You are viewing 1 of your 1 free articles
SHPS valuation: employer pension deficit contributions to increase by 50% as £1.5bn shortfall fails to narrow
Employers using the Social Housing Pension Scheme (SHPS) will have to increase deficit contributions by 50% over the next seven years to help close a £1.5bn funding gap, it has been agreed following the latest three-yearly assessment.
Delayed results from the 2020 valuation of the scheme released today show that funding levels for the scheme have improved amid better-than-expected investment returns, but not enough to shrink the deficit.
The immediate impact for the 400-plus housing organisations participating in the scheme will be an increase in the yearly combined contributions they must pay to help reduce the shortfall to £175m from April 2022, up from £150m currently.
These contributions will then increase by 5.5% a year from April 2023 and be payable until March 2028 – 18 months after the existing recovery plan was set to end.
That initial increase combined with faster rises and a longer payment period will mean that the total deficit contributions are 50% or £500m higher than what was agreed after the last SHPS valuation in 2017.
Experts said the increased deficit contributions – which are additional to the standard employer contributions to SHPS – are likely to drive further transfers out of the scheme by large housing associations.
Contributions for defined benefit pensions, where pensions are in the form of a specific amount paid each year based on salary and longevity, will also increase by 50%.
That means defined benefit pension holders in SHPS, of whom there are currently around 7,000, 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.
READ MORE
At 30 September 2020, SHPS had a funding level of 77%, up from 75% at the last valuation in 2017.
The funding level represents the difference between the projected value of contributions to SHPS and the amount the scheme is committed to paying out to its 65,000 pension holders.
TPT Retirement Solutions, the pensions provider that manages SHPS, said the scheme’s investments performed better than expected between 2017 and 2020 with annual returns of 9%.
But the scheme’s liabilities – that is, the amount it is required to shell out in retirement incomes – have also increased, meaning the deficit has edged up from £1.52bn to £1.56bn.
That is despite deficit contributions already increasing after the last valuation.
Many pension schemes across industries have seen liabilities increase amid falling bond yields and fluctuations in inflation during the coronavirus pandemic, TPT said.
SHPS employers and trustees will hope the new recovery plan they have agreed after lengthy discussions strikes the balance between protecting employee benefits in the long term and keeping contributions affordable for employers amid huge fire safety and decarbonisation costs.
Employers will pay differing amounts based on their liabilities in the scheme – in other words, how much their employees are owed in pensions.
Emmy Labovitch, chair of the SHPS employer committee, said: “The employer committee, representative of large and small sector organisations, has been working hard to obtain a fair outcome for scheme employers over the last six months.
“Discussions with the scheme committee were constructive. We were able to impress upon them that the employer committee could only endorse a deficit recovery plan that reflected the priorities and constraints of the social housing sector.”
Melanie Cusack, chair of the scheme committee, which represents SHPS trustees, said: “The scheme committee were keen to engage with the employer committee to understand affordability concerns in challenging times.
“Reaching agreement on contributions has involved compromise on a later recovery period end point than originally proposed, however we are confident this does not undermine the security of member benefits.
“We recognise that there is significant benefit for the scheme and employers in having a plan that is straightforward, linear and enables employers to plan ahead and budget.”
Mike Richardson, partner at pension adviser LCP, said: “The increase in pension contributions will hit housing associations hard.
“We expected higher contributions, and the reality of the increases is now clear.
“All associations will need to find more cash to pay to SHPS, with the increase in costs of future defined benefits being particularly stark for those remaining associations that continue to offer such a benefit.”
A number of large housing associations have left SHPS in recent years to escape rising costs, including Clarion, Sanctuary and The Guinness Partnership.
The £1.56bn funding gap is therefore now shared among fewer employers, increasing the share that each left in the scheme will need to pay in deficit contributions.
