LCP predicts that the upcoming Social Housing Pension Scheme (SHPS) valuation could reveal a deficit in the scheme of £1.5bn, if the same methodology is used as in 2017.

This would be almost £500m higher than expected under the funding plan set following the 2017 valuation, and is likely to mean a large increase in contributions for housing associations.

LCP estimates these results could potentially increase deficit contributions being paid by housing associations by between 30% and 50%. While the estimated deficit would remain the same as in the last valuation in 2017, this is despite Housing Associations paying significant contributions of over £400m over the last three years.

In addition, LCP are expecting that costs may increase by up to 5% or more of salary in contributions for employees currently earning Defined Benefit pensions in the scheme.

While these changes aren’t expected to come into force until April 2022, LCP are warning that the SHPS valuation should be high on Housing Association Board agendas because of the potentially huge impact on costs.

Mike Richardson, Partner at LCP, commented,

“With Housing Associations paying significant contributions over the last few years, as well as some associations transferring their share of the deficit out of SHPS, it would be hoped that the deficit would have reduced. However, our calculations show that the deficit has stubbornly remained at around the £1.5bn level as assets have failed to keep up with the growth of liabilities.”

Richard Soldan, LCP Partner and head of LCP’s Social Housing practice added:

“As well as an increase in deficit contributions, employers are potentially facing an eye-watering increase in costs for employees that are earning DB pensions in the scheme. This increase will need to be met by employers, employees, or a combination of the two – and none of these options will be welcome. Boards will need to start to think about how they will respond to the likely significant increases in costs.”

Tim Gilbert, Senior Consultant at LCP noted:

“The SHPS valuation should be on Boards’ agendas as soon as possible given the likely impact on costs, especially given the current economic climate. They will need to consider their options in relation to managing their SHPS exposure, and this may include investigating whether they should be following in the path of the increasing number of employers who have transferred their pension liabilities out of SHPS and into their own scheme. The looming increases in costs may act as the trigger for more associations to make the move.”

More details on the implications are available in this blogpost from LCP Partner Mike Richardson