UK: The Social Housing Pension Scheme

Last Updated: 16 November 2009
Article by Jonathan Pryor

Have you missed the boat?

RPs who participate in Social Housing Pension Schemes (SHPS) have until 30 November this year to advise The Pensions Trust (TPT) of their new strategy for pensions. However, for those who cannot meet the deadline there are other options available.


The SHPS had accrued a substantial past service funding deficit by the date of its last actuarial valuation, 30 September 2008. This has necessitated a dramatic hike in past service deficit recovery contributions from April 2010, increasing from 4.4% of pensionable payroll to 7.5% of a notional payroll (determined on the valuation date), which will increase by 4.7% per annum until the past service deficit is eliminated, which is expected to occur by 2023. Future service contributions have also increased.

Where n/60th final salary benefits are being provided, the new rates will result in contributions being increased by approximately 15% (n/70th final salary – 16%), relative to what is currently being paid. The monetary increase will be closer to 21% for those who have previously adopted the 'lower cost' career average revalued earnings (Care) alternative.

What's new?

A lower cost n/80ths defined benefit (DB) structure is to be introduced in April 2010, along with a 1/80th Care option. A defined contribution (DC) alternative will become available in October 2010, when TPT has appropriate administration systems in place. TPT will be withdrawing the n/70ths final salary option from employers who do not currently subscribe to it.


TPT has given RPs until 30 November 2009 to advise of their future pensions strategy, but a decision on the strategy cannot be made by a board of directors without first undertaking a formal consultation process with employees, which must last for a minimum of 60 days. This leaves little time to devise a strategy, consult staff and agree the final programme.

We anticipate the process could take up to five months to complete, including the 60-day requirement. Therefore, if you have not yet started this process, it is likely that you will miss the deadline and there will be no alternative but to pay 15% to 21% higher total pension contributions from next April.

So you think you're going to miss the deadline?

Good news; you have another chance. Historically, there has been little scope to adopt new benefit structures other than on dates specified by TPT, usually 1 October. This will change from April 2010, when it will be possible to adopt alternative structures from the first day of any month, on giving appropriate notice to TPT and having completed a formal consultation process. Notice periods will be three months (DB structures) and six months (DC structures).

On the basis that perhaps five months will be needed for formal analysis, consultation, management and board meetings, the process would need to commence now in order for you to be in a position to give notice to TPT on 1 April 2010. This would enable a revised DB structure to be implemented from 1 July, or the new DC option to be adopted from 1 October 2010.

Employees who move from DB to DC

Many employers will view the new DC option as more affordable than any of the DB structures. However, the DC option may not be quite as 'inexpensive' as it first appears. Consideration needs to be given to compensating existing members for the loss of certain benefits, as well as other direct costs, which are identified below.

Where employees leave one of the existing DB options to move into the DC environment, the following issues will need to be considered.

  • Full rate national insurance (NI) contributions will become payable (employers' NI contributions will increase by 3.7% of band earnings).
  • Deficit recovery contributions will continue to be payable (7.5%).
  • Whether compensation is needed for the loss of ill-health early-retirement provisions.
  • Whether compensation is needed for loss of survivors' pensions.

Benefits and contribution rates

We have outlined the total contribution rates associated with each benefit structure. TPT will remove its requirement for employers to contribute at least 50% of the cost, in order to facilitate the new DC option. Employee contribution rates may be revisited as a part of the review process and compliance with age discrimination legislation should also be considered.

Final salary n/70th will cease to be available for employers who do not currently offer it. Contributions on this basis will increase to 15.4% (future service) and 7.5% of notional salary (past service).

* Employee contributions will rise to 5% from April 2012 to comply with personal accounts legislation. If appropriate, deficit contributions of 7.5% of notional salaries would also be payable.

Conflicts of interest

For most RPs, their executive will be largely responsible for putting together proposals for their board, which will inevitably create challenges for them with respect to independence. TPT is not in a position to give independent advice or to make recommendations, so guidance must be sought elsewhere.

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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