Special report: housing associations’ pension deficit falls nearly 40%

The accounting change, which came into effect in the 2018-19 accounts, essentially provided a baseline across the whole of the social housing sector upon which it can consistently compare all defined benefit provisions.

The figures came ahead of the significant market disruption seen in the wake of Liz Truss’ Mini Budget as well as the subsequent interest rate rises, which Barry McKay, partner at pensions advisory firm Barnett Waddingham, said has further impacted deficit and surplus for the 12-month period to 31 March 2023.

“We’ve run a lot of calculations for the March 2023 accounting position and not only are we seeing a large decrease in deficit, in fact some housing associations are now in surplus on accounting standards.”

He added: “That’s not a surprise. Last September the Mini Budget that Liz Truss rolled out caused government bond yields to go shooting up and corporate bond yields, which are used for the accounting standards, followed.”

Individual housing associations’ deficits and surpluses

Within the 76 HAs that had deficits over £8m, eight organisations reported totals over £55m, with five of them reducing their deficit by around a third.

This included Peabody, which had the largest deficit overall with £72m. This was down from £109m in 2021. It was followed by Thirteen Group, which recorded a £68m deficit, from £97m the year before, and Together Housing Group, which showed a deficit of £62m from £96m.

Peabody had 67,958 units in the period, meaning its deficit on a per-unit basis was £1,059. Thirteen, with 35,414 units, had a deficit of £1,926 per unit, while Together Housing, with 36,689 units, had a per-unit deficit of £1,689.

In its accounts for the period, Peabody said it had a number of defined benefit pension schemes, the three main ones being the SHPS, the London Pension Fund Authority and the Kent County Council scheme.

It added: “While higher inflation rates have increased the pension obligations, with strong asset performance and increased discount rates, given that central banks are now increasing interest rates, there has been a reduction in the overall net pension liabilities position.

“The group’s net pension deficit liability under FRS 102 at the end of March was £72m (2021: £109m), with a £36m actuarial gain for the year (2021: £31m loss) being recognised in other comprehensive income.”

The bulk of Thirteen Group’s £68m deficit related to its Teesside Pension Fund scheme – a multi-employer defined benefit scheme. A smaller £7m related to SHPS and £81,000 to a closed defined benefit scheme.

In its accounts for the period, the group said that throughout the year it had been working on finalising the group’s pension offer, “ensuring that it continues to be attractive and affordable for the business”.

It said: “Having finalised our offer, Thirteen can confirm that we can retain a defined benefit scheme for current employees, even when considering increased costs linked to the SHPS 2020 valuation. We also offer a competitive defined contribution scheme for all new starters.”

It said a key priority for the 2022-23 period was setting up its own defined benefit scheme, adding that “we continue to provide arrangements for our current employees”.

Together Housing said its employees had been members of a number of defined benefit pension schemes over the year, including West Yorkshire Fund, Lancashire County Pensions, Greater Manchester Pensions Fund and the Together Pension Scheme – the latter of which had the smallest deficit of £7.4m, which had decreased from £11m.

In 2019, Together became one of a number of organisations to leave SHPS, joining the likes of Clarion, Radian, Genesis, Sanctuary and most recently Moat (in 2023) in a move that some organisations said would them help better manage the risks associated with a defined benefit scheme. Together transferred the assets and liabilities of the SHPS into its new Together Pension Scheme.

Mark Dunford, the group’s executive director of finance and commercial, said it had seen further reductions in its deficit during 2023.

“[Together Housing] has seen a further significant reduction in its pension deficit in the year to 31 March 2023 driven by changes in the financial assumptions, primarily driven by an increase in interest rates, and hence the discount rate which reduces our liabilities.”

Noteworthy changes in deficits between 2021 and 2022 included Sanctuary Housing, which saw a near 70 per cent decrease in its deficit for the period to £21.6m, from £69m. That was based on 105,509 units, which meant it had a low per-unit deficit of £205.

Clarion’s deficit reduced to £14.6m, from £58.5m. In its accounts the group said that general macroeconomic factors within the UK economy and associated interest rate rises contributed to the decrease.

It added: “A smaller movement has been seen in the fair value of the group’s assets, which have increased by £19m (2021: £57m increase), reflecting market uncertainty linked to the war in Ukraine and the cost of living crisis. Our net obligation continues to remain below the pre-pandemic level (September 2019: £70m).”

There were 13 HAs that had schemes in surplus, which totalled £37m and £310 on a per-unit basis.

The majority (nine) of these were English organisations, with Hendre and Merthyr Valleys Homes being the only two Welsh organisations and Queens Cross Housing Association and Sanctuary Scotland Housing Association being the only two Scottish ones.

Bromford recorded the largest total surplus at £11.9m and a surplus per unit of £261. This was compared to a deficit of over £16m the year before.

It was followed by One Manchester with a surplus of £11.2m and Merthyr Valleys Homes with a surplus of £4.6m. One Manchester had a deficit of nearly £4m the year before.

Looking ahead

Commenting on the improved accounting positions in 2023, Isio’s Ms Taylor said: “Those organisations particularly in the LGPS will now be grappling with how to deal with a surplus rather than a deficit – on both an accounting and funding basis – which throws up different questions, including how can you use that surplus for funding?

“Ironically, defined benefit provision has just got more sustainable at the point where de-risking options might be forcing employers out of funds altogether if no flexibility is offered. Do you need to exit completely? What can you de-risk while still offering LGPS? Could you partially exit? And so on.”

She added that for those organisations in SHPS or some of the larger organisations that have their own schemes, “they’ll be less affected by interest rate rises due to investment hedging strategies being more common, but will still be wanting to think about whether defined benefit and/or defined contribution is the right thing to be offering, how you integrate this into an overall benefit offer and then how you manage down those legacy liabilities”.

Looking further afield, Ms Taylor noted how the sector would need to innovate and modernise to meet people’s needs as priorities and preferences change, considering “AI, member education and individual choice rather than necessarily being dictated to by your employer or the state”.

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