The September 2023 triennial valuation of Social Housing Pension Scheme (SHPS) is now underway and, for the first time in over 20 years, it is expected to show an improvement. Whilst clearly positive news, this does mean that SHPS employers will need to think through issues and options that may not have been considered previously.
What we expect from this time’s valuation
We expect the deficit to have halved compared to three years ago on an ‘all-else-equal’ basis. Nevertheless, we think the SHPS trustees will seek to broadly maintain housing associations’ existing deficit contributions so that the remaining deficit can be paid off sooner and investment risks can be reduced.
Exit debts (the cost of exiting from SHPS) are also likely to have reduced by more than half over the last three years. This presents opportunities for some housing associations to consider exiting SHPS entirely when this may not have been affordable in the past. Exiting would extinguish any future deficit payments, remove exposure to risks and other employers in the scheme, and reduce management time required to consider your exposure – but does come at a premium as can be seen in the graph below. The graph shows that the solvency deficit – which drives exit debts – is greater than the ongoing deficit – which drives deficit contributions.
Future service contribution rates
We also expect significant reductions in the costs of future service for those organisations where SHPS defined benefits continue to build up.
For instance, overall future service costs for the Final Salary 60ths section might reduce from c.41% to, say, 25% of pensionable pay, assuming no changes in methodology. Rates for the other SHPS DB sections would reduce proportionately too.
Given that SHPS allows individual employers to decide how the joint future service rates are split between the organisation and the employee, this could lead to some interesting discussions with members and representatives, and in many cases will need careful consideration.
What else could affect the results?
- The gilt market turmoil in September 2022 led to changes in SHPS investment strategy, which could lead to lower expected returns on invested assets. In isolation this would lead to a higher funding target being proposed by the Trustee, and therefore a higher deficit.
- The long-term effects of the pandemic are still being felt through reduced life expectancies and increased morbidity. Whilst this is likely bad news for SHPS members, we do expect this to prompt a reduction in the SHPS deficit.
- The ongoing TPT High Court case could add to SHPS liabilities (by c£100m or more), but we don’t expect the court hearing until 2025, so any extra liabilities are likely to feed through to the 2026 valuation at the earliest.
What should employers in SHPS do now?
Housing associations should consider the issues in advance so that they are ready when the results are announced (expected in Autumn 2024):
- Manage expectations regarding budgets – we expect SHPS will require current deficit contributions to be maintained even though the deficit is likely to have halved.
- Consider how you will manage employee communications, especially if you have recently closed SHPS to future defined benefit build-up, or if you have increased members’ contributions significantly in the past – we expect big reductions in the costs of benefit accrual.
- Consider whether to exit SHPS to de-risk – SHPS exit debts have significantly reduced meaning a full exit may now be a realistic prospect for some housing associations.
- For larger employers, a SHPS bulk transfer may now be more affordable, as the costs of meeting your share of SHPS orphan liabilities will have halved. A bulk transfer is a significant undertaking, so it’s worth weighing up the pros and cons before committing.
- Review your defined contribution (DC) pension scheme. If your DC scheme is now your main (or only) pension scheme, is it still offering value for money and is it still competitive against your peers? We have worked with a number of housing associations who have been through this process and decided to make changes to improve the offering to their employees.
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.
LCP is a leading pensions and benefits consultancy with particular expertise in helping housing associations to provide better pensions to their staff and to manage legacy pension issues.
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