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Explainer: what the SHPS valuation means for housing associations and employee pensions

A valuation of the Social Housing Pension Scheme (SHPS) has been announced for the first time in three years, with big implications for organisations and employees in the sector. Nathaniel Barker explains what it is all about

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A valuation of the Social Housing Pension Scheme has been announced for the first time in three years, with big implications for organisations and employees in the sector. @NatBarkerIH explains what it is all about #UKhousing

What is SHPS?

SHPS is the pre-eminent pension scheme for the social housing sector. It is used by most housing associations as their main pensions arrangement, as well as organisations such the National Housing Federation. In total, around 65,000 employees from more than 400 employers are enrolled in the scheme.

It is run by pensions provider TPT Retirement Solutions, and was established in 1977.

Two kinds of pension are offered through SHPS. The more common defined contribution one invests employer and employee contributions, with the performance of those investments determining how much is paid out on retirement. Defined benefit pensions offer a specific pension amount each year after retirement, based on salary and longevity. Around 7,000 people in SHPS are on a defined benefit package.

The advantage of a sector-wide pension scheme like SHPS is that it is straightforward for employers to administer, and it means an individual does not have to change pension provider if they move jobs within social housing. The downside is that such a system limits flexibility for individual employers regarding how they manage their pension commitments.

What is the valuation?

The SHPS is revalued every three years to assess the gap between the scheme’s assets and liabilities – that is, shortfall between the projected value of contributions to SHPS and the amount the scheme is committed to paying out to its pension holders.

And there certainly is a gap. At the last valuation in September 2017, it stood at £1.5bn. That is largely because of continued drops in interest rates, which mean the scheme’s investments are set to make smaller returns in the future. This is a challenge faced by many pension schemes across industries, not just SHPS.


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What does the valuation show?

The funding level – the aforementioned gap expressed as a percentage – has actually improved since the previous valuation thanks to better-than-expected performance from SHPS’s investments in recent years. In September 2017, the funding level was 75%. By September 2020, the new valuation shows it was 77%.

However, those low interest rates mean the valuation of the liabilities also had to be increased. As a result, the deficit has edged up from £1.52bn to £1.56bn.

This is a problem for SHPS. After the 2017 valuation, a recovery plan was put in place which meant employers had to step up the amount they are paying in to try and close the £1.5bn shortfall. One would therefore have expected the deficit to shrink rather than increase. Simply put, the previous recovery plan has not been enough. As Neal Thompson, partner at First Actuarial, the pensions advisor, says: “The funding of SHPS appears to be behind schedule.”

What does that mean for employers?

In short: higher costs.

After lengthy discussions, SHPS employers and trustees have agreed a new recovery plan aimed at filling that £1.5bn hole via bigger contributions.

From April 2022, the aggregate deficit contributions they must pay to help reduce the shortfall will increase to £175m a year, up from £150m currently per the previous recovery plan.

These contributions will then increase by 5.5% a year from April 2023 and be payable until March 2028 – 18 months after the previous recovery plan was set to end. So while the initial increase is not as big as some analysts had feared, the larger deficit contributions will increase faster and go on for longer.

Consequently, the total deficit contributions for SHPS employers over the seven-year period are 50% – or £500m – higher than what was agreed after the last valuation in 2017.

And remember, these deficit contributions are on top of the standard contributions which must be paid into the scheme.

Contributions for defined benefit pensions will also increase by 50% – more on that later.

These costs will hit different organisations harder, depending on how many employees they have in SHPS and the type of pension plans they are on. The architects of the recovery plan have emphasised that they worked hard to find a level that is affordable for employers, but balancing these costs with things such as fire safety and decarbonisation bills will be difficult.

“The increase in contributions will prompt many associations to consider how to react,” says Richard Soldan, partner at LCP, the pension advisor, and head of its social housing practice.

Some could choose to exit SHPS and make alternative pension arrangements over which they have more control in a bid to bring costs down. It’s more likely that larger organisations will make the leap, as they have bigger liabilities to grapple with and greater capacity to set up their own pension schemes. About 20 employers have already left SHPS since 2012, including Clarion, Sanctuary and the Guinness Partnership.

Also, the fact that more organisations have left since 2017 means those remaining each represent a bigger share of that £1.52bn deficit.

What about employees?

As mentioned above, contributions for already-expensive defined benefit pensions are increasing dramatically. The main impact of the latest SHPS valuation will therefore fall on the 7,000 or so members on this type of pension plan.

They are likely to be asked either to pay bigger contributions for the same benefits or to take a cut to the benefits they are earning. Many will probably see their employer close down their defined benefit section completely.

“We have heard plenty of suggestions that we have reached the ‘final nail in the coffin’ for defined benefits. Well, this really does feel like the final nail as far as SHPS is concerned,” says Mr Soldan.

Employees of organisations which choose to transfer out of SHPS and enter new pension arrangements will also probably see changes to their pension offers. Last year, Clarion increased employee contributions for some defined benefit pensions by 100%.

But if you are worried that the £1.5bn deficit means you won’t get your promised pension, don’t panic just yet. The liabilities are stretched out over a very long period – more than 100 years – so SHPS is not going to run out of money to pay retirement incomes any time soon.

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