Housing associations to suffer following SHPS valuation

The SHPS’s 2020 valuation, now agreed, showed a modest increase in its funding level to 77 per cent, up from 75 per cent in 2017.

While its investment returns were better than expected, averaging 9 per cent a year between the two valuations, a combination of factors — including falls in government bond yields and changes to the retail price index — saw its liabilities increase, leading to a small rise in the size of its deficit. The scheme’s shortfall now stands at £1.6bn, up from £1.5bn in 2017.

A recovery plan has been agreed with the goals of maintaining a prudent funding approach, protecting member benefits and the long-term funding of the scheme.

The new plan, replacing the one agreed in 2018, will see aggregate deficit contributions of £175m a year payable from April 2022 to March 2028, amounting to an additional 18 months beyond the end date of the original plan.

Deficit contributions will increase at 5.5 per cent a year from April 2023.

Emmy Labovitch, chair of the employer committee at the SHPS, said: “The employer committee, representative of large and small sector organisations, has been working hard to obtain a fair outcome for scheme employers over the past six months.

“Discussions with the scheme committee were constructive. We were able to impress upon them that the employer committee could only endorse a deficit recovery plan that reflected the priorities and constraints of the social housing sector.”

Melanie Cusack, chair of the scheme committee, representing the trustee, said: “Reaching agreement on contributions has involved compromise on a later recovery period end point than originally proposed. However, we are confident this does not undermine the security of member benefits.

“We recognise that there is significant benefit for the scheme and employers in having a plan that is straightforward, linear and enables employers to plan ahead and budget.”

LCP warned in October last year that the 2020 valuation, once agreed, could show a deficit in excess of £1.5bn, some £500m higher than expected following the 2017 valuation when it was predicted the deficit would be £1.1bn and eliminated by 2026.

While the deficit figure remained largely unchanged, stasis was only achieved because housing associations made contributions of £400m between the two valuations.

It warned in October that the increase in costs could see more housing associations leave the scheme.

Pensions Expert has reported previouslythat several housing associations have already left the 65,000 member scheme, including Riverside, Orbit, Clarion, Bromford and Sovereign.

Around £1bn of liabilities and £750m of assets have been transferred out of the scheme, representing more than 10 per cent of the total, without moving the deficit.

Responding to the news that the 2020 valuation had been agreed, LCP warned that the deficit is now shared across fewer institutions, increasing the cost that must be borne by the scheme’s remaining associations.

It added that associations that continue to provide defined benefit pensions through the SHPS are facing 50 per cent contribution increases for those benefits, a “huge impact” that will have to be borne by employers, staff or a combination of the two.

Mike Richardson, partner in LCP’s social housing practice, said: “The increase in pension contributions will hit housing associations hard. We expected higher contributions, and the reality of the increases is now clear.

“All associations will need to find more cash to pay to SHPS, with the increase in costs of future defined benefits being particularly stark for those remaining associations that continue to offer such a benefit.” 

Richard Soldan, partner and head of LCP’s social housing practice, added: “The increase in contributions will prompt many associations to consider how to react. Those that provide defined benefits at present will surely have to review the benefits they are offering to their staff.

“We have heard plenty of suggestions that we have reached the 'final nail in the coffin' for defined benefits — well, this really does feel like the final nail as far as SHPS is concerned,” he said.  

“And all associations, particularly the larger ones that remain in SHPS, may well question whether they should consider the option that a number of the biggest associations have taken in recent years and transfer their pension liabilities to a separate scheme, where they have greater input and influence on the way in which those pension liabilities are managed and funded.”