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SHPS deficit falls due to gilt market turmoil
The recent increase in gilt yields is likely to have led to an improved funding position in the Social Housing Pension Scheme (SHPS).
Analysis by pensions advisor LCP, shared with Inside Housing, revealed a significant fall in the deficit in the SHPS.
This is because defined benefit (DB) pension schemes pay future pensions as they fall due.
The value of a scheme’s liabilities is the estimated current value of those future pension payments. Most pension schemes will calculate the value of their liabilities as a discounted value of those future payments using an interest rate related to gilt yields.
When the interest rate used to discount the payments increases, the value of the liabilities decreases. At the same time, most schemes invest in gilts to try to match their assets to the liabilities.
The result is that increases in gilt yields have led to a decrease in liabilities and asset values, but where schemes are not fully hedged, asset values will have typically decreased by less than liability values and overall the funding position will have improved.
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This will be considered more good news for SHPS members and follows on from an earlier analysis in February which showed that the deficit of the SHPS had dropped below £1bn for the first time in 10 years.
The SHPS is run by pensions provider TPT Retirement Solutions and has around 65,000 employees from the social housing sector enrolled.
TPT declined to comment on how the recent gilt market turmoil has affected the scheme’s position.
LCP explained that although the recent turmoil in financial markets has been unwelcome for some in the short term, the resulting financial conditions may well be positive for housing associations’ pension schemes.
Given the seismic changes in markets, all pension schemes will need to review their long-term strategies to reconsider the appropriate balance of risk and investment returns, LCP said.
This opens opportunities that have not been available to landlords previously and could lead to reduced costs for DB schemes in future, and options to reduce risk exposure.
In addition, alongside an improved funding level for SHPS, LCP said the gilt market increases could result in reduced exit debts for many organisations in the Local Government Pension Scheme (LGPS).
Tim Gilbert, partner in LCP’s social housing practice, said: “The current economic conditions might lead to additional pressures on housing associations’ finances, for example through increased borrowing costs. But the cost of DB pensions may be a source of pain relief.
“Whilst DB scheme asset values are likely to have decreased, the reduction in the value placed on liabilities is likely to have been greater in many cases. We are therefore seeing reductions in deficits for some of our clients. In turn, housing associations are considering options to reduce pension risk, such as exiting LGPS funds, which may not have been affordable at the start of the year.”
Mr Gilbert said it is important for associations to “lock in to any recent funding improvements, to reduce future risks and give greater certainty”.
Richard Soldan, partner and head of LCP’s not-for-profit practice, added: “In our view the SHPS trustees should consider what steps they will take to lock in the improvements, whether that is reducing contributions or taking risk out of the investment strategy.”
Mr Soldan questioned whether the SHPS would advance its triennial valuation by a year so that current financial conditions can be factored in to future contributions for associations as soon as possible.
Sam Mullock, a partner at First Actuarial, said he expects the funding level of SHPS to have been relatively robust over recent weeks.
He explained that some pension schemes have faced liquidity concerns due to the collateral calls from liability-driven investment (LDI) funds, but initial indications are that the SHPS LDI funds have operated as expected.
Mr Mullock added: “Overall, the economic environment has dramatically changed for pension schemes and this means that there is a lot to consider for employers when they review the costs and risks from their current pension arrangements after the ‘dust has settled’ following the recent market volatility.”
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