Pensions are stopping us building houses and housing is stopping us buying pensions!

sausageThis was the 52nd pension play pen lunch and one of the best. Attended by a knowledgeable gang of social housing officers, pension consultants and a fair few bankers, the lunch group set out to answer the question “are pensions stopping houses getting built?”

On the face of it- Pensions were found guilty as charged

  1. Funding defined benefit pensions, in particular the public pensions that social housing engage with under Fair Deal is preventing Social Housing Groups buying land and building houses.
  2. Requirements to auto- enrol protected people into expensive defined benefit schemes is increasing cash-flow strain and long-term liabilities
  3. The DWP block on the statutory override for former public sector pensions is making the abolition of protected rights an NI nightmare in 2016

With pensions drawing on the reserves of social housing associations, it is a wonder that Eddy Truell and Boris Johnson are allowing the LPFA to treat Social Housing covenants as junk. News that the LPFA are demanding that housing groups fund on a discontinuance basis were met with consternation by those in the room unfamiliar with the issue. “Social Housing groups are not going bust so why should they be forced to fund as if each tomorrow was their last”, was the comment of one officer.

News from legal Guru Robert O’Donovan that Social Housing organisations were to be hit by the double whammy of contractual enrolment of Protected staff into Local Government Schemes and  the prospect of higher NI with no mitigation of pension liabilities came as a further blow. The sound of choking on beer and sandwiches deafened the room.

But mitigation was at hand

Michael Harrowven, Chair of Saffron  Housing Association explained how they’d raise £125m from the market at 1.25% over the gilt rate. He looked smug as well he might. At the time (a couple of years back).  Moodys had given his organisation a double A debt rating. Today this rating has been downgraded but he has his money for a further 28 years.

Michael had explained that to get the finance he’d need to prove to the market he had effective management, control of various risks surrounding the housing stock and that political risk was minimal. He had succeeded but Jan Taranczuk, Vice Chair at the Chartered Institute of Housing and Kevin McCarthy, Director at Just Housing pointed out that the landscape had changed and not for the better. With the odd exception (the Pension Fund of Greater Manchester being cited), the expected investment from Pension Funds predicted by consultancies such as Redington had not yet materialised.

Jan and Kevin pointed out that what had seemed a clean regulatory environment had become sullied. The latest SOPR imposed on Housing Associations now required them to account for their assets not at their value but at the discounted cost after state subsidy. This reduced the Housing Association’s capacity to borrow and the attraction of their debt to Pension Funds. As with the LPFA, the unintended consequence of a Regulatory tightening was to reduce the scope of the Housing Associations to build houses.

Under inquisition from Ian Bright, senior economist at ING it became clear that much of the advantage enjoyed by Council Housing (free land) was not enjoyed by Housing Associations .  And while there had been a transfer of control of the housing stock from central to local authority, the funds from council house sales were being kept on local authority balance sheets and not made available to housing associations for investment in new stock.

The fiduciary dilemma

With 68% of social housing revenues coming from the Benefits budget, these revenues were now being considered “at risk” from changes arising from Universal Credit and from overall caps on family benefit budgets (£28k). With the  threats to alternative funding sources mentioned above, trustees of pension schemes were understandably confused as to whether they would be investing commercially or for the public good. Camilla de Ste Croix of Share Action pointed out that most trustees were being instructed to invest on a commercial basis and while Share Action were lobbying to improve the SRI element in the decision, she could understand trustees looking to invest in alternative ways.

Charles Tatham, Chair of Barker Tatham, put it succinctly, he could not see the risk/reward of pension funds investing in social housing as sufficient for him to advise for it against other infrastructure investments.

A sorry picture

It was left to the bankers Geraldine Davies and Arjan Verbeek to sum up the financial case for pension funds to continue to consider Social Housing. They pointed to the continued security of inflation linked income streams and the match between pension scheme liabilities and the long-term nature of social housing debt. They explained that banks no longer wished to lend in this long-term way and that pension funds and social housing really should be friends.

But as we filed out of the Counting House on a wet March lunchtime, I sensed that housing and pensions really don’t get along.

The costs of renting – especially in the South East are now so high that they are the single biggest obstacle to saving. Ironically it is those who have most by way of pension rights who have the cheapest housing costs. It is those with cheap mortgages that can most afford further pension schemes and are most likely to have the security of well-funded defined benefit pension schemes.

To bring down the costs of renting, we need to build 40,000 houses in London (BoJo’s estimate) and up to 200,000 houses around the country. But these houses are not going to be built by social housing organisations without bank finance or long-term investment.

A ray of light?

If a ray of light can be determined at the end of the tunnel – it may be from pressure on annuities to deliver more. Here is the wonderful Adrian Boulding on Twitter;

Now we are using annuity customers’ money to fund accommodation for key NHS workers in London …

And lest I be accused of offering provider bias- here is John Lawson’s take

@JohnRalfe1 @JosephineCumbo Annuities now invest in comm property, infrastructure and loans, so ERP gap not as large as assumed

But in the final analysis – will pensions and housing ever be true bed-fellows? I suspect we are divided by liquidity!

“You can’t buy a sausage with a brick”

This article first appeared at

About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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2 Responses to Pensions are stopping us building houses and housing is stopping us buying pensions!

  1. Anon says:

    A few observations:

    – annuity providers continue to view the sector extremely favourably and even small, illiquid, bond issuance can be completed at credit spreads which contain little or no reward for the investor to compensate illiquidity. This is a result of the value insurers derive from the 30 year maturity which provides capital efficiency by lengthening the duration of their credit portfolios

    – pension schemes were very keen to pour funds into this sector when various investment managers raised funds promising returns of 2% or more above gilts. However, pension schemes ceased to be willing to invest when the illiquidity premium was competed away by insurers fighting to secure allocation following a number of new investors coming in to the sector

    – a further impediment to pension scheme access was the fact that investment managers had promised to source RPI linked debt (often using borrower-unfriendly sale and leaseback structures). However, due to uncertainty about the inflationary link to social rents (now confirmed as CPI), Housing Associations have favoured fixed rate debt in recent years. Also, for larger bond issuance the public markets for index-linked debt are viewed by issuers as posing execution risk

    – in summary, Housing Associations of all sizes have good access to capital markets and don’t really need pension schemes. At the same time, due to the hot competition from insurers for these assets it seems unlikely that the returns on offer will be sufficient to tempt pension schemes away from higher yielding illiquid credit

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