The results of the 30 September 2020  three-yearly valuation of the Social Housing Pension Scheme (SHPS) are now out and show a material increase to the employer contributions required. 

SHPS is used by many housing associations as their main pensions arrangement, and so these results could have a significant impact on organisations and their staff. There is a very short window for decisions to be made and notified to SHPS, and so Boards will need to act swiftly in order to decide on their response.  

In this blog we will look at the results and consider the options available to participating employers.  

The valuation results 

The headline results are:   

• The liabilities (the target level of assets to be held) increased over the three years, from £6.08bn in 2017 to £6.71bn in 2020. 
• Whilst the assets performed strongly (increasing from £4.55bn to £5.15bn over the period), they did not keep pace with the growth in liabilities and so the deficit marginally increased, from £1,522m to £1,560m.   
• Although the deficit is broadly unchanged, it should actually have reduced, as a result both of the significant deficit contributions paid by employers (around £400m since 2017) and the employers who left SHPS and transferred to another arrangement, taking their share of the deficit.  
• This means employers will be required to pay total deficit contributions totalling £175m pa from 1 April 2022, an increase of 17% on the current recovery plan.    
• The recovery plan has also been extended from 30 September 2026 to 31 March 2028, meaning that, in total, the amount associations will be paying towards the deficit in future will be around 50% higher than expected under the 2017 deficit repayment plan.  
• The cost of providing new benefits to employees has also increased by up to 14% of salaries. In £ terms this could mean an increase of more than 50% to the amount being paid.  

Why have contributions gone up so much?  

The key reasons for the increase in contributions is the fall in Government bond yields (which are used to measure the liabilities), since 30 September 2017.  This has significantly increased the value of the liabilities. It also directly leads to the increase in the cost of new benefits.   

In addition, the deficit is now shared across fewer associations, following the exit from SHPS of a number of the larger associations over the last few years. This increases the share of the deficit that each association that remains in SHPS will need to fund.   

What are your options?  

There are limited options available for employers to challenge the valuation results or the underlying assumptions. However, there are some important steps you should be taking:  

1. If the increase in deficit contributions is genuinely unaffordable, make an affordability appeal to the SHPS Committee as soon as possible. 
2. Consider your SHPS exposure and your options to manage the risks arising. One option is to transfer your SHPS liabilities to a different scheme, which can give greater flexibility over how the liabilities are funded. Over the past three years an increasing number of housing associations have taken this step.  
3. Where benefits are still being earned in the defined benefit sections of SHPS, develop a plan to manage the increase in these costs This could include passing some or all of the increase in the cost to employees or changing to a more affordable benefit scale, or even closing the defined benefit section entirely. Given the increased rates are due to take effect from 1 April 2022, and SHPS’s requirement that that they are informed of any changes by 31 January 2022, any policy will need to be agreed by the Board soon. This is particularly the case if the proposed changes will require consultation with affected employees, which is likely to be for 60 days. 

If you need assistance with understanding the risks presented by your SHPS participation, and your options for managing and mitigating those risks, please contact me or one of the other experts in LCP’s Social Housing Practice.