Pension promises and obligations in defined benefits schemes like the Local Government Pension Scheme (LGPS), Social Housing Pension Scheme (SHPS) and single employer Trusts or TPT Sections are linked to inflation.
Whilst it is inflation expectations in the long term that will affect the liability measure put on funding and accounting obligations in the main, a rise in the short term will also have an impact. Short term high inflation is likely to mean that the next actual pension increase applied to benefits currently being paid, as well as those in deferment, will be higher than currently built into valuation assumptions.
Any inflation increase measured at the next pension increase date will be “baked in” to the benefit level paid, and obligations, with future increases being added on top.
With the LGPS valuation currently underway, housing associations with LGPS obligations should engage with their LGPS Fund and obtain advice on likely outcomes and possible ways to control contributions and mitigate risks. Inflation will be one risk that needs to be understood and managed.
It is in the public domain that TPT is carrying out a benefit review to understand whether benefit rules have been applied correctly to date. This may impact on obligations attributed to employers in SHPS, as well as any with their own section in TPT or having exited previously. This could be very significant depending on how the court case is ruled. Proceedings are currently scheduled for 2024.
Housing associations should consider whether they wish to obtain advice on the possible impact for their organisation and their members, and their options for managing this.
With pay reviews, accounting year end, pension increases, and a new LGPS contribution schedule all due, 31 March 2023 will be a key date for housing associations when the impact of inflation will come through via different routes.
Budgeting and planning, risk management and stress testing can all be used to ensure that pensions and benefits are offering value to an organisation and employees, whilst being affordable.
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