Modelling from pension advisers LCP shows that over the last three years, the funding position has improved significantly on an “all else equal” basis, meaning that SHPS is ahead of where it is expected to be. After allowing for changes in methodology that LCP expect to be introduced for this valuation, LCP estimates the deficit to be around £¾bn – a shortfall that should be covered by the contributions that associations are currently paying. This means that absent a significant change of approach, deficit contributions are likely to stay at broadly the current level. This will be a new experience for many associations, who are used to dealing with valuations where the key consideration is how much the deficit contributions will increase by.
Mike Richardson, LCP's head of Social Housing explained, "The key driver in the results is the huge increase in long-term interest rates, which has led to a material shrinking in the size of SHPS. In fact, we estimate that it is now back to around the size it was in 2011. For many organisations, the improved funding position may make options available which weren't there previously. For example, a typical association may see its current exit debt be less than half the equivalent figure three years ago at the time of the last valuation. Payment of this amount may not have been affordable then, but perhaps it would be today? This is a new option for many associations, and we have worked with a number of associations that have already taken advantage of the reduced cost of exit."
Richard Soldan, head of LCP's Not-For-Profit Practice added, “Another consideration is those employers who still have employees building up new defined benefit pensions. On an all-else-being-equal basis, we would expect the total cost of providing these benefits to have broadly halved. For example, the cost of building up new benefits in the Final Salary 60th section may fall from just over 40% of pensionable salary to around 20% or 25% - which is a huge reduction. The reaction of employers is likely to depend on how increases at previous valuations were dealt with – were increases met solely by either the member or the organisation, or was the pain shared? Given the scale of the likely changes, we recommend that employers in this position start considering their options as soon as possible.
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