Social Housing Pension Scheme: which is the right option for you?
Updated July 2009
On 22 April 2009 the Social Housing Pension Scheme (SHPS) announced a significant increase in the scheme's funding deficit to £663 million in September 2008. SHPS will be extending the deficit recovery plan and requiring increased contributions from participating employers. In order to counteract the inevitable cost implications involved, SHPS will also be offering new defined benefit and defined contribution options within the existing scheme, intended to be more affordable for employers. However the deficit in the SHPS will also have to be funded going forward alongside new benefit options.
This briefing is relevant to all employers participating in SHPS. We examine the new SHPS options and the key legal areas employers will need to consider when contemplating changes to the benefits structure on offer. It also sets out a timeline and key dates for employers.
What are the new options under SHPS?
All employers participating in SHPS were sent a letter in April 2009 setting out the results of the recent actuarial valuation and the changes to the SHPS benefit structure and funding requirements, along with more detailed employer guidance notes. By way of summary, the existing 1/70th option based on final salary will be closed to new members from April 2010 and the following will be introduced:
- 1/80th option based on final salary (April 2010)
- 1/80th option based on career average salary (known as "CARE") (April 2010)
- Defined contribution option (October 2010).
Employers will only be able to offer one of the defined benefit options to new members (final salary or CARE), plus the defined contribution option (if the employer chooses). However, existing members can continue to accrue benefits under the current defined benefit options if the employer decides to allow this. Participating employers therefore need to carefully consider the new options available, and must notify the Pensions Trust (who run SHPS) of the decision by 30 November 2009.
For the first time, employers participating in SHPS will be able to offer a defined contribution option to members. This option has been structured to allow employers to comply with the requirements for the introduction of Personal Accounts from 2012. It should be noted that the SHPS defined contribution section will require a minimum contribution rate of 3% by the member and 3% by the employer from October 2010, which is intended to rise to an employer contribution rate of 5% in 2012. This is above the minimum requirement of a 3% employer contribution for Personal Accounts.
What is the impact on employer contribution rates?
As a result of the greatly increased deficit in the SHPS scheme, employer contribution rates have also been increased from April 2009. Recovery contributions for the deficit relating to past service will be increased to 7.5% of the pensionable payroll for each participating employer at 30 September 2008, and will be increased annually by 4.7%. Subject to any consultation requirements, employers may determine how this contribution rate for defined benefit members is split between employer and members.
What are the consultation requirements?
Employers are likely to have to consult employees about any changes they propose making to the SHPS benefits they offer, either because the changes will constitute 'listed changes' for the purposes of pensions legislation, or because they will involve changes to employees' terms and conditions of employment. In addition, the SHPS Pensions Committee has stated that it recommends all employers consult with employees as a matter of good practice. It is therefore important for employers to establish the level of consultation required.
'Listed changes'
The statutory obligation to consult employees arising under the Pensions Act 2004 and regulations made under it applies to any employer considering making a 'listed change' to existing benefits structures (including pension provision). It only applies to employers with 50 employees or more. If an employer falls within this category it must engage in meaningful consultation with all affected members (current members of SHPS and any employee who is eligible to join SHPS under their employment contract) for at least 60 days before making any change. In order for the consultation to be meaningful it is important that the employer considers any comments received before making changes. Failure to comply with the statutory consultation requirements could lead to the Pensions Regulator imposing a fine on the employer up to a maximum of £50,000.
Changes to employment contracts
All employers also need to carefully consider whether the proposed changes to SHPS benefits will mean existing contracts of employment need amending. If changes are required, additional consultation may be needed which could extend to a minimum of 90 days in some circumstances. Participating employers should ensure they obtain a review of the provisions of their employment contracts as soon as possible.
Internal procedures
These could be contained in internal procedure manuals or governance arrangements relating to the way in which consultation should be conducted, and it is important that any such requirements are complied with (regardless of whether the employer must also comply with the statutory consultation regime).
If an employer is not required to carry out consultation as a result of there being no listed changes, no amendments required to employment contracts, and no relevant internal procedures in place, the SHPS Pensions Committee still recommends consultation should be carried out and suggests a minimum 30 day period.
Following consultation, and by 30 November 2009 at the latest, the employer must notify the Pensions Trust of the proposed benefit and funding structures going forward. This should be done using the employer form of authority which has already been provided to SHPS employers, and should be completed and returned regardless of whether the existing benefit structure is changed or maintained.
What changes may be needed after a decision is reached?
If the employer decides to change the existing benefit structure in any way, amendments to employment contracts and pensions information issued to current and prospective scheme members may be required. The SHPS Pensions Committee has strongly recommended that employers obtain legal advice both on the consultation requirements and on any proposed or required amendments to employee terms and conditions.
If the employer decides to allow membership of the defined contribution section of SHPS it should consider whether it wishes to provide ill health pensions to defined contribution members. This will not be covered by SHPS, and a separate insurance policy will need to be purchased. Employers should also be aware that the defined contribution section will be accompanied by a one off set up fee, an annual administration fee and an annual management charge. Further details have yet to be provided by SHPS Pensions Committee.
Can potential employer debt consequences be avoided?
When an employer stops participating in a multi-employer pension scheme (such as SHPS) because all its active members have left the scheme while other employers continue to have active members, the employer may be required to pay its share of the deficit into the scheme on an annuity 'buy out' basis (known as Section 75 Debt). Given the size of the SHPS deficit as at September 2008 this is an onerous prospect for employers.
The defined contribution section of the scheme will allow employers the opportunity to avoid the cost implications of enrolling new members in defined benefit sections. They will also have the chance to continue as a participating employer in SHPS with active members in the defined contribution section, thus reducing the risk that a Section 75 Debt will be triggered.
If employers are considering ceasing future accrual for active members in either the defined benefit or the CARE sections of SHPS they need to take legal advice.
What next?
The deadline for employers to notify SHPS of their final benefit and funding options is 30 November 2009. As the SHPS Pensions Committee suggests a minimum consultation period of 30 days which may be increased to a minimum of 90 days if statutory obligations apply, employers should be considering the options available and preparing proposals to employees now. The key dates are set out below.
- Now - Begin considering option, prepare proposals and begin consultation
- 30 November 2009 - All employers must notify SHPS of their final benefit and funding options
- April 2010 - 1/80th CARE and Final Salary options introduced, 1/70th Final Salary option closed to new members
- October 2010 - Defined contribution option introduced
TLT's Pension team has experience of advising on SHPS and can offer a fixed price audit, to review and advise you on any contractual issues in relation to the proposed changes, your consultation requirements and management of any potential Section 75 Debt. If you would like to know more please contact Sasha Butterworth.
This publication is intended for general guidance and represents our understanding of the relevant law and practice as at July 2009. Specific advice should be sought for specific cases; we cannot be held responsible for any action (or decision not to take action) made in reliance upon the content of this publication.
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