KPMG explains what changes organisations that currently participate in the scheme can expect.
26 February 2018
If your organisation participates in the Social Housing Pension Scheme (SHPS), your exposure to the cost and risk factors associated with defined benefit pension provision is undergoing significant change.
What we expect to change
- The triennial funding valuation is underway and likely to lead to an increase in annual contributions.
- The accounting treatment of SHPS is changing, leading to a more transparent but seemingly higher pension liability.
- Developments in the pensions market more widely are leading to talk of regulatory change on the horizon.
- A growing number of housing associations are announcing their exit from SHPS, leading to a change in character of the scheme that’s left behind.
These give an idea of some of the wide-reaching changes we expect, but by no means cover them all.
Assessing the value of being part of SHPS
The most recent housing association to leave SHPS is the first to move out of the TPT Retirement Solutions (TPT) universe entirely.
A number of other housing associations have chosen to stay within the TPT master trust but ring-fence their own assets and liabilities.
These organisations have benefited from:
- having more control over pace of funding
- the potential to have a more bespoke and efficient investment strategy
- the scope to manage the liabilities in a way which results in the creation of significant value.
These organisations have deemed the benefits of leaving SHPS to be more valuable than the cost of implementation, which can tally into the millions if you include the cost of leaving behind orphan liabilities.
With pensions creeping up the risk register in many organisations, value can be created in many forms – not just in terms of reduced cash contributions. For example, value can be unlocked for use in pension asset risk reduction and/or contribution certainty over the medium to long term.
What would SHPS exit mean for my organisation?
SHPS exit is not right for every organisation – there are advantages to being part of a large multi-employer scheme.
However, from a governance as well as a financial perspective, it is important to understand how your organisation is likely to be affected by the changes to SHPS and what the costs and opportunities of staying in or leaving SHPS are.
While a multi-employer scheme in the social housing sector should benefit from a strong covenant, the assumptions used are relatively cautious, the recovery plan is short and front-end loaded and the regulator is increasingly involved. As a result, the potential funding benefits of being in the multi-employer scheme are not necessarily coming through.
Interestingly, the Pension Protection Fund (PPF) assumes that the multi-employer covenant is of significant benefit and this leads to a very low PPF levy relative to standalone schemes.
A key question for your organisation to ask is whether there is an opportunity to better leverage your asset-rich balance sheet as part of your pensions strategy. In turn, this could help free up resources to more directly meet your objectives beyond pensions.
Given the changes to SHPS and the wider pensions market, we would advise that if your organisation currently participates, it would be sensible to consider your position in the scheme. At the very least, if it is right for you to stay in SHPS, it is helpful to be able to articulate the reasons why.