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Former SHPS pension schemes have highest funding levels in the social housing sector, survey finds
Employers that have exited the Social Housing Pension Scheme (SHPS) have recorded higher funding levels than those that remained in the scheme, according to a survey.
The survey, done by pensions provider First Actuarial, found that on 31 March, SHPS funding levels stood at 87%, up from 74% the year before.
But by comparison, former SHPS schemes reported funding levels of 93% – rising from 78% in March 2019.
Aggregate funding levels across four groups – SHPS, ex-SHPS, Local Government Pension Scheme (LGPS) and ‘own scheme’ – increased from 78% in 2019 to 86% this year, First Actuarial said.
Funding levels represent the difference between the amount of money in a defined benefit scheme’s coffers and the amount it needs in order to pay retirement incomes to members.
A number of large housing associations have left the SHPS in recent years including Clarion, Radian, Sanctuary and Bromford.
SHPS, which is managed by Leeds-based pension provider TPT, has faced an increasing funding shortfall in recent years, and in 2018 it emerged that its deficit had risen to £1.5bn.
This growing deficit meant associations needed to increase their contributions.
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Researchers noted that late March was a recent peak for FRS 102 funding levels and by June some associations will have seen a 10% fall in their funding level.
The findings, from the sector’s biggest ever defined benefit survey, are based on FRS 102 assumptions and results for the social housing sector. This accounting method was introduced in 2016 to make accounting more transparent and comparable.
Under FRS 102, organisations have to recognise their complex financial instruments such as derivatives and swaps in their income statement.
The aggregate asset value across the sector stayed at £6.3bn, with contributions offsetting the coronavirus-related fall in financial markets in 2020, according to the survey.
First Actuarial estimated that if investment returns of 3.2% per annum can be achieved for the lifetime of scheme members, then there is enough money to pay benefits without any further employer deficit contributions.
But the organisation added: “Arguably, a return of 3.2% per annum is challenging in the current low-interest rate environment (particularly if the investment strategy is cautious), and we therefore expect many employers will be asked for deficit contributions at upcoming actuarial valuations.”
Separate analysis by pension advisors Isio on behalf of the National Housing Federation (NHF) said that with the Pensions Regulator’s new defined benefit funding code of practice currently in consultation, “many sponsoring employers are already going to be under pressure to pay more money in more quickly”.
Isio estimated that as things stand, contributions would need to increase between three and five times with no “mitigating action” and cautioned that “any latitude offered by the regulator for contributions payable during the current economic emergency will not resolve the need for more funding in the future”.
The NHF, supported by Isio, is meeting the regulator to discuss how the housing sector might best be represented and how factors such as strong covenant are to be reflected in any new funding schedule.
