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Pension liabilities - how to de-risk

Housing Associations (HAs) are moving towards being a commercial provider with a social objective. Private sector competitors restructured their pension provision ten years ago, moving away from expensive and volatile defined benefit pension schemes. Now is the time to consider your pension strategy. 

Radical changes to pensions came into effect on 6 April 2015. How can HAs take advantage of the new pension flexibilities and save costs? Many employees will want to know what options are available to them, so clear communications are key. 

Consider the legals

The first step is for HAs to consider their legal position by checking employees' contracts of employment and any employment related documentation. For those who have transferred from the public sector, check the contracts for any TUPE and Fair Deal requirements agreed on a stock transfer. Also review any admission agreements with the Local Government Pension Scheme (LGPS). These can make it difficult to change pension benefits but it is possible to negotiate with councils and employees, to agree changes.  

If a HA has its own pension scheme, the documentation should be checked to see whether benefits can be restructured or closed. Pay close attention to whether the trustees or the employer holds the power to amend the scheme and how this must be done. Ensure that no amendments or closure would trigger a liability to the scheme.

Stick or switch

HAs should speak to Social Housing Pension Scheme (SHPS) and any LGPS schemes in which they participate, to understand whether they have any options to change the benefits they offer. The liability for any shortfall in benefits in a defined benefit scheme sits with the employer. But in a defined contribution scheme, benefits are based on the size of a member's pension pot. Any risk is taken by the member. 

HAs need to take particular care to confirm with SHPS or the LGPS that exiting from any defined benefit section would not trigger a large payment into either pension scheme. The best approach would be to pay off any deficit over a number of years and some LGPS will agree up to three years. Ensure an accountant and actuary review the impact of any changes on the balance sheet. 

Pension flexibilities

Under the brave new pension world, members have the option to transfer benefits out of a pension scheme. Members have ‘pick and mix’ options. These include the traditional route of buying an annuity and taking 25% cash. New options include the flexible drawdown of benefits or taking all benefits at once, with 25% in cash and the rest at the member's marginal tax rate.   

If employees take advantage of the new flexibilities, it may reduce employers' funding costs for defined benefit (DB) pension schemes, such as SHPS and the LGPS. Some schemes will offer a partial transfer, so members can take advantage of both a DB pension and drawdown in another scheme.

A move away from DB schemes could help reduce volatility of pension costs and give HAs more control over their pension spend.

Time scales

Depending on the pension changes, you may require up to 90 days consultation with employees. 

Negotiating with SHPS, LGPS or trustees of your own scheme will take time to reach a financial agreement, if you propose to exit or close your scheme or a section of it.

Start now

Set up a project plan and agree a 2016 pension strategy. Now is the time for a change. 

This publication is intended for general guidance and represents our understanding of the relevant law and practice as at November 2015. Specific advice should be sought for specific cases. For more information see our terms & conditions on www.TLTsolicitors.com

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