Spotlight on continued improvement in market conditions

Isio look at what the continued improvement in market conditions mean for the Local Government Pensions Scheme, the Social Housing Pensions Scheme, and single-employer own schemes.

Spotlight on continued improvement in market conditions for LGPS employers

The Local Government Pensions Scheme (LGPS) still invests most of its £400bn or so in growth assets, including UK equities. During the recent economic crisis LGPS assets have, remarkably, kept their value. This means that since March last year the LGPS as a whole has moved from only holding around 67p against every £1 of liabilities to being fully funded. And this is if you assess the liabilities in a low-risk scenario with reference to the bond market.

Why does this matter? An insurance company is happy to take on the assets and liabilities of a Defined Benefit pension scheme when there are sufficient assets to invest in a portfolio of bonds designed to meet the promised pension payments. This demonstrates that the LGPS would currently be able to move to a very low risk position by investing all of its assets in gilts. It follows that the benefits already built up in the LGPS are currently over-funded if some prudence is removed, as is the usual practice. 

Housing associations have immediate options to reduce risk or contributions

If you are in the LGPS you may well be making significant overpayments as your current contributions were assessed based on market conditions back in March 2022.  It also suggests there is an immediate chance to de-risk and “lock into” this good experience for a (currently) low or zero cost. 

Housing associations in the LGPS should be reviewing and assessing their options and not relying on their Fund to approach them.

This is not about closure to new build up of benefits – if anything they have become more affordable. So if an organisation decides that closure is not right for its people at this point, there are other potential ways to de-risk without an impact on the future build up of benefits. This makes this a purely financial decision and engagement with your individual Fund.

Case study

A medium sized housing association client which was in a £50m deficit on a low risk exit basis at 31 March 2022 is now currently in surplus and could exit the LGPS fully for no cost under its Funds existing process (if deemed right for its employees and all necessary legal steps are taken). That housing association is currently considering LGPS closure, but in the meantime also looking to agree with its Fund de-risking approach for its existing liabilities without the need for full closure, so that no time is lost and the risk of markets moving back the other way is contained as far as possible.

Actions and support available

The first step for a housing association is to understand the size of the opportunity and the strategic options for its own LGPS participation. This should consider finance, people and governance angles.

Isio is able to carry out a low cost “look see” analysis and options report on a housing association’s current LGPS funding position and specific Fund’s approach to support internal Executive and Board decision making.

Spotlight on continued improvement in market conditions for SHPS

For housing associations in the Social Housing Pension Scheme (SHPS), the reduction in deficit seen in the LGPS is likely to be smaller as investment hedging strategies will have dampened the net effect of rising bond yields. 

Liability-Driven Investment hedging strategies can leverage up the impact of interest rate changes on assets to try to match the impact on liabilities, and whilst the LGPS does not employ this approach, SHPS and other TPT schemes generally do.  

However, the size of SHPS overall will have reduced in current conditions, meaning the size of asset and liability share for any individual employer is likely to have reduced too. 

Actions and support available

Housing associations may want to look to refresh their understanding of their SHPS cost and risk profile and strategic options.

Isio is able to carry out a low cost “look see” analysis on a housing association’s current SHPS position. This will include a look ahead to the next SHPS valuation at 30 September 2023.

Spotlight on continued improvement in market conditions for single-employer own schemes

For housing associations in their own single-employer scheme, the current position will be dependent on individual investment strategies and funding, but we might expect positions to have shifted positively.

A housing association in its own scheme will have more control over its own approach than one in the LGPS or SHPS and, depending on the funding position, could potentially be looking to capture the current favourable experience via a change in investment approach or perhaps a transfer of risk to an insurer. 

If you’d like to find out more, please use this form to get in touch with a member of the Isio team.

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Isio is one of the country’s leading independent pensions advisory firms, known and respected for its agility and the team has more than 1,000 client relationships. We're working with our pensions advisers Isio to keep the sector up to date on key areas affecting housing associations.

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Who to speak to

Adam Gravely, Finance Policy Officer