Why are some organisations leaving SHPS – and what does this mean?

Why consider a bulk transfer?

The primary reason for a bulk transfer from SHPS is increased control over the costs and risks associated with your organisation’s DB pension promises.

What does that mean in practice? Well, one example is deficit contributions. SHPS is facing its fifth valuation in a row with an increased deficit. An organisation wanting to take a more prudent approach and benefit from paying more contributions now (to reduce the risk of increased costs in the future) would find this is not possible in the SHPS.

Another example is investment strategy. The SHPS’s assets (and liabilities) are held in a single fund, and are not separately ringfenced for each participating employer. This means that one investment strategy is set which aims to be appropriate for the whole scheme, rather than looking at what might be appropriate investments for each employer.

If your liabilities are significantly more or less mature than the average employer in the SHPS then you may decide your organisation is better served by a bespoke investment strategy more tailored to your liabilities and objectives.

Finally, on the liabilities side, the number of members taking transfer values from the DB section of the SHPS to a defined contribution (DC) scheme has increased six-fold over the past three years. Employers can benefit more directly from this increase in transfers (and decrease in defined benefit liability – and potentially deficit) if they have their own scheme.

On the downside...

There are significant disadvantages as well. A bulk transfer is a considerable undertaking.

The shortest time so far for a bulk transfer from a multi-employer scheme within TPT Retirement Solutions (formerly known as The Pensions Trust) is around one year.

This can mean a large amount of management time dealing with the bulk transfer. You also have to pay for advice not only from your actuaries and lawyers, but also the costs of SHPS’s actuaries and lawyers.

How many will there be?

To make a bulk transfer feasible you need a critical mass of DB liabilities in the SHPS and the financial strength to support your own DB scheme. In practice, we think less than 10 per cent of the SHPS’s employers will be in this position.

The biggest 40 employers in the SHPS are responsible for around 40 per cent of the liabilities. However, not all of these employers will want to transfer and run their own DB scheme. This means we might see at most 10 to 20 more transfers in the next few years.

The majority of bulk transfers so far have been to a new section within TPT. However, it is possible to transfer to a scheme outside TPT.

The decision of whether to remain in TPT depends on whether you already have a standalone DB scheme, if you can accept the trustee-friendly powers in the TPT rules and whether you are happy to manage the more complex bulk transfer process to exit entirely. In addition, staying with TPT might mean there is a trustee preference for a similar funding or investment strategy to the SHPS.

Impact on those who stay

Bulk transfers are generally good news for the remaining employers. The transferring employer takes their share of the assets and liabilities – and therefore their share of the deficit.

There are two important positives for remaining employers. The transferring employer is required to at least pay their share of the deficit for ‘orphan liabilities’, improving the funding position of the SHPS. In addition, the reduction in liabilities reduces cross-subsidy and ‘last-man-standing’ risks for remaining employers.

The DB section of the SHPS has more than 470 employers and assets exceeding £4.5bn; in our view the SHPS will remain a very large scheme that is able to share costs and risks even after an increase in bulk transfers.

Impact on members

The key point for members is that the pension benefits they have earned are protected. They will receive at least equal benefits in the new scheme to those they would have received in the SHPS. The only difference is that these will be paid from a different scheme.

However, a transfer does mean members have increased exposure to the insolvency of their employer. If a scheme has only one sponsoring employer, their failure is likely to result in benefit reductions and possibly entry into the Pension Protection Fund. Within the SHPS, benefits would continue to be paid in full after an employer’s insolvency.

One of the common misconceptions about bulk transfers is that employees need to stop earning DB pension and move to a DC scheme. This is not true. Which pension scheme to offer your employees is a separate decision, and does not need to be impacted by a bulk transfer. For example, Bromford has announced that the DB section of its new scheme will be open to all staff, including those joining the company.

What now?

Bulk transfers are a normal way for organisations to manage their DB pension liabilities, and they are a regular occurrence in the private sector. There will be further bulk transfer from the SHPS, and due to the high-profile organisations likely to be involved, these will hit the headlines. However, arguably the biggest issue for the sector is how organisations manage pension costs and risks, rather than where.