SHPS or leaky boat?

David Davison

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“Déjà vu all over again” is a famous quote attributed to famous baseball manager Yogi Berra which must perfectly describe how England and Wales social housing organisations must be feeling following the publication of the results of the 2014 valuation for the Social Housing Pension Scheme (“SHPS”). The results show that the ‘on-going’ funding deficit has increased from £283m in 2005 to £663m in 2008 to £1,035m in 2011 and now £1,323m at 2014. I’ll not mention the current position which would be even worse!!

In the face of further  increased future contribution costs and further future risk exposure, organisations may now be considering what options are open to them.

Interestingly the exit debt figure is used by the Scheme to assess the financial strength of its participants and therefore their ability to stand over any liabilities built up. Organisations are expected to have assets which cover this liability – and cover it comfortably – to be able to continue with the provision of defined benefits.

Clearly as the exit debt rises the numbers able to meet this assessment will fall and they will be compulsorily required to amend their scheme benefits. Other organisations not considered ‘high risk’ will have the option to use the numerous final salary and CARE options, and a defined contribution option, which SHPS offers and can help control contribution costs and limit risk.

In terms of exiting SHPS this is likely to be an option open to very few organisations. The exit debt which would be applicable could be four to five times that quoted above so organisations are therefore likely to be forced to work within the confines of the Scheme unless they have options to transfer to another scheme, such as a local government scheme, by using member consents. Organisations may well also want to consider what impact the new pension flexibilities may have and whether highlighting these to staff may have a positive impact on the funding position.

What must also be a concern to Registered Social Landlords (RSLs), and indeed their auditors, is that none of the SHPS liabilities appear on balance sheets.  With the introduction of FRS102 and as SHPS makes the move to identifying deficits based on each RSL’s share of liabilities, the current a disclosure approach is not likely to be sustainable going forward. Finance directors will have to incorporate pension deficit figures in their accounts, which will have a significant, unwelcome and negative impact on their financial statements.

Organisations participating in the SHPS need to have a realistic understanding of their future commitments and the likely impact those commitments will have on their available income. They also need to be sure that the current proposals set realistic and achievable objectives and should not just be prepared to accept that the position the scheme finds itself in is totally a result of market conditions.

Appeared in Social Housing magazine 23/03/2015

David Davison

Post by David Davison

Specialist consultant on pensions strategy for corporate, public sector and not for profit employers

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