KPMG summarises two recent updates on the Social Housing Pension Scheme.
9 July 2018
TPT Retirement Solutions (TPT) has sent two important Social Housing Pension Scheme (SHPS) communications to employers recently:
an update on the sector-wide move to full defined benefit accounting under FRS102 at the end of June
- a valuation update on behalf of the SHPS Employer Committee at the start of July.
We have outlined each of these communications below.
The update gave employers a helpful reminder of what has been proposed and why. It gives new insight on the increased certainty of timescales for implementation as well as some new detail on process designed to give comfort to auditors. It also gives a description of the online modeller intended to be built for distributing results.
The modeller will be available for year-ends of March 2019 onwards. Importantly for some, the modeller will not become available until May 2019. You should consider how this will impact on your planned timescales for publishing your 2018/19 financial statements.
While this is a helpful update, there are a number of areas not covered in the update which may initially seem like minor details, but could actually have significant consequences for employers.
- On what measure of liabilities will the assets be shared between employers? Assets divided between employers according to their share of liabilities measured on the triennial funding basis will lead to a different asset figure than basing assets on share of liabilities on the accounting basis. This depends primarily on the age profile of your members. Those with an older membership will benefit from assets based on accounting liabilities and vice versa.
- We also await updates on the proposed approach for recognising the step change in accounting.
- For those undertaking corporate activity, such as mergers, TPT is still considering the rules it will put in place.
The update doesn’t quantify the impact other than to say it is likely to be unfavourable at the moment. However, KPMG has prepared analysis concluding that the change is expected to lead to a doubling of the sector’s net balance sheet liability and a doubling of its annual income and expenditure charge on average, based on current market conditions. If this will be material for your organisation, we recommend you work to understand the specific impact in good time for your year-end.
TPT’s update signposted its next communication to employers due later in July, which will set out the additional support options employers may wish to consider.
2017 valuation update
The main purpose of this update was to request employers’ views on how deficit contributions should be allocated between employers. This is a welcome invitation as it is an area that will lead to winners and losers regardless of whether a change is made or not – more on this below.
The update also explains how the SHPS Employer Committee is working on behalf of the sector in areas such as taking reasonable credit for the sector’s covenant.
It demonstrates clearly that the new governance structure within TPT, where there is now a separate committee representing employers – the Employer Committee – which is working to more robustly test the appropriateness of the method and assumptions proposed by SHPS. However, this does come at the expense of a swift conclusion and clarity on costs from April 2019.
At the moment, a large chunk of the deficit contributions you pay (the two contribution ‘tiers’ scheduled to finish in 2020 and 2023) is based on what your salary roll was at a single point in time back in September 2008.
The winners of this are those that had a low active membership at that point, and hence a low salary roll, but lots of deferred and pensioner members leading to a large share of the historic liability from which the deficit has materialised.
The losers are those who had a large number of actives in 2008 with fewer deferreds and pensioners.
The remaining two contribution ‘tiers’, both scheduled to finish in 2026, are based on each employer’s share of historic liability.
The Employer Committee believes it would be fairer to base all the deficit contributions on each employer’s share of the historic liability rather than being part based on the September 2008 salary roll. Those who are currently winners would lose their advantage. But those who are currently losers will say that they have been paying off the deficit created by other employers for far too long.
It’s worth noting that if this goes through it may make deficit payments fairer going forwards but it will not rectify the ‘overpayments’ made by some organisations to date.
Non-sectionalised, multi-employer schemes like SHPS have a lot of cross-subsidies in them, with this deficit contribution issue being just one example.
Another is future service rates, which reflect the average membership profile of all of SHPS rather than the specific profile of your organisation. Therefore, this particular deficit contribution issue should be considered in the wider context.
The challenge from an organisation that is currently a winner could be to reflect that, if the Employer Committee is considering this cross-subsidy, then shouldn’t it be considering them all?
We would encourage you to engage in this process by understanding how this is likely to impact on your organisations and providing your feedback to the committee.
If you have any questions about either of these updates, please contact Will Jeffwitz.