The Social Housing Pension Scheme (SHPS) 2020 valuation results were published in August 2021. With a significant increase in contributions due from April 2022, we consider what the results might mean for your organisation more widely and the steps you can take to review your pension strategy and form your longer term response.
The cost of building up new Defined Benefit (DB) benefits in the SHPS has risen sharply since 2017, driven by a fall in government bond yields. The change in cost of new benefits over the years leads to cross-subsidies between employers – some will be winners and others losers. Those now closed to new service are still exposed to the risk from employers who remain open to new benefits.
If your organisation is still offering DB benefits to employees, you will want review whether that remains in line with your business and people objectives and, if you decide to change the offer, look to consult with employees on a different contribution rate or accrual rate. If you haven’t already consulted in time for a change from when the new 1/120ths accrual rate and new contributions come in April 2022, this does not stop you having the chance to implement a change from a later date.
The cost of funding benefits already built up has also risen, although the full impact has been delayed until later years.
Employer contributions towards benefits already built up will rise from April 2022 by 17% on average (but for some employers by as much as 50% or more). Overall however ,- the increase is 72% when comparing all years committed to up to the end of the new recovery plan to the old recovery plan.
There is a clear link between the average term (or ‘duration’) of an employer’s liabilities and the increase in deficit contributions seen at the 2020 valuation. Typically, those organisations with younger membership profiles (i.e. those with longer durations) will have seen the largest increases in their deficit contributions. This is predominantly due to changes in key assumptions introduced by the SHPS Scheme Actuary at the 2020 valuation and you will need to take advice on individual analysis to understand the implications for your organisation.
The overall impact will depend on a housing association’s individual profile. You should be assessing what the impact is for your organisation individually and you will then need to make decisions around finances, your people, and your governance processes. The decisions you need to make and how you make them will depend on what your obligations in SHPS are and what your objectives are. Planning the route through to your preferred position will naturally follow.
Questions you might ask for your participation in SHPS are:
• What has caused the change in deficit allocated to your organisation?
• Is the pace of funding appropriate?
• What is the level of risk being taken in the investment strategy?
• What are the alternatives?
• Is there a way to offer a member options exercise?
• Can you use your balance sheet more effectively?
• How does the contribution rate compare to staff in other pension schemes?
• Is the benefit valued by staff?
• Will you pass any contribution increases to your staff?
• Does the cost to employers meet your inclusivity objectives?
• Are your staff getting value for money from their pension scheme?
• Are you comfortable with the degree of flexibility offered to staff?
• Are you happy with the governance structure and quality of engagement with you and your staff?
Isio’s SHPS 2020 valuation modules are designed to offer in depth, tailored analysis of your organisation’s own participation, in order to inform decision making and strategy. If you would like support and want to understand your options, please get in contact with Housing Lead, Katy Taylor.
You can read more about the results, the wider implications and views on the short term and longer term options for housing associations in Isio’s bulletin – to manage your legacy liabilities as well as to find the right pension offer for current employees.
Isio is one of the country’s leading independent pensions advisory firms, known and respected for its agility and the team has more than 1,000 client relationships. We're working with our pensions advisers Isio to keep the sector up to date on key areas affecting housing associations.Find out more