Could pensions legislation have a big impact on activity in the social housing sector?

Helen Abbott, 29 February 2024

Helen Abbott from LCP’s Covenant practice, looks at how pensions legislation can impact housing association activities and what action providers should be taking.

It’s really important that housing associations are aware of, and respond to, some additional powers of The Pensions Regulator (TPR), introduced by The Pension Schemes Act 2021 which were effective from October 2021.  These can be particularly relevant when considering mergers or refinancing.

TPR’s greater powers have enhanced the obligations on housing associations with defined benefit pension schemes to consider the impact that their actions could have on the strength of the financial support (or ‘covenant’) for their scheme.  If the impact could be detrimental, housing associations need to consider steps to mitigate the impact.

We produced a guide for not-for-profit employers back when these measures first came into effect: The Pension Schemes Act 2021 – New risks for not-for-profits.pdf ( These pensions’ regulatory obligations impact all aspects of employer decision-making where a course of action, or even inaction, could impact the strength of the scheme’s sponsor.

Impacts need to be assessed in the context of the ongoing covenant, or employer earnings, and also the exit covenant – what would happen if there was an insolvency of the employer? It’s worth noting that ‘detriment’ is assessed relative to an employer’s buy-out (or solvency) pension obligations – the highest measure of a scheme’s deficit. So even if your pension scheme is well funded on an ongoing basis and doesn’t need a recovery plan any more, it will still fall under this remit.

These powers have been in place a while now and we’ve really seen them impacting the approach that housing associations have taken to decision making, involving pension scheme considerations at an earlier stage, and sometimes modifying business plans.

Here are a couple of examples of how we’ve supported housing associations recently.

Merger of two housing associations

We advised on a merger involving two housing associations, each with defined benefit pension commitments across various schemes. Our role was to assess the merger's impact on these schemes, managing pensions regulatory risks and supporting discussions with the scheme’s trustees. 

We looked at the merger's financial and legal structure, comparing the covenant support for each defined benefit scheme pre and post-merger. This analysis included assessing the merger's immediate and longer-term effects on earnings and potential insolvency outcomes, and quantifying potential detriment. We assessed whether it was material and could warrant mitigation for any of the schemes or else risk the unwelcome prospect of TPR’s intervention.

Ultimately, we determined that despite a temporary reduction in coverage for one housing association’s schemes post-merger, the overall benefits of the merger - such as operational synergies - could be expected to outweigh the initial short-term disadvantages. We concluded that the pensions regulatory risk was manageable, with no need to mitigate the defined beneft schemes involved.

Research suggests there have been 71 housing association mergers since 2012, so this is likely to be an area of focus for many housing associations in the short to medium term.

Refinancing challenges

Refinancing represents another event that should prompt housing associations to consider how their defined benefit schemes might be impacted, particularly given the current challenging lending market. We recently advised one housing association, which was carrying out a refinancing, about concerns with new clauses in the lending documentation referencing its defined benefit pension schemes. Our review identified that these clauses appeared to be taken from the lender’s agreements with customers that had more straightforward pensions arrangements and weren’t appropriate in this context. The housing association used our advice to engage with lenders to modify the terms so that references to the multi-employer schemes it sponsored were appropriate and acceptable.

Looking ahead: the new defined benefit funding regime

This is expected to be in effect for valuations from 22 September 2024, representing another significant development. With TPR set to release expanded guidance on covenant assessments, all defined benefit schemes, especially those with funding deficits and recovery plans, will need to pay close attention. LCP is closely monitoring these developments and will provide future updates

In summary, the Pension Schemes Act 2021 has ushered in a new era of pensions regulation, with employers expected to integrate pensions considerations into every stage of their strategic planning.

Our experiences with housing associations demonstrate the importance of proactive engagement in pensions issues and with scheme trustees. As the regulatory environment continues to evolve, particularly with the new defined benefit funding regime, staying informed and prepared will be crucial for all employers with defined benefit pension scheme obligations.

Want to find out more? 

LCP’s specialist team can help with all aspects of your pension strategy.  If you’d like to discuss how we can support you, please do get in touch.