The recent announcement about the improved funding position of the Social Housing Pension Scheme (SHPS), while good news on the face of it does warrant some further investigation and should encourage some questions to be asked by participants.
There is some positive news with the scheme asset value having increased to £1.92bn in 2010 from £1.53bn in 2008, and the deficit reducing by £44m from £663m to around £620m. As the deficit represents the difference between the value of the assets and the value placed on the benefits built up, this implies that the value of the benefits built up increased from £2,190m in 2008 to £2,540m in 2010.
It is also worth bearing in mind that this is the “on-going funding position”, on this basis it is assumed that the Scheme (and by extension the participating employers) will continue in existence for ever and a day. The results as at 2008 as shown in the SHPS annual review in 2009 showed an eye-watering deficit of £3.384Bn (31.1% funded) on scheme closure. The Pension Trust make the statement that there is no intention for the scheme to close, however how can they be so sure about future events given the economic background we face at the moment? Up until 2009 there was no intention that the Scottish Voluntary Services Pension Scheme (“SVSPS”) was to close but it did in 2010 with serious implications for many of the participants.
To consider the scale of the deficit faced, the ongoing deficit of £620m at 2010 is equivalent on average to £10,000 in respect of each of the 60,000 membership, whilst the 2008 discontinuance deficit is about £56,000 on average. Interestingly it should be noted that the contributions are funded across only the active membership, and that’s only about 27,000 members out of the total of 60,000 meaning that the funding required per head would increase to on average £23,000 and £125,000 respectively.
It is also important to note that the buyout deficit figure is not only relevant when the scheme as a whole closes, but also has significance in other circumstances such as:-
- Should an individual employer wish to leave the scheme then that employer would be liable for the exit debt (i.e. to make up the 68.9% shortfall), and not the on-going funding debt (i.e. the 24.4% shortfall). Based upon the figures above this could be a five times multiple of the on-going position. How many organisations are in a strong enough position to cope with this level of debt? Very few I imagine. Clearly this seriously restricts people’s ability to exit even if they wanted to, trapping them between the Hobson’s choice of rising contributions or an unaffordable exit cost.
- In addition, if an employer exited on the grounds of insolvency then their full liability under this ‘multi-employer scheme’ would be shared amongst the other participants thereby increasing their liabilities and therefore their exit cost.
In my experience most participants in schemes similar to this wouldn’t agree to join if they understood the full implications. The Professional Pensions article suggests that 3,000 new members had joined SHPS in the last year which must raise the question, do their employers actually fully understand the decision and the linked level of risk they are taking and are these issues being clearly communicated by the Pensions Trust prior to them joining?
The LGPS Scheme has taken sensible steps in this regard to ensure that new participants have the financial backing in the form of guarantees to be able to accept the risks.
This news highlights some pretty worrying figures for the charity sector and raises a number of questions about pension scheme funding in the third sector, the use of these multi-employer schemes and the approach the Pensions Trust are taking. Participants in this scheme and indeed schemes of a similar type, need to have a much greater involvement and understanding of the risks these schemes pose to the future success of their organisation.