UK: Social Housing Pension Scheme - Brace Yourselves

Last Updated: 4 April 2012
Article by Christopher Murray

It's that time again for the social housing pension scheme

Christopher Murray discusses the options available to RPs once The Pensions Trust has delivered its latest valuation results.

Can it really be three years since RPs locked into the Social Housing Pension Scheme (SHPS) were dreading a letter from The Pensions Trust with news of how much the cost of their pension schemes would increase? Well here we are again, at a point when liabilities have increased beyond expectations and investments haven't.

There's little point in trying to speculate what the damage might be, other than to brace ourselves for another increase in contributions, interpreted by most non-actuaries as 'costs'. We don't expect to see anything concrete until May, when the results of the 30 September 2011 valuation should be released. Employers will then be consulted on how best to pay off the inevitable increase in deficit over a respectable period.

The current plan for clearing the deficit that existed at 30 September 2008 is to apply a charge of 7.5% of each employer's scheme salary role at that date and to increase this by 4.7% per annum compound for 15 years from 2010. This means that deficit recovery contributions will double over the period, regardless of any decline (or increase) in membership.

If the Pension Regulator's guidance is adhered to, any new recovery plan will be additional to the existing one, but given the financial pressures that have been experienced by RPs over the last year, it remains to be seen whether or not this will be the case.

On the basis that 'forewarned is forearmed' it is probably worth considering what options might be on the table.

Do nothing

It depends on your starting point but if you can afford to maintain the status quo, once the increased funding requirements are known (which may also affect contributions for future accrual) this would at least put off the need to enter into a consultation process with your employees.

There are many variations within SHPS, from RPs who have kept their original defined benefit (DB) structure open to new entrants, to those who have ceased future DB accrual in favour of the defined contribution (DC) structure that was introduced in 2010 and paying a reduced surcharge of 1.5%. The surcharge itself may well be revisited, as could the 50% concession to those who have adopted the DC plan.

Introduce salary sacrifice

Over the last 18 months or so there has been a considerable increase in companies introducing salary sacrifice facilities for their staff as a cost-effective way to make pension contributions. This has occurred primarily where some form of DC arrangement is in place. More recently we have seen the same approach used with DB schemes, such as the SHPS final salary and CARE benefit structures. Indeed, The Pensions Trust has made it surprisingly easy to operate salary sacrifice alongside 'traditional' contributions.

By 'sacrificing' an amount of salary equal to a person's pension contribution in favour of an equivalent amount being paid into the scheme as an employer's contribution neither party pays national insurance (NI) on the amount sacrificed. As the present SHPS DB schemes are all contracted-out of the state second pension, the amount of personal NI saving will be 10.6% of the contribution for most basic rate taxpayers, or 2% for most higher rate taxpayers. The employer will save 10.4% or 13.8%, depending on a person's level of earnings (all percentages effective from 6 April 2012).

Worthwhile savings could be made by both parties by using salary sacrifice. In the case of employers, this could help to offset increased costs arising from the valuation.

The effectiveness of a salary sacrifice facility is greatly dependent on how well the concept is communicated to staff. Face to face presentations have been found to be considerably more effective than the most well-presented written material, although both are needed in order to ensure that individuals understand the options available to them.

Reduce future benefits (within SHPS)

This may well have been done in 2010 with the advent of lower cost n/80ths final salary and CARE alternatives. The DC option that was introduced in October 2010 might have appeared to offer an attractive home for future contributions although the increase in NI contributions and the loss of certain benefits under the mainstream SHPS would also need to have been considered.

If future service benefits were reduced in 2010, it might be difficult to review the structure again so soon. But three years ago, who could have predicted such instability in the eurozone, the depth of recession and the extent of financial constraints that have been inflicted upon RPs? On this basis, it might again be worth looking at the lower cost options that are available.

One option that has been mooted is to introduce an n/120ths contracted-in final salary scheme. If it does come into being, one wonders just how useful such a scheme might be. Not only would the NI rebates (on earnings between £5,564 and £40,040) be lost, but the pension generated by this would be minimal. The only mitigating factor is that people would start to accrue benefits under the state second pension, which favours lower earners.

Benefits beyond SHPS

It would be possible to offer a lower cost scheme for future new entrants, while maintaining at least some form of active membership of SHPS (DB or DC) so as not to trigger the liability for a Section 75 debt (full buy-out costs; unaffordable for most employers).

Deficit recovery contributions would continue to be payable alongside whatever 'active' element of SHPS is maintained. If another scheme is permitted to run alongside SHPS as a vehicle for new members, the full surcharge (currently 3% but subject to review) would be payable. On the other hand, auto-enrolment may not be far over the horizon, depending on staff numbers, which will also require consideration, so it might be worth 'biting the bullet' and moving to a non- SHPS alternative while some attractive propositions are still available in the market.

Members' contributions

If members were asked to pay more last time around in order to maintain their existing scheme structure, it would be difficult to approach them again so soon. In addition, there could now be a perception among employees that a right has been created to enjoy a certain level of benefits.

Financial assessment

By the end of 2011, all employers who participate in SHPS in any of its guises will have undergone a form of employer covenant assessment. The idea is for The Pensions Trust to establish the ability of employers to meet their future obligations under SHPS. In some cases, this could lead to only lower cost options being available from April 2013, when new funding rates will be in place and the yet-to-bedetermined recovery plan is implemented.

Action

It would be prudent to start considering your options before the results of the valuation are known. This will allow your organisation to develop a strategy to cope with the range of possible outcomes before you get funnelled into what we expect will be The Pension Trusts' prescribed timetable for decisions and processes.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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