The Social Housing Pension Scheme (SHPS) valuation results are due to be published soon. Employers may be feeling that additional cash flow into the scheme can be delayed with no material additional risk to the scheme and its members. The strong asset base, 30 year business planning and regulated nature of the sector could be argued to provide support that is more than adequate.
The sector is facing multiple demands on its cash at present, and pension funding is just one of these demands. At a time when the provision of housing across the country is one of the government’s top priorities, and challenges such as decarbonisation and building safety require urgent investment, pensions are not necessarily top of the list.
Now might not be seen as the right time for money to be diverted towards funding defined benefit pension promises, which only need be paid out gradually over many decades, but how does this argument shape up for pension scheme members and the trustees? A pension trustee has a duty to protect members’ benefits, but runs the risk that by asking for too much it creates problems for the employer further down the line.
The general expectation is that, since markets have deteriorated since the last valuation in 2017, the financial conditions at 30 September 2020 will force the SHPS trustee to measure a higher deficit, even with the same level of prudence. The prudence may be increased further in the wake of future market uncertainty and pressure from The Pensions Regulator (TPR). This could lead to increased contributions being required, to fund legacy promises and also future defined benefit provision.
Given TPR’s new funding regime due in 2022 and the challenges many housing associations are facing, perhaps now is the right time for pension trustees in the sector to take a step back and consider funding in the round. TPR’s integrated risk management framework for pension scheme funding is very helpful at this point when looking at cash funding, pension scheme assets and employer support together. SHPS will be considering this as part of discussions with the employer committee.
Conversations are also being had around covenant. “Covenant” in this context is the ability of an employer to still exist and to “put its hand in its pocket” if the combination of investment returns and cash contributions does not deliver in the longer term. The stronger the covenant, the more risk can be run, the lower the prudence required, and the lower the contributions required in the short term – all in the expectation that lower contributions will be required in the longer term too.
The NHF have been working with Isio, and in discussion with the Regulator of Social Housing and TPR, to raise the profile of the housing sector’s unique covenant. TPR could apply its new, more cautious principles, see that the sector is strong and ask for a rapid acceleration of cash funding. This would be because TPR’s new 2022 funding regime states that trustees should not assume that an employer can provide support beyond as little as three to five years.
The emerging term for this is “covenant visibility”. It is a very important consideration, however, the sector has much longer visibility than this, despite its challenges.
TPR has indicated that if longer covenant visibility can be evidenced then a less cash demanding approach to pension funding may be allowed.
There is a case to say that not only have sector pension schemes typically had very strong asset backing and very strong covenant visibility compared with other organisations, but also that there is significant scope for reduced prudence levels within SHPS and other schemes.
There is a natural tension for employers when considering how to fund liabilities in a trust based scheme. An individual employer might prefer a direct and bespoke approach to managing their pensions funding challenge, although it will need to weigh this up against the efficiencies of being in a multi-employer scheme.
As an employer, you will need to digest and analyse your SHPS results before deciding on how to respond. This will depend on your objectives and participation profile, for example whether you still offer future accrual.
Isio are offering SHPS valuation support with a number of cost effective advice modules and training to fit within your governance process. Isio will take your organisation’s data and valuation results, and help you and your Board react with the right decisions at the right time. The advice modules on offer include:
Find out more about insights, questions employers should be asking and how Isio can help. If you require any more information or would like to discuss support further, contact Isio directly via Katy Taylor.
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