LGPS funding level decline outstrips SHPS amid Covid-19 volatility

The Local Government Pension Scheme (LGPS) funding level is estimated to have fallen by over 10 per cent due to the coronavirus crisis, whilst the Social Housing Pension Scheme (SHPS) funding level is estimated to have reduced by around 5 per cent, according to Isio.

The estimates were outlined in a National Housing Federation (NHF) update from pension advisers Isio, which said that the LGPS had been harder hit by the crisis, as it was "on the whole" invested in riskier assets.

Isio predicted that SHPS had also been impacted by these recent market movements, which, combined with upcoming changes to defined benefit (DB) funding regulations, which NHF said had put more pressure on scheme funding levels.

Overall, Isio estimated that SHPS funding levels fell 8 per cent since the start of the year to around 70 per cent as at April 2020, with an estimated deficit of around £1.7bn, driven by a fall in assets from £4.7bn (December 2019) to £4.4bn.

This is despite employer contributions totalling £371m, made since the schemes last valuation in September 2017, when a funding level of 75 per cent and a deficit of £1.5bn were recorded.

A spokesperson for TPT, who manages the SHPS, commented after this article was published: "The reported funding level of SHPS was 78 per cent as at 31 December 2019. This fell to a reported 75 per cent as at 31 March 2020 and TPT estimates indicate that it has recovered to in excess of 77 per cent as at 30 June 2020.

"TPT has the data to provide this information. Estimating this position without the data, to which only TPT is privy, is difficult due to the broad diversification of the investment portfolio and the specific nature of the hedging instruments that are in place to protect against downside risk.

The NHF update emphasised that in light of TPR's new DB funding code of practice, many sponsoring employers are going to be under pressure to "pay more money in, more quickly".

It also warned that any easements offered by TPR for contributions payable during the current economic emergency would not resolve the need for more funding in future.

In light of these concerns, the NHF is meeting with TPR to discuss how the housing sector might best be represented and how factors such as strong covenant are to be reflected in any new funding schedule.

However, the NHF emphasised that as things stand, contributions would need to “increase significantly”, with Isio predicting that this could see an increase of between three and five times with no mitigating actions.

The update clarified that these issues would not directly impact the LPGS scheme, as this was set up under separate regulations.

It suggested that employers in the SHPS should approach TPT Retirement Solutions if they would like the flexibility to reduce contributions, clarifying that the LGPS has yet to issue any guidance similar to that of TPR, to allow flexibility for employers when paying their rates and adjustments.

Responding to the update, a TPT spokesperson added: "TPT has a strong ongoing relationship with The Pensions Regulator (TPR) and is aware of the changes to the funding code of practice.

"However, TPT has not seen any evidence to support the fact that SHPS employer contributions could increase by between three and five times."

The update also noted, that if organisations are recognising in their accounts the SHPS position at 31 March measured on an FRS 102 basis, this will be different from the funding position outlined above.

It explained that FRS 102 liabilities are marked to corporate bond yields rather than government bonds, and in general, the deficit has not increased by as much, as the schemes FRS 102 position looked “better than perhaps anticipated”.

It emphasised that once considerations, such as CPI inflation, are coupled with TPT’s change in methodology for discount rate, and an update in mortality assumptions, employers could expect to see liability values in the region of 15 per cent smaller than last year, and net deficit figures that are equal to, or improved from, 2019.

For organisations in the LGPS, the FRS 102 valuation is again expected to be better than under the funding measure, for similar reasons to SHPS.

However, Isio clarified that there will perhaps be “quite marked variation” across funds due to the different asset strategies taken.

    Share Story:

Recent Stories

De-risking options for pension schemes
In this latest Pensions Age podcast, Linklaters' Sarah Parkin talks to Laura Blows about the wide range of choice available to pensions schemes for the partial, or full, removal of their risks

Risk transfer opportunities
Laura Blows speaks to Lisa Purdy, Head of Fiduciary Distribution at Legal & General Investment Management and Gavin Smith, Pricing and Execution Director - UK PRT at Legal & General, about the impact of the recent market volatility on the bulk annuity and risk transfer market and the potential opportunities for the future

Bulk annuities during coronavirus
Laura Blows speaks to Just business development manager Prash Mehta about the impact of coronavirus on transactions

Investing in infrastructure
Laura Blows speaks to James Dawes about how, and why, pension funds should be looking at infrastructure as an investment opportunity