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Is SHPS heading for choppy waters? The state of the Social Housing Pension Scheme explained
Last month saw the latest three-yearly Social Housing Pension Scheme valuation. Dominic Brady looks at the early estimates and their implications for those working in the sector. Picture by Getty
What is the Social Housing Pension Scheme?
As its name suggests, the Social Housing Pension Scheme (SHPS) is the main scheme for housing association employees, offering both defined benefit (DB) and defined contribution (DC) pension structures.
DB schemes offer a specific or ‘defined’ pension amount each year after retirement, based on your salary and how long you have worked for your employer. DC schemes see employer and employee contributions invested, with the performance of those investments determining how much is paid out on retirement.
SHPS is run by Leeds-based pensions provider TPT Retirement Solutions, which has enrolled nearly 100,000 employees for more than 700 employers in all.
TPT established the SHPS defined contribution scheme in October 2010, now accounting for around 70,000 people’s pensions. It also manages the SHPS defined benefit scheme, which was established in 1977 and covers 7,000 employees.
Every three years the scheme is revalued to work out whether there is a deficit – that is, a shortfall between the amount of money in the scheme’s coffers and the amount due to be paid out in pension payments, which must be made up through increased contributions. The last valuation from TPT appeared in September 2017, meaning the pension provider will now be working on the latest valuation.
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Is the deficit growing?
Recent analysis has shown the deficit staying where it was three years ago, while other estimates anticipate a slight increase.
Analysis by pension consultant First Actuarial estimates that the deficit has increased from £1.5bn in 2017 to £1.6bn this year, while rival consultancy LCP expects the deficit to remain at £1.5bn. At the previous revaluation in 2014 the deficit stood at £1.3bn, so even when taking the higher estimate, the rate of deficit increase has slowed. However, these estimates are much higher than forecasts suggested in 2017,
with employers significantly upping their contributions over the past three years.
As Sam Mullock, partner at First Actuarial, explains: “If everything had gone to plan and there had been no bulk transfers, the deficit would be at about £1.1bn today.”
Mr Mullock alludes to a number of large associations that have exited the SHPS in recent years, including Clarion, Bromford and Sovereign. In exiting, they take with them their share of assets and liabilities and, in circumstances with economic stability, you could expect the deficit to shrink.
But Mike Richardson, partner at LCP, notes: “The fact that it isn’t smaller despite bulk transfers and contributions paid means that the SHPS is further behind the curve.”
What does this mean for employers and employees?
For associations involved in SHPS, a deficit of £1.5bn means one thing: increased costs.
LCP estimates that the deficit could translate to increased housing association contributions of up to 50%, which will be particularly painful given they have shelled out a massive £400m in deficit contributions over the past three years. Increased contributions of £160m per annum – agreed on at the last valuation – were expected to reduce the deficit by about £1bn by 2026, but analysis showing the deficit has remained roughly the same poses a problem.
Mr Richardson says: “There’s potentially an extra 50% of deficit contributions that needs to be found. Broadly you can either pay 50% extra in contributions for the same length of time or you can pay the same level of contributions for an extra 50% of the time, or some combination of the two.”
LCP and First Actuarial agree that this means boards should begin planning to see how they can meet these increased costs. As for individual employees, it will depend on what type of scheme they belong to. The vast majority of SHPS members are included in the DC section and will therefore not be impacted by the valuation. But for those on DB schemes, of which there are around 7,000, the deficit could mean higher contributions.
“For those on the DB scheme, there is a risk that contributions – for the new benefits they are earning – go up and employers pass some or all of future service cost increases on to employees,” he tells Inside Housing.
The most common DB section is career average revalued earnings (CARE) 60ths. This is where an employee accrues 1/60th of their average salary for each year they are in the scheme. So for someone earning £24,000 for 10 years on a CARE 60th, they would receive a pension of £4,000 a year.
“Current contributions are 22.1% and we think that might go up to 24% to 29%,” says Mr Mullock. “Then it is up to the employer: do they pass it on to the employee and risk pricing them out, or take it on themselves?”
What does this mean for SHPS in the future?
“Does a bigger deficit increase the chances of more bulk transfers? Arguably yes, because the bigger the size of the problem I think the more attractive it is that you have control over that problem,” Mr Mullock predicts.
But he also notes that there are only so many employers that are big enough to afford the costs involved in transferring out of SHPS and says there is no risk of SHPS breaking up.
Mr Richardson posits that in many cases associations will exit the scheme because they actually want to pay higher contributions in order to reach the “de-risked” point sooner.
TPT is keen to stress that the figures being produced are just estimates and it will share results of the valuation in spring 2021. The pensions sector is also anticipating far-reaching changes with the Pension Schemes Bill working its way through parliament. Included are changes to the powers of The Pensions Regulator, a new style of defined contribution scheme and changes to defined benefit scheme regulation.
Mr Richardson says: “The regulator is looking for schemes to reduce the level of risk and for employees to increase deficit contributions where it is affordable. While the new bill won’t cover explicitly this valuation,
it represents the direction of travel for the 2023 valuation and beyond, and I would be surprised if SHPS trustees didn’t keep that in mind when setting the approach to be taken.”
