Special report: housing associations’ pension surpluses surge

Our analysis also does not distinguish between the different pension funds used by associations. As each one may respond to changes in inflation and market conditions differently, our figures for collective deficits and surpluses do not necessarily reflect the performance of any individual fund.

Pension experts, however, say that our findings do reflect the general shift in pension fund positions following former prime minister Liz Truss’ Mini Budget in September 2022. “This pushed up interest rates and long gilt yields,” says Steve Simkins, partner at pension advisory firm Isio. “This had different impacts on the LGPS and SHPS.”

“The LGPS is not hedged against interest rate fluctuations. So it ended up in the fantastic position of having assets which maintained their value while liabilities fell significantly.” A lot of associations in the LGPS will have slipped into a surplus, Mr Simkins says. “But SHPS was hedged against interest rate fluctuations, so it did not see its asset values overtake its liabilities. However, liability and asset values both fell and so did deficits.”

English associations included in the analysis posted the largest deficit of £519.9m in 2023, down 41.1 per cent from £882.3m for the same cohort recorded in 2022. In contrast, Welsh associations’ deficit position improved only marginally, from £19.8m in 2022 to £18.1m in 2023. There was one Welsh association and 31 English associations with a net deficit.

The largest deficit in 2023, of £36.5m, was posted by 124,777-home Clarion Housing Group, which was also the largest association by number of units. This represents a more-than doubling of the £14.6m deficit in the previous year and is the biggest decrease in deficit in cash terms. Its 2023 deficit is, however, lower than the £58.5m it posted in 2021.

A spokesperson for Clarion says: “We participate in a number of defined benefit pension schemes (LGPSs and own-name schemes) with each being managed by differing trustees with differing investment strategies. Unfortunately, one of schemes was materially impacted by the significant increase in gilt yields following the Truss Mini Budget in September 2022, an action that impacted many pension schemes across the country.” 

The scheme in question used liability-driven investing (LDI), which meant some funds had to quickly raise cash when gilt yields shot up following the Mini Budget.

LDI enables defined benefit pension funds to borrow to invest in gilts – to hedge the interest and inflation risk of their liabilities – and in equities to boost returns and so close their deficit. The funds hold buffers of liquid assets to absorb any losses on the gilts but the steep rise in gilt yields following the mini budget meant losses exceeded that buffer for some funds and they had to raise cash quickly to rebalance. A subset of the LDI market called pooled funds, where a pot of assets is managed for a large number of pension funds, found it especially difficult to raise funds speedily whereas others in different arrangements found it easier to raise money. 

Clarion has closed all its defined benefit pension schemes to future accruals, the spokesperson adds. “This will reduce our exposure to the long-term uncertainty and volatility associated with such schemes. We are also working with the scheme trustees to look at the longer-term investment strategy and recovery plan. We will of course continue to fund the scheme and its recovery plan.”

Abri and Sanctuary Group posted the second and third-largest deficits of £31.6m and £29m respectively. They both declined to comment.

Sovereign Housing Association saw the biggest proportional improvement in its deficit. It dropped 83.1 per cent from £49.3m in 2022 to £8.3m in 2023. Peabody saw the biggest improvement in its deficit in cash terms as it moved from £72m in 2022 to £24m in 2023. On this measure, the 107,449-home London-based landlord had £48m wiped off its deficit in one year. “The improvement is due to market changes and our actuaries adjusting some assumptions, which reduced the total deficit,” a Peabody spokesperson says.

Sovereign Network Group (SNG) said it had five defined pension schemes before its merger with Network Homes in 2023. All five are closed to new members.

“Of these, the Sovereign Pension Plan (SPP) is the largest pension scheme, which has seen a significant reduction of circa £23m in its net liabilities between 2021-22 and 2022-23. This is due to two key factors unique to SPP: SHA’s commitment over the last two years to invest additional contributions of circa £12m during this period to improve the funding level of the SPP and SHA’s investment strategy. The investment strategy focused on investing in growth assets, such as equities, and benefited from equity and gilt market movements during this period,” the spokesperson says.

The spokesperson adds: “Across all five of Sovereign’s defined benefit schemes over the past three years, the percentage fall in pension liabilities was higher than any corresponding fall in pension scheme assets. SNG will continue to take a prudent and proactive view to fund its pension obligations.”

