The Social Housing Pension Scheme actuarial valuation is currently in progress with results expected to be announced in early March 2015.
With the deficit expected to rise from just over £1bn at the 2011 valuation to around £1.4bn at the 2015 valuation, it is likely this will mean increases in contributions for many of you who participate in SHPS. These increases could be significant if, as is also expected, a shorter period is used to recover the new deficit. In addition, the worsening market conditions since the valuation date are expected to have increased the deficit still further meaning SHPS may feel a more cautious approach is necessary than in previous years.
Increases in deficit contributions are likely to be accompanied by increases in ongoing contributions for future service benefits. Information provided by SHPS at the roadshows indicated a potential increase of 2%-3% pa in the overall future service contribution rates for the different benefit sections; however this increase may be mitigated if benefit changes under consultation are adopted. This would be expected to take effect from April 2016 at the same time as the increase to national insurance contributions arising from the cessation of contracting out.
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 FRS102 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.
In October 2014 SHPS began a consultation on potential changes to benefits. This consultation is looking at increasing the normal retirement age to be in line with the state pension age and a reduction in the future rate of revaluation for Career Average Revalued Earnings (CARE) benefits. These changes would be expected to largely mitigate the increase in future service rates mentioned above. The consultation closed on 31 January 2015 and no doubt SHPS will update you on the responses in due course.
These changes will lead many employers to reconsider the range of options offered to staff under the scheme and the related employee contributions. Therefore careful communication with staff about these changes will be extremely important as there could be a significant impact on members’ benefits.
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.