Here’s why I think we’re at a pensions crossroads for housing associations:
1. The problems of the past are (hopefully) receding
I’ve spent much of my career telling clients that deficits and costs in defined benefit schemes such as the Social Housing Pension Scheme (SHPS) and the Local Government Pension Scheme (LGPS) are going up, again. But they’re now going down.
In SHPS, we’re about to see the first valuation in over 20 years where costs are likely to be held constant or reduced. You can read more about this in my colleague Damian’s blog.
In the LGPS, for many housing associations historical deficits may well have reduced significantly or become surpluses. Some housing associations are even getting refunds and removing their future risks at the same time. We’ve been helping a group of employers in one LGPS fund collectively argue their position and they’re set to receive millions of pounds back.
For many of my housing association clients their legacy defined benefit schemes have for a long time been a significant drag on resources and management time. But is there now light at the end of the tunnel? In the context of improving pension schemes finances, just how many housing associations could transform their pensions cost and risk exposures with “one last big push”?
To give you an idea of the potential wins here, one of my housing associations clients has now reduced the number of pension schemes where they are exposed to defined benefit risk from six to one, at a far lower cost than they had anticipated.
2. There are exciting new options for the future on the horizon
Here are two of them.
Firstly, what if pension schemes were allowed or even encouraged to invest for the long-term, to the benefit of both members and housing associations? This could be possible thanks to the contribution of our LCP Powering Possibility in Pensions proposal.
Secondly, what if there were a new type pension scheme that “looked” more like defined benefit for employees and provided better benefits than “normal” defined contribution schemes, but came with no additional financial risk for the employer? It’s called Collective Defined Contribution (CDC) and we’re expecting the legislative framework for this to be possible across entire industries soon, and are already working with large multi-employer groups to try and make this a reality.
CDC schemes are expected to bridge the gap between defined benefit and defined contribution pension schemes. In my opinion the housing sector is particularly well placed to operate a successful CDC scheme – the sector has the scale to make the economics work, and the collaborative nature and shared social purpose to make implementation a success.
So what should housing associations be doing now?
1. Take another look at defined benefit scheme positions
Funding positions have fundamentally changed. If it has been more than a year since you last looked at the position you need to look again, even just to check whether the logic you followed at the time still holds. Would your view change if we’re talking about an exit surplus?
At worst, it’s good governance, and budgets and business plans can be tweaked. At best you’ll capitalise on an opportunity to move on from the problems of the past, and potentially save millions of pounds in doing so.
2. Engage with and look to the future
For all but the very largest employers, a CDC scheme is likely to only work if implemented collaboratively across a sector. So for now we’d simply recommend that housing associations engage in and keep up with the conversation, whilst also focusing on the value for money offered by your current defined contribution scheme.
Three years ago I would never have imagined that we would be where we are today - I’m excited to see where the next few years will take us.
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 help, please do get in touch.