The Social Housing Pension Scheme’s funding deficit has to be reduced, but employers also need to consider the bigger picture
Bringing everyone on board
The Social Housing Pension Scheme has announced the results of its latest actuarial valuation. The scheme’s funding deficit is up from £663 million three years ago to £1.035 billion as at 30 September 2011. Employers will be faced with finding an extra £30 million a year for the next 13-and-a-half years to fund the extra deficit. And the cost of earning new benefits will also increase. Changes to the contributions will apply from April 2013. So what should employers be doing now?
There are three narrow options. First, the employer pays all the increase. That could be practical where only a small proportion of staff are in SHPS.
Second, passing on some or all of the increase to members by increasing members’ contributions.
And third, move staff to a cheaper SHPS-defined benefit section.
Putting up members’ contributions might encourage some to opt out, but inertia means that most will stay in. The main effect of high member contributions tends to be reduced take-up of the pension scheme among new recruits.
However, employers should be considering the bigger picture and the elephant in the room is called ‘auto-enrolment’ - where staff are automatically enrolled in a scheme and can then opt out. Rather than asking ‘What do we do about SHPS?’, employers ought to be asking ‘What do we do about auto-enrolment?’ and fit their reaction to the SHPS valuation results into their response to this wider question.
Pensions are for everyone. Auto-enrolment is an opportunity to redesign pension provision to make it affordable for all staff to join, by which I mean both affordable employers’ contributions and affordable members’ contributions. This necessarily means lower pensions, but better to provide a lower pension for everyone than a higher pension for some and no pension for others.
I am pleased that SHPS has decided to introduce a career average revalued earnings section with 120ths accrual. This is in addition to both the basic state pension (£5,587 per annum) and the state second pension (potentially around £3,900 per annum), so the combination of the CARE 120ths pension and the two state pensions may well be adequate for many people. This new section is worthy of consideration by those looking for an affordable option.
SHPS has not yet disclosed the actuarial basis of the figures. They have mentioned that ‘The increase in the deficit is largely driven by… the fall in long-term interest rates.’
Ultimately, the cost of the benefits will be determined by the benefits paid out, and not the contributions estimated by the actuary. There is always scope for debate about advance contribution estimates.
Derek Benstead is senior consultant at First Actuarial