Organisations participating in the Social Housing Pension Scheme (“SHPS”) will no doubt be experiencing that sinking feeling, perhaps mixed in with a little déjà vu, as the results of the 2011 scheme valuation hit their desks this month. The communication will have brought the unwelcome news that the ‘on-going’ funding deficit has increased from £663m to £1,035m as at 30 September 2011 (having increased from £283m in 2005). The discontinuance deficit position was £3,384m at 2008 and this must now be approaching £5bn. This will result in a further increase to contributions of over £30m per annum (increasing at 3% a year for 13.5 years). The cost of benefits being earned by members for the future will also increase by about 10% over those previously being paid. The communication states that the “increase in the deficit is largely driven by recent economic factors”. But is that the only factor at play? There is little question that SHPS has relied very heavily on anticipated investment outperformance when setting expected contribution requirements for the future. There are only two sources of funding for pension schemes: investment returns and contributions. If investment returns don’t deliver then, inevitably, more contributions have to be found. Recent experience argues for a degree of balance and prudence when assessing the level of allowance to make for investment outperformance. These recent valuation results would tend to suggest that the SHPS continues to not quite get the balance right. The historic contributions set to meet the cost of future benefits have been in the region of 10% lower than some equivalent schemes on the expectation that the scheme investments will achieve real rates of return (i.e. returns after inflation) in excess of twice what equivalent schemes had been estimating. These optimistic assumptions were also being used against a backdrop of a scheme already comparatively pretty poorly funded, at less than 70% in 2008. There is little doubt that recent market conditions have impacted on the position but it is far from the full story. Over a similar period we’ve seen schemes with less of an emphasis on taking credit for assumed future investment return and a requirement for higher contributions manage to maintain their funding position despite the poor economic back drop. A more insidious side affect of this approach is that it makes participation in SHPS seem more financially viable than in reality might be the case, encouraging employers to maintain higher benefits for a longer period than might be reasonably afforded. It also results, as the 2011 valuation demonstrates, in higher future contributions being required eventually. Employers end up being responsible for funding all the past deficit built up, whereas there is a the potential to split the cost with the employee when meeting the cost of future benefits. What must also be a concern to Registered Social Landlords (RSL’s), and indeed their auditors, is that none of these liabilities appear on their balance sheets. Organisations can use an exemption to the financial reporting standard FRS17 which allows the use of a disclosure note rather than identifying the level of scheme deficit. As the SHPS moves towards identifying deficits based on each RSL’s share of liabilities, such an approach is not likely to be sustainable going forward. Finance directors will have to incorporate pension deficit figures in their accounts, which will have a significant, unwelcome and negative impact on their financial statements. This is also something which will undoubtedly receive greater scrutiny from funders, especially with the potential focus on infrastructure investment with much of that likely to be on social housing investment. Organisations participating in the SHPS need to have a realistic understanding of their future commitments and the likely impact those commitments will have on their available income. They also need to be sure that the current proposals coming out of the 2011 valuation set realistic and achievable objectives and should not just be prepared to accept that the position the scheme finds itself in is totally a result of market conditions. In my native Belfast, the home of Harland and Wolff, we know a thing or two about SH(i)PS sailing serenely towards impending disaster. There is a story, probably apochryphal, about a shipyard worker being challenged as to how anyone could take pride in the Titanic, given her eventual fate. The worker replied: “Sure, she was all right when she left us”. I hope the Pensions Trust show no such hubris when dealing with employers in relation to the 2011 SHPS valuation.