Recommended actions from SHAPS valuation results
Now the results of the 30 September 2024 actuarial valuation for the Scottish Housing Association Pension Scheme (“SHAPS”) have been finalised and shared with employers, what are the key takeaways?
Deterioration in funding level
While overall Scheme liabilities have reduced significantly – driven by rising gilt yields – the funding level has declined from 98% in 2021 to 90% in 2024. Consequently, the Scheme deficit has increased from £27.3 million to £79.5 million.
TPT has attributed the deterioration primarily to underperformance in the Scheme’s asset portfolio, particularly around the time of the September 2022 mini-budget, which caused widespread market volatility.
Re-introduction of deficit contributions
To address the shortfall, a new recovery plan has been implemented.
- Deficit contributions will be £15.6 million per annum across all employers, increasing by 3% each April. This broadly equates to annual contributions that are around half the level being paid before they turned off in 2022.
- Payments will restart on 1 April 2026 and will be reviewed again at the 2027 valuation. They are currently due to stop on 31 March 2030 but this could be extended if there is adverse experience at the 2027 valuation (most notably if the 2025 Court case leads to additional liabilities).
Employers continue to pay scheme expense
Employers will continue to pay scheme expenses on top of the deficit contributions. The method for allocating expenses across employers is being reviewed, but for the 2024 valuation they have been split in proportion to each employer’s liability share.
Reduction in future service contribution rates
The significant increase in gilt yields between the 2021 and 2024 valuations has also led to a notable reduction in future service contribution rates.
This may be a welcome development for employers continuing to offer defined benefit accrual. However, employers will need to consider how the total contribution rate is shared between employers and employees, particularly in light of ongoing affordability pressures.
Valuation timeline
TPT have also shared an updated timeline for concluding the valuation:
What should employers be doing?
The way in which employers respond to the SHAPS valuation results will depend on individual circumstances, such as whether employees are still accruing SHAPS DB and whether the employer has other DB arrangements such as LGPS. But considerations include:
- How to fund the recommencement of deficit contributions, and re-shaping of pension budgets to accommodate these deficit contributions? Organisations in well funded LGPS arrangements may want to look at accessing exit credits from these arrangements to fund the SHAPS deficit contributions.
- How best to split the future service contribution rate between the employer and employees for SHAPS DB future accrual, given the fall in these rates? If employees were asked to pay an increasing contribution as rates went up, it may be appropriate to consider reducing their rate now. However, in contrast the recommencement of deficit contributions funded solely by the employer is arguably a reason for the employer to retain more of the future service savings than employees.
- Should pension benefits be reviewed? The recommencement of deficit contributions may be a reason to consider turning off DB accrual in SHAPS for those organisations that offer SHAPS DB accrual. Any organisations accessing LGPS exit credits will be turning off DB accrual in LGPS to do this, which may also be a reason to review any remaining DB accrual in SHAPS.
Conclusion
The 2024 SHAPS actuarial valuation highlights a mixed outlook for participating employers. While rising gilt yields have reduced liabilities and future service contribution rates, asset underperformance has significantly worsened the Scheme’s funding position, leading to the reintroduction of deficit contributions from 2026.
Employers will need to plan carefully for the financial impact, balancing the cost of renewed contributions with potential savings and reviewing how these changes affect overall pension strategy. In particular, the valuation presents a timely opportunity to reassess the structure of future pension provision, including the viability of continuing defined benefit accrual.
Contact us today if you’d like to discuss your situation or hear more about your options.
