Pensions: the implications of the SHPS valuation figures

Posted: 15/12/2020

TPT Retirement Solutions (TPT), which manages the Social Housing Pension Scheme (SHPS), has published estimated figures for the latest triennial funding valuation as at 30 September 2020. TPT has indicated that the preliminary results should be shared with employers by Spring 2021. Housing association employers could face significantly increased pension contributions moving forward, as analysis suggests that the deficit is between £1.5 billion and £1.6 billion.

What does the scheme valuation do?

Every three years, the valuation process will assess whether there is a deficit in the defined benefit section of the SHPS by comparing the assets against the long-term costs of providing pension payments and other benefits to members (the liabilities). Where the liabilities are greater than the assets, a recovery plan will be needed to provide additional contributions from participating employers.

Changes since the previous valuation

As at the previous valuation in 2017, the deficit was over £1.5 billion, having increased from £1.3 billion in 2014. Since 2017, employers have been paying increased deficit contributions, amounting to £160 million per year. Forecasts in 2017 indicated that the deficit for 2020 should have been approximately £1.1 billion, with the increased contributions expected to extinguish the deficit by 2026. Over the past few years a number of large housing associations have also left the SHPS, taking their liabilities with them (including Riverside, Orbit, Clarion, Bromford and Sovereign) further increasing expectations that the deficit would shrink. However, with an anticipated deficit of £1.5 billion and above for 2020, the deficit has not reduced since 2017 despite the increased contributions and departures. This will have implications for housing associations participating in the defined benefit section of the SHPS moving forward.

Implications

The main issue for housing associations relates to the costs of increased contributions to make up the deficit. Actuaries Lane Clark & Peacock LLP (LCP) have indicated that the overall deficit contributions could go up by 50%. Boards should be made aware now of the likelihood of increased contributions from April 2022, with regular discussions on this point to be tabled for future meetings. They should also consider incorporating estimated contributions into business projections. Housing associations may have to make difficult choices between spending cash on housing projects and prudent funding of pension promises. If employers have previously passed on the increased cost of contributions to individual employees, they should consider whether this is affordable or whether a fresh approach should be implemented in order to meet these costs.

A combination of the pandemic impact, alongside the increased SHPS deficit, might also have the effect of driving further housing associations to exit the SHPS in the future in order to avoid increased contributions. However, the costs and time required for such an exercise may mean this is only viable for a limited number of housing associations.

TPT Retirement Solutions has published a draft timetable to assist in structuring decision-making.

Draft timetable

There will be a valuation consultation between the SHPS and the Employer Committee through to Spring 2021, after which it is intended that the preliminary valuation results will be shared with employers. Over the Summer 2021, employers will be reminded of the valuation results and the affordability appeals take place. During September/October 2021 employers will be notified of final results and any changes to employer contributions, with the final sign off and submission of the valuation to the Pensions Regulator by 31 December 2021. The deadline for employers to confirm contribution changes will be 31 January 2022 and they will take effect on 1 April 2022.

Housing associations should therefore be considering and planning for increased contributions from April 2022, and taking advice, where appropriate, to ensure they understand their risk exposure and potential impacts on cash flows.

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