attracted by the opportunity to support the business’ long-term investment needs.

In 2021, the pension fund is buying another 8.8 percent of shares, bringing its total holdings closer to 20 percent. In its latest annual report, USS said investments in “long-term, stable, predictable, manageable and inflation-related assets” were “key” to fulfilling its primary duty to pay the pensions promised to members.

Financial details of the 2021 transaction were not disclosed by USS, but the deal came months before benefits cuts were imposed on tens of thousands of USS members, due to a £14 billion shortfall.

On Tuesday, the chief executive of regulator Ofwat told a House of Lords committee that Thames Water needed billions of pounds more in cash at a time when there was “absolute resistance” from investors to put more money into the sector.