16 July 2018
How will the results of the Social Housing Pension Scheme valuation affect housing associations? And what can they do about it?
The deadline for completing the triennial valuation of the Social Housing Pension Scheme (SHPS) is 31 December 2018, and at the time of writing we are yet to see the preliminary results. In this blog, we set out our predicted outcome and how housing associations can begin preparing now for the inevitable increase in SHPS contributions.
What has changed?
Since the last valuation of SHPS in 2014, the EU referendum has had a significant impact on UK long term interest rates. Long term real yields dropped significantly during the latter half of 2016, and have remained at stubbornly low levels since.
Whilst low interest rates are good for consumers, for employers that sponsor defined benefit pension schemes, the value placed on pension liabilities has risen hugely, leading to increased pressure on balance sheets and pension contributions.
What are we anticipating?
Our prediction is that this will be a difficult valuation. As well as the difficult financial conditions, it is also being carried out in the context of a Pensions Regulator feeling bruised about the criticism it has been receiving for its ineffective actions on Carillion and BHS, amongst others.
While there is no suggestion that the overall employer covenant of SHPS is anything like the situation in those schemes, we know that SHPS is on the Regulator’s radar, and it would not be a surprise to see a strengthening of the assumptions (ie a bigger deficit), and potentially a reduction of the length of the recovery plan.
Originally preliminary results were expected in December 2017. However, given the above, as well as the new governance arrangements that SHPS introduced at the end of 2017, they have not been published, and it seems unlikely that anything will be circulated any time before September 2018. Despite this, the valuation will still need to be finalised by 31 December 2018, and past practice has been for any changes in contributions and or benefits to take effect from the following April ie April 2019 for the current valuation
On an “all else being equal” basis, we expect the deficit of SHPS to have increased from £1.3bn to £1.5bn, despite over £300m of deficit contributions being paid in by associations over the last three years. However, for the reasons set out above, all may not be equal, meaning the deficit has the potential to be bigger.
What does this mean for you?
Total contributions to SHPS are likely to increase significantly. This comes from two separate sources:
- Deficit contributions (relating to benefits already promised to past and existing employees) will likely increase. In present value terms this could be by 50% or more, but the figure for any one employer will ultimately depend on the final assumptions and recovery plan structure chosen.
In addition, the SHPS Employer Committee are looking at the cross subsidies inherent in the way contributions are currently allocated amongst associations; whilst this is a “zero sum” game overall, if those cross subsidies were to be removed then some associations could see a material change in their contributions.
- Contributions for future service are also likely to increase. Again this will depend on the final assumptions used, but on an all else being equal basis, the increase could be 5% to 10% of pensionable salary. This would be a huge increase.
This leaves very limited time for strategic decisions around pensions and/or any consultation with employees, particularly if associations plan to ask employees to pay more, or offer lower benefits going forwards.
If they haven’t started already, it is important that associations now think about how they should respond, to avoid being caught off-guard when the results are finally announced.
Formal consultation process
In most cases, benefit or contribution changes will require a formal consultation process of at least 60 days with affected employees. Given the squeezed timetable this time around, it would be good practice to warn key decision makers in your organisation as to what to expect from the valuation, and that big decisions and possible consultations with employees are approaching later in 2018 / early in 2019.
Better still – this is the time to review pension benefits across the organisation to check that benefits are consistent and ready for the future.