SHPS valuation – March 2015 update

SHPS valuation – March 2015 update

Managing past service deficits in a multi-employer scheme such as SHPS is a challenge as you have little control over the degree of investment risk or the rate at which contributions are paid.

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The Social Housing Pension Scheme (SHPS) Committee has published provisional valuation results and information on proposed future service benefit changes.

Provisional results

In an announcement of the provisional deficit on 13 March 2015, SHPS told the sector that the deficit of £1bn in 2011 has increased to £1.3bn in 2014, due to lower expected future interest rates and changes to other assumptions. Consequently, deficit contributions will rise for all employers by a similar amount to that, following the 2011 valuation. The cost of benefits building up going forward has also increased as a result, although this has been offset by announced changes to the benefits members will build up in future. The overall impact on individual employer contributions will be announced in July.

The allowance for scheme expenses is also going to change from a flat rate of 0.9% of salary roll for all, to a rate that depends on the number of defined benefit pension scheme members. This will be beneficial for some and not for others.

As well as the changes outlined above, the end of contracting out in April 2016 will increase the level of National Insurance contributions required by both employers and employees.

Impact on people

Changes to future benefits building up, which come into force from April 2016, will include increasing the normal retirement age to 67 from 65 and capping pension payment increases before and after retirement at 2.5% p.a.

These changes will lead many employers to reconsider the range of options that are offered to staff under the scheme and the related employee contributions. Therefore careful communication with staff about these changes will be extremely important because there could be a significant impact on members’ benefits.

Financial impact

You should consider the impact of these increases in contributions on your 30 year business plan and any associated stress testing. The impact of the introduction of FRS 102 will mean the present value of the agreed deficit contributions will be shown as a liability on the balance sheet.

Managing past service deficits in a multi-employer scheme such as SHPS is a challenge as you have little control over the degree of investment risk or the rate at which contributions are paid. However, you will be aware that some SHPS employers have taken control of financing benefits and risk management by transferring a proportion of their section out of SHPS and into their own scheme.

If you would like to discuss these or any other issues relating to SHPS, please speak to your usual KPMG pensions contact or contact Steve Simkins.

This article represents the views of the author only, and does not necessarily represent the views or professional advice of KPMG in the UK.

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