Mixed news for the Scottish Housing Associations’ Pension Scheme – an update and recommendations for employers
First Actuarial partner Dale Walmsley provides a summary of developments in the Scottish Housing Associations’ Pension Scheme (SHAPS) and outlines the actions that employers should be considering.
By Dale Walmsley, Partner at First Actuarial.
In 2015, the funding position was a concern to the employers in SHAPS (around 140), a significant scheme in the housing sector with both defined benefit (DB) and defined contribution (DC) sections.
The funding level at that time was 76%, and the deficit was around £200 million. Since then, employers have been paying deficit recovery contributions to restore the funding to 100%. These contributions currently stand at £32 million per annum.
Every three years, an actuarial valuation is carried out for the DB section. The actuarial valuation estimates how much is needed today to pay all the pensions promised to members. This estimate rests on several assumptions, including the scheme’s investment returns, how long its members are expected to live and inflation.
The SHAPS Employer Committee (EC) – with First Actuarial providing advice – has recently been negotiating the 30 September 2021 actuarial valuation with the trustee.
Improvement in the funding level of the DB section
The EC has communicated some good news – deficit contributions will cease earlier than expected on 30 September 2022.
There is always variability in the funding levels of DB schemes, and the EC has stressed that there is no guarantee that further deficits will not arise at future valuations. However, this is welcome news at a time when there are so many other calls on employers’ resources in the sector.
Action: Boards should ensure that their finance teams are aware of the changes and consider whether budgets need to be updated.
Possible changes to DB benefits earned in the future
Although the DB section is expected to have enough money to pay for benefits already earned, the 2021 valuation results show that an increase in contributions will be required to fund new DB benefits earned in the final salary or career average revalued earnings (CARE) sections.
For example, the total cost of new benefits in the CARE 80th section is expected to increase from 23.7% to around 31%, according to the EC.
These cost increases are significant and may present affordability challenges for employers and employees. Therefore, the EC is consulting employers on whether to change future benefit structures to make them more affordable.
For example, by changing the way that pensions increase before retirement, the EC estimates that the cost of the CARE 80th section can be kept at around 26% (rather than 31%).
In my view, the changes being proposed are a sensible way to make the DB sections more sustainable.
Action: Employers with employees still earning benefits in the DB section should respond to the consultation by 22 July (but late responses are still likely to be considered).
Scheme benefit review
The SHAPS trustee has been reviewing whether DB benefits have been paid in line with the requirements of the scheme’s legal documentation.
This review is now complete, and the trustee has received legal advice that there is uncertainty about to calculate some member benefits. The trustee is going to court to obtain clarity on the calculation.
The trustee will be arguing in court that benefit calculations should be applied in the way they are now. However, if the court rules against the trustee, this will create additional liabilities, and these will need to be met by employers.
The scheme actuary for SHAPS estimated the additional liabilities at around £40 million as at 30 September 2021. This is around 3.2% of the c£1.2 billion liabilities in the DB section.
Employers will need to make sure their interests are protected. It is the role of the EC to do this on their behalf. In my view, any attempt to form new groups runs the risk of fragmenting the employers’ response.
The trustee is aiming to provide the EC with a copy of the proposed court documents by the end of the year, with a three-month period for employers to provide any comments if they wish. The trustee has stated that, in its opinion, there is no requirement for employers to take independent legal advice and will present the case that the status quo should apply.
The trustee expects to be able to share court documents with employers in Q4 2022, with court proceedings and judgment expected in the second half of 2024.
Don’t forget the DC section…
While there are around 800 employees earning benefits in the DB section, the DC section of SHAPS has more than 4,000 active members.
Employers should regularly review the pension scheme offered to employees, making sure it remains appropriate and offers good value for money.
There is more positive news, this time about investment performance and administration improvements in the DC section of SHAPS – but these are worthy of a blog by themselves!
Action: Make sure there are appropriate governance arrangements to monitor and review your pension offering to staff on a regular basis.
How First Actuarial can help
First Actuarial provides independent advice to more than 130 housing associations – more than any other firm in the sector. If you would like to discuss how we can help then please get in touch:
Dale Walmsley
Partner
dale.walmsley@firstactuarial.co.uk