The results are in and it's not good news for employers with liabilities in the defined benefit structures of SHPS. The overall deficit has slightly increased to £1.56 billion, although in percentage terms there has been a slight increase in the funding level to 77%. Given that previous deficit contributions have not shrunk the deficit, this inevitably means that contributions are going to go up.
Future service contributions
Contributions for benefits that employees will earn in the future are going to rise by around 50% from April 2022. This means that, for instance, contributions to the CARE 1/120th will increase by 5.5% to 16.8% of pensionable pay and for the final salary 1/60th the increase will be by 14% to an eye-watering 41.2% of pensionable pay.
Contributions to reduce the deficit in respect of benefits already earned are also going to increase year on year until 31 March 2028. Overall deficit contributions will increase from £150 million to £175 million per year from April 2022 and then by 5.5% per year from April 2023. The recovery plan to pay down the deficit has also been lengthened by 18 months so that it now ends in March 2028 rather than September 2026. In total there will be an additional £500 million in deficit contributions.
What this means for individual employers will depend on how their share of the overall liability has changed since the 2017 valuation. Everyone will see an increase but this will vary depending on how their share of the liability has changed in proportion to other employers. It seems likely that those employers who still allow employees to earn benefits in one or more of the defined benefit structures will see higher increases in deficit contributions.
What should employers do now?
With the changes being implemented from 1 April 2022, employers have limited time in which to make decisions and consult with staff about any proposals that come out of these results.
Employers will need to look at their options for managing the costs of future service benefits which could include closing defined benefit structures or requiring staff to pay some or all of the additional cost.
Any changes to the split of contributions or benefits need to be notified to the Pensions Trust by 31 January 2022 if they are to take effect from 1 April.
For employers who are looking to manage their deficit contributions, it may be appropriate to consider a bulk transfer out of SHPS or liability management exercises.
“All associations will need to find more cash to pay to SHPS, with the increase in costs of future defined benefits being particularly stark for those remaining associations that continue to offer such a benefit.”