Social Housing Pension Scheme valuation 2023 – what might the changes be to future service contributions

Martin Robinson, Senior Consultant in LCP’s Social Housing practice, considers what the SHPS 2023 valuation results might mean for future service contributions and how it might lead to some tricky conversations with employees.

The September 2023 triennial valuation of the Social Housing Pension Scheme (SHPS) is now underway, with results due to be published in the next few months.  These will set out what housing associations’ contribution commitment to SHPS will be going forwards. This includes benefits built up in the past - deficit recovery contributions - and, where current employees continue to build up SHPS defined benefits, those benefits being earned in the future - future service contributions.

As we have mentioned previously, despite an expected reduction in the size of the deficit we expect the amount of deficit recovery contributions to remain broadly unchanged in the short to medium term. Arguably it is the future service contributions that will require more immediate action from housing associations.

We are expecting the results to show a significant reduction in the costs of future service for those organisations where SHPS defined benefits continue to build-up - potentially halving. So, for instance, overall future service costs for the Final Salary 60ths section might reduce from around 40% to, say, 20% of pensionable pay.

Whilst obviously welcome for any associations paying high contributions, this significant drop in contribution rates could lead to various issues.

How will the new rate be split between employer and staff?

Housing associations often have a practice established from previous valuations, when contribution rates increased. Typical approaches include:

• Employer pays a fixed contribution rate, employee meets the balance of cost.
• Employee pays a fixed contribution rate, employer meets the balance of cost.
• Any change in contribution rate is shared 50:50 between employer and employee.

Where this is the case, it might seem straight forward to work out how the new rates will be split. However, given the big rate reductions expected, it will be important to check whether these practices remain appropriate.

When will the change take effect from?

Based on previous SHPS valuations, we would expect any change to take effect from 1 April 2025. However, this would arguably mean employees and employers are overpaying until then. So, should this date be brought forward? There are definitely good arguments for doing so, given the scale of the numbers involved. Equally, in previous valuations when rates have needed to increase, SHPS haven’t accelerated those changes, so may they just consider this an inevitable part of the normal timing issues of running a valuation process?

What if you’ve recently closed to accrual, or a member has recently opted out?

Housing associations who are currently going through consultations to close SHPS defined benefits so employees cease to build up more benefits, or have recently gone through such consultations, will need to think very carefully about the messaging. This is particularly so if affordability was used as one of the rationales for change. Housing associations should consider now how to communicate the fall in rates to employees to prevent staff feeling unfairly treated or wanting decisions reversed.

Similarly, we have seen examples where individuals who meet the bulk of the joint contributions rate themselves, in some cases paying upwards of 30% of their salary, recently opting out due to affordability. These employees may feel aggrieved over the timing of their opt out and the new rates being announced. 

Actions and next steps

Given the likely scale of these changes in rates, it is important that housing associations start to consider their likely responses and actions now, rather than risk having to react without proper consideration once the rates are announced.

Want to find out more? 

LCP’s specialist team can help with all aspects of your pension strategy.  If you’d like to discuss how we can help, please do get in touch.