The results of the Social Housing Pension Scheme (SHPS) valuation as at 30 September 2023 have now been published, showing a significant reduction in the headline deficit.
The key headlines from the valuation are:
- For the first time in a generation, the overall deficit has reduced from over £1.5bn three years ago to less than £700 million today. The deficit has not been that small since 2008.
- 94% of employers will see a reduction in their deficit contributions over the period to 31 March 2028, although we would expect this reduction to be modest.
- There has been a significant reduction in the cost of new benefits being earned, with total cost reducing in some cases by as much as 60%.
- The aggregate cost of exiting SHPS has reduced from almost £5bn three years ago to less than £1.5bn in September 2023, and we estimate it has continued to reduce since. This is a key change that presents opportunities for employers in SHPS.
Mike Richardson, LCP Partner and head of LCP’s Social Housing practice commented: “The results are clearly positive news for housing associations, who are facing significant pressures, and it’s pleasing that they are slightly better than we had been expecting. Employers will no doubt be happy to see the improvements in the funding level, and any reduction in deficit contributions must be welcome, even if it is relatively modest. However, at a higher level, these results highlight the opportunities currently available for associations to manage their pension risk in SHPS and, indeed, more broadly across all of their defined benefit schemes.
“Those employers with future service in the DB sections of SHPS now have a decision to make. The cost of providing those benefits has come down dramatically, and employees will need to decide how to allocate that savings between them and their employees. To give an idea of the scale of this change – at the moment, the total cost of benefits in the Final Salary 60ths section is 41.2% of pensionable salary. From April 2025, that will drop to 16%, a huge reduction of 25% of pensionable salary.
“Changes at this level are pretty much unprecedented, and employers will need to carefully consider how the reduction should be shared. Importantly, there is no default option this year, so all employers who offer benefits in the DB sections of SHPS will need to make a decision. Given the scale of the change, it may not simply be a case of maintaining past practice.
“Another important consideration will be consistency with benefits being provided to other members of staff and ensuring that any perceived unfairness can be identified and addressed.”
Richard Soldan, LCP Partner and Lead of LCP’s Not-for-Profit practice added: “There is also a particular issue for employers who offer the CARE 120ths section to current employees, as the cost of providing benefits in this section has shrunk to such an extent that it no longer complies with auto-enrolment requirements. SHPS has, therefore, decided to suspend the section from April 2025 for at least the next three years. Any employers currently using that section will have to make an active decision about what benefits to offer instead.”
Tim Gilbert, LCP Partner, commented: “The results are positive, but I think the bigger picture that employers need to be focusing on is how the current funding of pension schemes, including SHPS, presents opportunities which simply weren’t there several years ago.
“Even if pensions were reviewed recently, the position today could be vastly improved, and options which were discounted as being unaffordable may suddenly be back on the table.
“There is a real opportunity for associations to significantly improve their financial strength and resilience, which some associations have already taken advantage of. This opportunity may be short-lived, and we strongly encourage all associations to consider their options now – across SHPS and any other DB schemes.”
