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Ten thousand housing workers face threat of pension changes as deficit rises again
Ten thousand housing workers could be transferred to less generous pension schemes following the announcement of further increases in the deficit in the sector’s multi-employer pension scheme.
Employers were this week told that the deficit on the Social Housing Pension Scheme (SHPS) will increase to £1.5bn, meaning employers will have to increase their contributions to pay it off by 50%.
The housing associations that will be hit hardest by the change are those with employees on ‘defined benefits’ schemes – pensions which pay a guaranteed amount on retirement. As well as increased contributions, they will see the cost of future benefits rise by 30%.
According to pensions experts, many housing associations will seek to avoid these costs by moving employees on defined benefits to defined contributions, which are calculated based on the amount paid in and are less generous as a result.
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SHPS data shared with Inside Housing by XPS Pensions Group shows there were 10,025 employees with defined benefit pensions in September, but this is thought to have fallen slightly below 10,000 since then.
A source familiar with the SHPS valuation told Inside Housing: “It’s a watershed moment. Without any action or innovative thinking from employers, almost every employee will be in the DC [defined contribution] section in three or four years’ time.”
At the last revaluation three years ago, the deficit increased to £1.3bn and associations were asked to pay more to reduce it to £1bn.
Despite these increased contributions, however, a fall in the ‘discount rate’ used by actuaries to calculate the values of pension schemes has led to the increased deficit at this latest valuation by TPT Retirement Solutions – formerly known as The Pensions Trust – which manages SHPS.
Housing associations have some flexibility within SHPS to keep employees on defined benefits but ask them to pay more, or change the benefits to which they are entitled.
Experts, however, told Inside Housing that most employers would shift employees from defined benefits to defined contributions.
Steve Simkins, pensions director at KPMG, told Inside Housing: “Employers have got to decide whether they’re going to bear the cost or share the cost, or make benefit change. Benefit change could be to a less generous benefit structure or to defined contribution.”
Chris Mapp, head of social housing at XPS Pension Group, added: “The majority still do [have defined benefit pensions] and quite a few still offer it to new employees, but I suspect that after this valuation, that will be pretty rare, and there will be a significant number of employers that decide as a result of these figures to terminate defined benefit accrual entirely.”
Richard Soldan, partner at consultancy Lane Clark & Peacock, agreed, saying: “I think the trend is towards stopping defined benefits and providing defined contributions. That’s certainly been the trend over the last few years and I think this will be the catalyst that will prompt a lot of associations to take that step as well.”
Unions, however, reacted negatively to the news. Siobhan Endean, national officer for the sector at the union Unite, told Inside Housing: “Unite will resist any changes that individual social housing organisations attempt to make to their pension schemes if it will result in a detriment to our members.
“Pensions are deferred pay and members will not stand idly by if their employer is intent on cutting their retirement income.”
John Gray, branch secretary of the housing association sector for Unison, added: “I’m making a general plea for people to stop and step back. Let’s talk about this. I’ve got lots of members in my Unison branch who are members of the scheme. It’s really important to them and their future.
“The whole yardstick for measuring the cost of liabilities in pension schemes is broken and loads of schemes have been closed down prematurely for no reason whatsoever.”
How will this affect me?
If you’re a social housing worker on a defined benefit pension within the Social Housing Pension Scheme, it’s as likely as not that your employer is one of those which will seek to move to defined contributions.
According to Chris Mapp, head of social housing at XPS Pension Group, it is almost certain that this will result in the housing association paying less into your pension, whether this means there is an overall fall in the total contribution or just a rise in the percentage paid by you.
But the main difference, Mr Mapp says, is that where with a defined benefit pension, the risk falls on the employer, with defined contribution, the employee bears the risk.
With a defined benefit pension, an employer guarantees the amount that will be paid out at the end. If the investments made by the pension scheme fail to deliver that amount because of a downturn in the market or something else, the employer makes up that shortfall.
With a defined contribution pension, however, no specific pay-out is guaranteed. Instead, the only thing that is fixed is the amount the employer contributes to it. Therefore, the employee is the one subject to the vagaries of private investments.
