Increasing SHPS defined benefit contributions – What are your options?

The SHPS 2020 valuation results were not good news for participating employers who had hoped that, after paying increased deficit contributions from 2019, the deficit in the scheme would have decreased on this occasion.

Whilst the increase in deficit was only considered slight from £1.52bn in 2017 to £1.56bn in 2020, given the number of employers that have departed SHPS following bulk transfers since the last valuation, this deficit is shared amongst fewer employers. In addition, as future investment returns for the scheme are expected to be lower, employers will be required to pay increased contributions for future service.

Participating employers will have now been provided with their individual valuation results with details of the increased contributions required from April 2022. Admitted employers have a limited time to consider whether they will bear the cost of this future service increase or whether this will be passed through to employees via the employee contribution rate.

Many employers in SHPS have now closed their DB sections to future accrual of benefits and moved members into the defined contribution (DC) section in order to mitigate their ongoing costs. SHPS is a multi employer scheme, and ordinarily when an admitted employer’s last active member leaves such a scheme, their share of any underfunding crystallises and becomes payable – this is often referred to as the ‘Section 75 debt’. This can be significant, with many admitted employers having estimated liabilities of millions of pounds within SHPS. Moving members into the SHPS DC scheme in parallel to closing the DB section avoids this (because the employer will still have active members in SHPS as a whole) and also allows members to retain the salary link with accrued DB benefits (provided it is an employer led decision).

Changes to SHPS, either to employee contribution rates or to close the DB section to future accrual, will require 60 days consultation with eligible employees and their representatives. This will need to be carried out prior to 31 January 2022, the date by which SHPS need to be notified of any changes to contribution rates.  Employers may also need to factor in employment consultation if members have a contractual right to participate in the SHPS DB section or to have a specific contribution rate.

We would therefore urge admitted employers to seek advice at the earliest opportunity so that any proposals to change employee contribution rates are formulated and consultation commenced as soon as possible to achieve the 31 January 2022 deadline.

For further information and advice, please contact Jane Bowen or your usual contact in the Employment Team.

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