The largest surplus of £15.5m was posted by Saxon Weald, the West Sussex-based association formed from the large-scale transfer of Horsham Council’s council housing in 2000. This surplus is up from £1.9m in 2021-22. In the preceding three years, the association had posted deficits ranging from £310,000 to £5.7m. Saxon Weald’s LGPS is administered by West Sussex Council, according to its accounts. The association did not respond to request for comment.

Three other associations posted net pensions surpluses of more than £10m: Eastlight Community Homes, Scottish Borders Housing Association, and Wales & West Housing.

Of the 24 associations that posted a surplus, Magenta Living’s pension position was the most improved in cash terms. It posted its first surplus in five years of £6.9m in 2023, compared with a deficit of £23.3m in 2022.

A spokesperson for Magenta Living says that the association has “no plans to utilise the surplus” shown in its accounts.

“The value and movement of our defined benefit pension figures are set by the actuaries who oversee the valuation of the pension,” they add. “Several external factors are considered at the time of valuation, which can determine the overall pension financial position, which is changeable at any point in time.”

Pension advisors urged associations with pension funds in surplus to consider now how they might exploit any surplus before a potential deterioration in their position. “In the past, associations with deficits have had to ‘white-knuckle’ their investments, hoping they would outperform; there was no investment strategy decision to make,” Mr Simkins says. “But if you have got a surplus now, there is a decision to make and that is whether or not to derisk.”

He continues: “Nobody anticipated this surplus position and, as is always the case, things could get better or worse from here. You have to ask: what is more important? If you have moved from a deficit that you couldn’t afford, to a surplus, there is likely to be a strong preference for making sure things don’t get worse again.”

Mike Richardson, partner and head of social housing practice at LCP, says that financial directors should not let pensions fall off their priority list when they turn a surplus.

“There is a huge amount going on for housing associations with big, important issues such as mould, decarbonisation and fire safety and so the fact that their pensions funding levels have improved may mean pensions has dropped down or off finance directors’ priority list,” he says. “But that means this opportunity to reduce risk could be missed. In many cases there are opportunities to remove risk at a much lower costs then ever thought possible a few years ago.”

Associations could use surpluses to pay future service costs in schemes that are still open or invest their assets in portfolios of corporate bonds and gilts to protect their position, Mr Simkins says. Providers could also “lock in” part of their surplus through partial exits of pensions schemes, or leave them completely, he adds.

Katy Taylor, director at Isio, says that some LGPS funds require a complete exit to realise a surplus. This would involve closing the scheme to current staff and to future accruals for existing members. Different ways of valuing schemes however meant that associations might receive less from realising a surplus than they expect, Ms Taylor adds.

“One association was £10m in surplus with their LGPS in 2024 but the fund changed its way of calculating the value to one that said it was £10m in deficit,” she adds. “The fund would say they are being prudent,” she says, “But we would say that is over funding. Other funds will offer different approaches.”

The move of many more associations into a surplus position should also trigger some “robust discussions” between employers and the LGPS, Mr Simkins says. “Employers should push hard to get what is right for them and right for the fund. More and more associations are having robust discussions with the LGPS about that, but a big challenge for the LGPS now is to find the resources to address this need.”

Mr Richardson adds that exit fees for some associations had plunged in recent years thanks to their improved pension positions. “In many cases the cost of exit has come right down, he adds. “One association we advised was told their exit fee would be £100m three years ago. They ultimately managed to exit last year for less than £10m.”

Ms Taylor says that exit fees for SHPS were less than two years ago because its assets and liabilities had “shrunk by a lot”, making the scheme itself much smaller.

One of the next big milestones for housing association pensions is, of course, the SHPS triennial valuation, which is due to be shared with its members later this year. TPT Retirement Solutions, which administers SHPS, declined to be interviewed for this piece.

Mr Simkins, however, says that market conditions in relation to pensions have been “very good” since March 2023, when they were still considered volatile, six months after the Mini Budget. “The significant inflationary pressures over the past two years have been a negative factor on pension funds but this has been overplayed as higher inflation had been anticipated. Equity markets have improved since 2023 so the LGPS funding position has got even better,” he adds. “Nothing remarkable has happened and the indications are that the markets are likely to be in a ‘new normal’”.

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