Posts Tagged ‘SHPS Valuation’

David Davison

What pointers does the SHPS Valuation provide for employers in SHAPS

In early October the results of the Social Housing Pension Scheme (‘SHPS’) actuarial valuation at 30 September 2017 were published and are available here. I’ve provided a full commentary on the impact and options for employers in the scheme here.

Given that the SHPS results are 12 months ahead of those in the Scottish Housing Associations Pension Scheme (‘SHAPS’) which are due at 30 September 2018 I wanted to consider if the results would provide a good barometer for what Scottish RSL’s might expect when they get their results next year.

The SHAPS scheme is much smaller than SHPS with a smaller number of employers but the two schemes do share many similarities in terms of employer covenant, trusteeship and investment methodology so the results should certainly identify trends.

If we start with the actuarial valuation assumptions for SHPS and SHAPS these are shown in the table below.

Assumption SHPS Valuation

30 September 2014

SHAPS Valuation

30 September 2015

SHPS Valuation

30 September 2017

(Equivalent basis)

Price Inflation RPI – 3.1%

CPI – 2.2%

RPI – 3.1%

CPI – 2.2%

RPI Curve (3.4%)

RPI Curve less 0.9% (2.5%)

Discount rate


– Post-retirement








Gilt Curve plus 2.4% (4.2%)

Gilt Curve plus 0.45% (2.25%)

Pensionable earnings growth (annual) 4.2% 3.7% CPI+1% (3.5%)

You can immediately see that the SHAPS assumptions at 30 September 2015 are very similar to those adopted by SHPS in 2014 with only a slight reduction in the discount rate pre and post retirement from 5.9% and 3.3% to 5.7% and 3.1% respectively and a salary increase assumption of 3.7% versus 4.2% to reflect different market conditions. The inflation assumptions were identical.

The changes to the SHPS valuation assumptions reflects changes in market conditions and a strengthening of the assumptions being used and these changes accounted for almost all of the identified deficit.

In a commentary I wrote on the 2015 SHAPS Valuation results I expressed some surprise/shock at the funding assumptions used. At a time when all the market indices were indicating a reduction in gilt yields the trustees decided to increase the discount rate used pre retirement from 5.3% p.a. in 2012 to 5.7% p.a. in 2015. This was apparently to reflect a strengthening in employer covenant. This decision had the effect of reducing the scheme liabilities and therefore the on-going deficit by around £100m. This would have been positive news for the employers but was this improvement real or some funding smoke and mirrors. Comparing the on-going deficit in 2012 of £304m to a cessation deficit of £732m compared to an on-going deficit of £198m in 2015 and a cessation deficit of £937m highlighted the change in funding prudence. My expressed concern was that this approach may result in additional future prudence and therefore increased future deficit contributions being required.

Given the similarities in the covenant strength and investment / funding approach across both schemes it does not seem unreasonable to assume that a similar methodology will be applied to the SHAPS valuation, though this would be something of a backtrack from the 2015 position.

If the trustees are adopting the same commitment “to both security and affordability” how can they not apply a consistent basis which would result in a materially higher deficit amount? If they do employers may reasonably question the approach taken in 2015.

We do not have the exact details of the SHPS change but from the information provided it looks like the discount rate has been reduced by 0.6% p.a. which alone could increase liabilities by around 5%. There may also be a further increase in liabilities to move the SHAPS assumptions in line with SHPS which could further increase the scheme deficit. Given that, as an example, the pre-retirement discount rate assumption in the SHPS valuation reduced from 5.9% to 4.2% this could be very material.

Like SHPS, SHAPS has deficit contributions based on proportion of salary and proportion of liabilities and a move to simplify contributions similar to SHPS could be attractive to the scheme. Whilst in my view the setting of contributions based purely on share of liabilities is a fairer distribution of cost it will mean that that there are some winners and losers in terms of contributions with potentially small numbers of employers seeing very material increases as a result of any change.

