£870m fall in SHPS deficit presents ‘real opportunity’ to housing associations

LCP said that the aggregate cost of exiting SHPS has reduced from almost £5bn three years ago to less than £1.5bn in September 2023, and it estimates that it has continued to reduce since.

On the reason behind the fall in deficit, TPT Retirement Solutions said that there has been a “substantial change” in market and financial conditions since the 2020 valuation.

“Despite significant market volatility, the scheme’s funding position has improved, and the deficit has reduced by £870m,” the firm said.

“This move is mainly driven by the scheme’s investment strategy and contributions from employers, partly offset by higher observed inflation and salary increases and an adjustment made to fully allow for the government’s changes in the method of calculating RPI inflation.”

Opportunities for housing associations

LCP said that the majority (94 per cent) of employers will see a reduction in their deficit contributions over the period to 31 March 2028. However, the consultancy said it would expect this reduction to be “modest”. 

According to LCP, there has been a “significant reduction” in the cost of new benefits being earned, with total cost reducing in some cases by as much as 60 per cent.  

The advisory firm estimates that SHPS’ valuation has continued to reduce since September 2023, “a key change that presents opportunities for employers in SHPS”. 

Mike Richardson, partner and head of LCP’s social housing practice, said: “The results are clearly positive news for housing associations, who are facing significant pressures, and it’s pleasing that they are slightly better than we had been expecting.

“Employers will no doubt be happy to see the improvements in the funding level, and any reduction in deficit contributions must be welcome, even if it is relatively modest.

“However, at a higher level, these results highlight the opportunities currently available for associations to manage their pension risk in SHPS and, indeed, more broadly across all of their defined benefit schemes.”

Writing in a comment piece for Social Housing today, Katy Taylor, social housing lead at consultancy Isio, said that the dramatic fall in the cost of future service defined benefits, due to the increase in gilt yields, is a “game changer for SHPS employers still offering defined benefits”.

She said this means there is some “fresh thinking to be done on the right type and shape of benefits for the sector, a long-term, asset-rich sector with employers who might be prepared to take on some defined benefit risk at much lower cost”.

Mr Richardson said that, for those employers with future service in the defined benefit sections of SHPS, there is now a need to decide how to allocate the savings between them and their employees.

He added: “To give an idea of the scale of this change, at the moment, the total cost of benefits in the Final Salary 60ths section is 41.2 per cent of pensionable salary. From April 2025, that will drop to 16 per cent, a huge reduction of 25 per cent of pensionable salary. 

“Changes at this level are pretty much unprecedented, and employers will need to carefully consider how the reduction should be shared.”

Mr Richardson added that there is no default option this year, so all employers who offer benefits in the DB sections of SHPS will need to make a decision. 

“Given the scale of the change, it may not simply be a case of maintaining past practice,” he said.  

“Another important consideration will be consistency with benefits being provided to other members of staff and ensuring that any perceived unfairness can be identified and addressed.” 

SHPS funding position

TPT Retirement Solutions said that an agreement has been made on the funding position of the scheme and the contributions to be put in by the employers going forward.

The firm said was this reached following a “collaborative and thorough” consultation exercise managed by TPT, the SHPS employer committee (representing both large and small housing sector organisations) and the SHPS scheme committee (which acts on behalf of the scheme trustee).

The new recovery plan, which sets out the contributions required from employers to remove the deficit over time, will start in April 2025 and will replace the existing plan agreed in 2021.

As well as deficit contributions being lower, they will increase at the lower rate of two per cent per annum, down from 5.5 per cent per year. The recovery plan end date will remain at 31 March 2028.

TPT Retirement Solutions said: “The agreement combines a prudent funding approach, to protect member benefits and the long-term funding of the scheme, with a significant reduction in the total deficit contributions being paid to the scheme.

“Affordability has been a key focus of discussions between the committees, given a backdrop of employer cash constraints and sector spending priorities, including housing safety and maintenance, and reducing carbon emissions.”