XPS Pensions Group has revealed that more than 50% of Housing Associations do not have policies in place for dealing with the expected SHPS pension cost increases arising from the 2017 valuation that is currently in progress.
The firm’s survey of SHPS employers is based on input from 33 Housing Associations, covering around 2,000 defined benefit (“DB”) SHPS members (i.e. 20% of the current SHPS DB membership) and 5,500 defined contribution (“DC”) SHPS members (i.e. around 8% of the current SHPS DC membership). The survey concluded that the vast majority of employers are looking to review their pension offering, and more than half are considering whether to close some/all of their DB sections to future accrual. In doing so, the Housing Association sector will be catching up with the changes seen in the private sector, where the switch to DC pension schemes has largely been completed. Key findings of the survey include:
• The SHPS 2014 triennial valuation forced many Housing Associations to review their pension arrangements for employees and this trend is accelerating now that the 2017 valuation is in progress, with many Associations revisiting previous reviews.
• In the past, Housing Associations have differed in practice on who should meet the cost of the increased future service contributions: with almost equal numbers passing the full cost to members, adding the full increase to the employer cost, or sharing the cost increase 50:50.
• Despite the ever increasing costs associated with SHPS DB pensions, many Housing Associations remain paternalistic and want to provide members with as much choice as possible (including a choice between DB and DC), although this is coming under increasing pressure.
• The most common expected activity following the 2017 SHPS valuation is to close some / all DB sections to future accrual, but there will be widespread differences between different employers.
Chris Mapp, Pension Actuary and Head of Social Housing at XPS Pensions Group said: “Successive SHPS valuations and the introduction of auto-enrolment have added significantly to the pension costs incurred by Housing Associations. Despite a desire to maintain the status quo, we are seeing many Associations close some or all DB sections offered to future accrual. Many are ever more concerned they will not be able to meet further increases in future service costs which are expected to increase by 30-50% as a result of the SHPS 2017 valuation.
“At the same time, we see Housing Associations keen to ensure that their DC pension offerings deliver a meaningful outcome for their staff. This often means contributing more than the statutory minimum under auto-enrolment, and we increasingly see a desire to harmonise provision for all staff and to stop the two-tier practices that have emerged over time.”
Prior to 2005, the SHPS DB pension scheme was in surplus. Every valuation since has shown an increased deficit, and at the last triennial valuation on 30 September 2014, the SHPS deficit had increased to £1,323 million. From what we understand, that deficit has grown further, and SHPS have warned that increases to future service costs may be in the range of 30-50%. In addition, there is a discussion as to whether the way the deficit contributions are shared between different employers is equitable. Currently, there are cross subsidies in play, and so revising the approach will result in there being winners and losers.
Chris added: “Individual Housing Associations have previously had little say in the outcome of the SHPS valuation but the new employer committee should give them more of a voice for the 2017 valuation. As the SHPS DB pension scheme deficit and future service costs continue to increase, it seems that Housing Associations have a wide range of opinion as to who meets those extra costs. Although many have been reviewing their pension offerings, the majority of Housing Associations do not have a policy in place to deal with the issues they face.
“Advising organisations in the social housing sector on their pension arrangements is incredibly complex. They are experiencing increased demands on their cash from many sources, not just pension scheme contributions, and careful consideration needs to be given to managing their pension costs and risks. There is no single “right answer” for the sector in how they approach this issue”
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