What would also be concerning for employers would be how the conversion from the existing funding basis with contributions reducing over the next few years to a level basis costed as a share of liabilities, similar to SHPS, would result in very material increases in future contributions and a linked increase in FRS102 accounting deficits just at the point where the scheme is promoting a move to a full FRS102 disclosure basis.

In terms of future service contributions the position may be less dramatic in SHAPS than in SHPS. Contributions increased materially at the 2015 SHAPS valuation to 27.1% p.a. for Final Salary 60th benefits and 25.8% p.a. for CARE 60th benefits. Both these figures include 0.7% p.a. death-in-service costs and reduced by 2% where employers offer DB to new entrants. These contributions are in my view more reflective of the costs of buying benefits and compare reasonably with the new SHPS rates. I would however still expect some increase to future service rates in SHAPS to reflect current market conditions, maturing scheme membership and costs being shared over a smaller membership population.

Given the more the material re-distribution of members in SHAPS away from DB I suspect we could also see an increase in on-going scheme expenses similar to that in SHPS.

Based on the above therefore I think it’s wholly reasonable to assume that SHAPS employers can expect similar bad news when they receive their results in 2019 as SHPS employers are currently dealing with. There could be something of a ‘triple whammy’ with negative movements in market conditions, a strengthening of valuation assumptions and increases in operational costs.

With DB membership numbers continuing to fall (now only around 1,000 compared to the 3,500 participating in 2012), only around 1/3rd of employers open to new DB members and huge increases in DC membership the scheme shape is changing. Any further increases in SHAPS contributions is likely to further hasten exits from DB and there must come a point where there will need to be a serious discussion about the future of the DB section of the scheme. Employers may also be once again questioning the approach adopted in 2015.

David Davison

The results of the Social Housing Pension Scheme (‘SHPS’) actuarial valuation at 30 September 2017 have been published and are available here. With new contributions due to be implemented from April 2019 RSL’s will need to consider their options and take any required decisions in the very short term.

The headlines from the SHPS Valuation are:-

  • The funding level has improved to 75% (from 70% as at 30 September 2014) but the monetary deficit has increased from £1.323Bn to £1.522Bn. While assets increased from £3.123Bn to £4.553Bn over the period (i.e. 46%) liabilities increased from £4.446Bn to £6.075Bn (i.e. 37%). A huge driver in the increase in liabilities, and therefore monetary deficit, was some material changes in the key valuation assumptions as shown in the table below:-
Assumption 30 September 2014
% p.a.
30 September 2017
% p.a.
Price Inflation RPI – 3.1%

