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Supporting Older
People Conference
B10: The future for housing association pensions
Speakers: Derek Benstead
Senior Housing Consultant First Actuarial
James Beardmore
Principal Actuary KPMG
Chair: Rob Griffiths
Director of Financial Services Longhurst Housing Group
The Future for Housing Association Pensions
NHF Housing Finance Conference
20 March 2013
Derek Benstead
First Actuarial
0161 868 1721 [email protected]
James Beardmore
KPMG Pensions
0121 609 6038
Sector pension schemes
LSVTs MIXED Traditional RP
LGPS £2bn+
Own DB
scheme £1bn+
SHPS £2bn+
DC scheme
Cost pressures
LGPS March 2013
actuarial valuation
SHPS September 2011
actuarial valuation
Auto-enrolment
Own scheme
triennial
valuation
■ 50% increase in deficit (lower gilt yields)
■ Future service cost increase despite reforms
■ Cost impact of reforms depends on membership profile
-3000
-1000
1000
3000
5000
7000
9000
Assets Liabilities Deficit
31/03/2010
30/09/2012
0.00%
2.00%
4.00%
6.00%
8.00%
10.00%
12.00%
14.00%
16.00%
Current rate Updated to 2012 Post 2014 reforms
Past Service Future Service
11.6% 12.1%
13.8%
£’0
00
s
Emp
loye
r co
ntr
ibu
tio
n r
ate
Pension scheme cost pressures
Pension scheme membership (1)
60ths Final
salary
2013 by 2015
49ths CARE
LGPS
SHPS Final salary
CARE
DC
Source: Independent Public Service Pension Commission: Interim Report – 7 October 2010
Pension scheme membership (2)
Public sector: ¼ million
new members
Private sector: 6 million new members
Target retirement income (1)
0
20
40
60
80
100
120
140
49thsCARE
60thsFinal
salary
80thsFinal
salary
80thsCARE
120thsCARE
DC20%
DC12%
DC8%
LGPSSHPS DBDC
Illustrative replacement income for employee with earnings £25,000 including state pension
Target retirement income (2)
Target retirement income (3)
The Future of the State Pension (1)
– State Pension Age reviewed every 5 years
– Annual increases at least average earnings growth
– Full entitlement if 35 qualifying years (pro-rata if less)
1. Basic State Pension 2. State Additional Pension 3. Category D Pensions 4. Age Additions 5. Savings Credit
Single-tier pension
£144 per week (£7,488 per year)
April 2017
The Future of the State Pension (2)
– Contracting-out of state pensions abolished
– Higher National Insurance contributions (3.4% from employers, 1.4% from members on earnings between £5,564 and £40,040)
– Statutory provision to recover extra employer cost?
Local Government Pension Scheme (1)
• Scheme design
– Final Salary Career Average
– 60ths accrual 49ths accrual with CPI revaluation
– Normal Pension Age of 65 State Pension Age
• Estimated scheme cost*
– Total: 21.7% 19.5%
– Employees: Average of 6.5% Average of 6.5%
– Employers: 15.2% 13.0%
*Source: LGA/LGPS paper with costings by GAD
Local Government Pension Scheme (2) Employer cost
• Employer future cost 13% plus deficit plus…?
• Does this include:
– protection for members within 10 years of age 65?
– a range of State Pension Ages?
• How and when will employer contributions be adjusted…..?
Local Government Pension Scheme (3) The Next Valuation
• The next actuarial valuation – As at 31st March 2013
– Implementation from 1st April 2014
• Cost to employers made up of – Future accrual of benefits
– Deficit recovery contributions
• Cost cap for employers – 2% buffer either side of a target future service cost
• If breached, benefits and/or members’ contributions may be adjusted
– To operate on a ‘model fund’ covering all LGPS funds
– Government considering proposals
Local Government Pension Scheme (4) Issues to Consider
• Admission Agreement (Guarantor?)
• Authority’s Funding Strategy Statement
• Termination debt
• 50/50 option for employees from 2014
• “25 year guarantee”
• Employer cost cap
Social Housing Pension Scheme (1) Employer cost
• Last SHPS valuation allowed short term brake on salary increases – expect 1.5% - 2.0% increase from April 2016
Total Future Service Contribution Rates as % of Salary From April 2013
Section of SHPS Current From
April 2013 Increase
1/3rd of cost (employee?)
2/3rds of cost (employer?)
1/60th Final Salary 17.8% 19.4% + 1.6% 6.5% 12.9%
1/70th Final Salary 15.4% 16.9% + 1.5% 5.6% 11.3%
1/80th Final Salary 13.5% 14.8% + 1.3% 4.9% 9.9%
1/60th CARE 14.9% 18.1% + 3.2% 6.0% 12.1%
1/80th CARE 11.9% 14.0% + 2.1% 4.7% 9.3%
1/120th CARE n/a 9.7% n/a 3.2% 6.5%
LGPS 6.5% 13.0%
Social Housing Pension Scheme (2) Issues
• Financial assessment of employers
• Reconsider appropriate defined benefit section
• Termination debt
• Closed employer surcharge of 2.5%
• Bulk transfer out to own scheme (Radian Group)
• SHPS considering NPA of 67 choice for members
Pensions tax changes Lifetime Allowance
• Lifetime Allowance reduces to £1.25 million from April 2014, subject to fixed/personalised protection
• Impact of possible freeze – maximum benefits to avoid charge on retirement at age 65
Age Max DC fund if 5% pa return
Max DC fund if 8.5% pa return
Max accrued pension if 2.5% pa revaluation
Max accrued pension if 5% pa revaluation
40 £369k £163k £34k £18k
50 £601k £368k £43k £30k
60 £980k £831k £55k £49k
Pensions tax changes Annual Allowance
• Annual Allowance reduces to £40,000 from April 2014
• Can now affect many more employees in an organisation particularly on promotion, eg:
(Figures exclude any carry forward, protections, or contributions/benefits in other arrangements)
Service in 60ths final salary scheme
Current pensionable earnings
Annual allowance charge if earnings increase by CPI + 20%
25y £50k £11k
25y £75k £24k
25y £100k £37k
Pension deficit funding option (1) Central Asset Reserve (CAR)
Fully funded Scheme
Assets
Ongoing liabilities
Partly
de-risked
ongoing
liabilities
Insured
benefits
Ongoing funding "gap”
Increased
Assets
“Insured
assets”
Route to self-sufficiency
Central Asset
Reserve
Better funding level enables buy-in or buy-out decision
CAR provides cash flexibility and enables
de-risking
Possible benefits ■ Immediate
reduction in deficit
■ Longer recovery
plan
■ Lower PPF levy
■ Brings forward tax relief
■ Mitigate departicipation debts
Pension deficit funding option (2) Central Asset Reserve (CAR)
The Future for Housing Association Pensions Your questions
• Increasing pension costs
• Scheme membership
• Target retirement income
• The Future of the State Pension
• Local Government Pension Scheme
• Social Housing Pension Scheme
• Pensions tax changes
• Central Asset Reserve
The Future for Housing Association Pensions
NHF Housing Finance Conference
20 March 2013
Derek Benstead
First Actuarial
0161 868 1721 [email protected]
James Beardmore
KPMG Pensions
0121 609 6038
Supporting Older
People Conference
B10: The future for housing association pensions
Speakers: Derek Benstead
Senior Housing Consultant First Actuarial
James Beardmore
Principal Actuary KPMG
Chair: Rob Griffiths
Director of Financial Services Longhurst Housing Group
