Last week saw the publication of the Social Housing Pension Scheme (SHPS) 2017 valuation results.
These showed that in keeping with the previous valuation results from 2014, the funding deficit had increased, to £1.52bn. The direct effect of this is that overall deficit contributions will increase, as will costs for future service.
Admitted employers will now 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. Whilst it has been announced that the implementation of the future service rates will be delayed to July 2019, admitted employers will still need to notify SHPS of any changes they wish to make to employee’s contributions by 30 April 2019.
Changes to employee contribution rates will require 60 days consultation with eligible employees therefore this will need to be carried out prior to 30 April 2019. 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 can begin early in the new year.
The increased deficit will not have come as a surprise to most, but the results have confirmed that there will be a new recovery plan from 1 April 2019 which will replace the current recovery plans in operation. We understand that there will be winners and losers under this new regime as some employers may see a reduction in the deficit contributions they pay in the short term, but over the period of the recovery plan all admitted employers are likely to see an increase in their contributions.
Unsurprisingly pensions have again featured in the Regulator of Social Housing’s recently published 2018 sector risk and it urges boards to seek independent legal advice where appropriate to understand their risk exposure. Defined Benefit (DB) pension schemes such as SHPS DB have declined in popularity in recent years, predominantly because of the increasing liabilities and consequential high deficit contributions admitted employers are being asked to pay in addition to contributions to fund future service.
Several 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 the 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). This requires consultation with members and in some circumstances individual contractual changes.
Another mitigation strategy that a small number of clients are looking at (although it won’t be a solution for all) is to take greater control over investment decisions, scheme performance and the contributions they are being asked to pay by transferring their DB benefits from one scheme into their own.