12 October 2022
Housing Associations could see improvements in their pension schemes in the current economic climate, and LCP analysis shows a significant fall in the deficit of the Social Housing Pension Scheme (SHPS) and reduced exit debts for many organisations in the Local Government Pension Scheme (LGPS).
LCP say that the position of SHPS is expected to have improved significantly in recent months and weeks, even since their estimates at the start of the year, which already showed the position was ahead of the funding plan.
Whilst the recent turmoil in financial markets has been unwelcome for some, much of the more adverse commentary for pension schemes has focused on the short-term operational considerations, but the resulting financial conditions at time of writing may well be positive for housing associations’ pension schemes. Given the seismic changes in markets, all pension schemes will need to review their long-term strategies to reconsider the appropriate balance of risk and investment returns. This opens opportunities that have not been available to housing associations previously and could lead to reduced costs for defined benefit pension schemes going forwards and options to reduce risk exposure. Many are now considering options to reduce pension risk such as exiting LGPS funds which may not have been affordable at the start of the year.
Tim Gilbert, partner in LCP’s social housing practice said: “While the current economic conditions might lead to additional pressures on housing associations’ finances, for example through increased borrowing costs, the reduced cost of DB pensions may be a source of pain relief. Whilst DB scheme asset values are likely to have decreased, the reduction in the value placed on liabilities is likely to have been greater in many cases. That’s why we are seeing reductions in deficits for some of our clients.
“Whilst housing associations will have many issues to consider at the moment, it is important that they take advantage of current conditions to lock into any recent funding improvements, to reduce future risks and give greater certainty for their schemes.”
Richard Soldan, head of LCP’s not-for-profit practice added: “SHPS trustees should consider what steps they will take to lock-in the improvements, whether that is reducing contributions or taking risk out of the investment strategy. SHPS could even advance their triennial valuation by a year so that current financial conditions can be factored into future contributions for associations as soon as possible.
“Where employers are offering defined benefit accrual for current staff there are likely to be further considerations around whether future contribution rates could reduce if current market conditions persist up to the next SHPS valuation date. Employers should understand how contributions could change before making any strategic decisions.”