There’s always risk if you choose to strike out on your own. But sometimes it’s worth it.
Like a lot of industry-wide pension schemes offering final salary-type benefits, the Social Housing Pension Scheme (SHPS) has been going through a difficult period. Changes to how housing associations report their SHPS pensions deficits over the last few years have brought the scale of deficits into sharp relief for many boards, and allowed direct comparisons with Local Government Pension Scheme deficits.
It’s not SHPS’s fault. It has to provide public-sector pension benefits working with private sector funding and regulatory requirements. One of those private sector requirements is regular valuations and the 2020 valuation is currently underway. One thing that the valuation calculates is any deficit in the Scheme – the difference between the funds it holds and the costs of providing promised benefits.
SHPS has been in deficit for a long time. Despite increasing employer contributions in recent years, the 2020 valuation is expected to show an increased deficit. Coupled with this a number of employers have exited the scheme over recent years swapping increased control of risk factors for their pensions obligations for greater uncertainty in the face of regulatory change.
The increased deficit will mean increasing employer contributions once again further straining associations’ cash flow. SHPS’s actuaries have said that the part of employer contributions intended to pay off the deficit could increase by 50%. That will hit employers in the Scheme hard at a time when their services, and their funds, have never been more needed.
Like many similar arrangements, the Scheme was set up to give employers in an industry access to high-quality pension provision, with generous benefits for employees. It was administratively easier to do this collectively than going it alone, and it was hoped that larger schemes would deliver better investment returns and efficiency savings.
Unfortunately, this has not proved to the case for some time. Existing employers have in many cases been forced to make some payments in respect of previous defaulting employers or orphan liabilities, and no matter what they do the cost of pensions only increases.
Stick or Twist?
Some employers have decided that despite the increased administrative and reporting responsibilities, and the ongoing liabilities they have to take on directly, it’s better to set up and run their own schemes.
This usually works by taking a ‘bulk transfer’ of the assets backing up the employer’s pension promise in the Scheme, and moving them to the employer’s new scheme. In simple terms the calculation is the additional costs in setting up a new scheme and transferring the benefits are outweighed by longer term cost savings and greater flexibility .
This means that there is no ‘exit debt’ to be paid, as would happen if the employer simply walked away from the Scheme.
The individual employer is then responsible for ensuring that benefits are properly funded until the very last member’s benefits have been paid, or the new scheme is well enough funded that the responsibility can be passed to an insurance company, by ‘buying out’ the liabilities. An employer can’t simply dictate how its own scheme will run and how much it will pay in. But it can have a greater influence, working with the trustees to ensure that its costs and pension promises are affordable, and investment strategy does not expose the employer to greater risks. None of this is available in SHPS.
Whether you are reviewing your options, looking to exit or considering next steps for dealing with your deficit the pension team at Bevan Brittan has a wealth of experience of helping employers with these difficult issues including the process of setting up your own scheme, and administering it once it’s up and running.