CPI – 2.2%

RPI Curve – equivalent to 3.4%

RPI Curve less 0.9% – equivalent to 2.5%

Discount rate

– Pre-retirement

– Post-retirement





Gilt Curve plus 2.4% – equivalent to 4.2%

Gilt Curve plus 0.45% – equivalent to 2.25%

Pensionable earnings growth (annual) 4.2% CPI+1% – equivalent to 3.5%


  • The changes have been as a result of two main factors:
    • Changes in market conditions over the period (a reduction in gilt yields and an increase in the markets expectation of inflation);
    • A change in the assumptions used to value the liabilities (less allowance is being made for expected returns in the pre-retirement discount rate and inflation looks to have also increase by more than pure market movements, the assumptions have also been updated for recent improvements in mortality)
  • The effect of these changes has been to increased the liabilities by £1.395Bn. So effectively the vast majority of the scheme deficit is accounted for by these two factors.
  • As a result of the increased monetary deficit, increased deficit contributions will be required from 1 April 2019. Total contributions will increase by £14m from £147m to £161m in April 2019 with contributions then rising by 2% per annum to 30 September 2026. This means that by April 2026 contributions will be around £180m per annum. What may have been missed by many however is that the existing contributions were to begin to reduce from next year tailing off to 2025 however this will not now happen so contributions in the last year could be as much as £100m more than under the previous funding plan. The option was there to look to extend the funding plan to retain existing contributions or smooth increases but this hasn’t been pursued.
  • Historic deficit contributions had been set based on a combination of pensionable salaries and share of scheme liabilities however all future deficit contributions from April 2019 will be paid based on share of liabilities. Whilst undoubtedly fairer, particularly where there is a mix of open and closed scheme accrual, as in this scheme, but the change could result in very large fluctuations in contributions for a number of employers.
  • Clearly the new higher contributions will have a negative impact on the FRS102 accounting disclosures, which are likely to be changing from 2019 from a net present value calculation to a full disclosure, so there could be a material balance sheet implications for scheme employers.
  • Future service contributions (i.e. the cost to buy more benefits) have increased by around 32% across the Board. Final salary 60th contribution s are up from 20.6% p.a. to 27.2% p.a. and CARE 60th contributions are up from 16.7% p.a. to 22.1% p.a. These are really material increases and it wouldn’t be unreasonable to wonder if historic contributions had been under-estimated, particularly when you see the cost of similar accrual in other Final Salary / CARE schemes.
  • Scheme expenses have increased from £1,800 per employer plus £70 per member pa to £1,900 per employer and £75 per member so a 5.6% and 7.1% increase respectively. I suspect this is not only inflationary but also a reflection of falling membership in the DB section and the need for TPT to recoup costs over a smaller membership base.

The direction of travel is seeing more and more RSL’s move to DC provision and away from DB and it’s easy to imagine that these changes will further encourage that move. It will be interesting to see the full valuation report when available to see how the membership profile has changed over the 3 year period.

So what can employers do?

  • In terms of deficit contributions not a great deal!! There is an appeals process where if contributions are deemed unaffordable this can be raised with the Scheme Trustees. However time to pursue this is short as appeals need to be in by 30 November 2018. If not pursued, or unsuccessful, then employers just have to find the money for the deficit contributions.
  • For future service contributions employers have a few more options:-They can just accept the increases as proposed
    • They can pass all or a proportion of the increases on to members. With member contributions in the final salary 60th option already at 10.3% then potentially increasing this to something up to either 13.6% or 16.9% must be unwelcome and really raises the question if this remains a viable option. In addition to the above if the membership is closed to new entrants an additional 1.1% of salary applies.
    • Employers could move to a lower DB accrual basis. The total cost of the final salary 80th option is now 20.5% in comparison to the 20.6% which previously applied to the final salary 60th option. A move to CARE 80th would have total contributions of 16.7% with the reduction potentially available to help fund the increased deficit contributions. Clearly remaining in the DB option, even at a lower accrual rate, does continue to build DB liabilities, though at a slower rate.
    • Employers could move to the DC Option within the scheme. Employer and employee contributions could be set at a fixed monetary amount at, above or below the level currently being paid. DB accrual would cease for these staff thereby limiting liabilities. This move could be for new staff only or for all staff.
    • Historically it has almost entirely been the case that new DC contributions would be arranged via the SHPS scheme primarily to avoid a cessation debt trigger on the DB liabilities. The relevant Section 75 legislation was amended in April 2018 which would allow DB accrual to be ceased without an automatic S75 debt trigger however at this stage it is unclear how TPT might provide access to this option and so this would have to be explored in more detail.
    • Employers could also consider setting up their own scheme or if they have a scheme already in place look at moving their assets and liabilities to that. Such an option is likely to be complex and potentially costly though, particularly for larger SHPS participants, is well worth considering as it does potentially increase the options available.
  • Clearly it’s likely any of the above changes would require communication with staff as a minimum and potentially consultation.
  • Employers need to be aware and manage any revised balance sheet impact.

Revised deficit contributions are applicable from April 2019 and future service contributions from July so employers will need to understand how the changes specifically impact on them and then consider what strategy they want to employ. Once a strategy is set they’ll need to consult with staff if there are any changes to contributions and/or benefits. This process will all have to be addressed in a relatively short period so engagement with the scheme and advisers in the short term will be necessary.

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