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Has this Social Housing merger delivered a pioneering pension solution?

Finance | David Davison | 14 Oct 2010

David Davison analyses a recent merger between two social housing providers.  

It was really interesting to read that two Housing Associations, Chester & District Housing Association and Cosmopolitan Housing Association are consulting tenants over a possible merger.

If successful the merged organisation will have assets in the region of £875m and 12,500 properties across Cheshire, Merseyside and Lancashire.

With more than 1,200 registered social landlords in England bracing themselves for cuts to government grants and rent levels consolidation seems an inevitable result.

The National Housing Federation, which represents registered social landlords, expects grant cuts of up to 30 per cent after the comprehensive spending review with other income being squeezed as benefits, which most tenants rely on to pay the rent, are cut.

Derek Long, head of the north of England for the Federation, said there were likely to be more mergers. “Housing associations are facing a perfect storm. Government cuts in benefits will mean less cash for associations at just the moment when they will be pressed both to build more affordable homes and fill in the gaps left by the ‘Big Society’. When councils and the state retreat, associations will be left holding the baby.”

Alongside this needs to be placed research from CapacityBuilders which highlighted that only 5 per cent of mergers have been successful in the last 2 years with 18 per cent abandoned before completion and about three-quarters, therefore, in a state of limbo.

A major issue cited in the breakdown of merger negotiations is the presence of a final salary pension scheme and I have commented on some of the issues previously. 

Interestingly, such issues are likely to exist in the Chester & District/Cosmopolitan case as I understand that one association participates in the Local Government Pension Scheme (“LGPS”) while the other also provides final salary pension benefits via either this route or an alternative defined benefit arrangement.

Should both schemes participate in LGPS then the pension issues may be easier to resolve as benefits and contributions are likely to be more consistent and the process to merge benefits a much more well trodden path. However should the schemes be different then the pension merger required is likely to be much more complex as there would undoubtedly be fundamental differences in benefits and costs, and evaluating these differences and the associated costs more difficult.

Critically there would be a need to make sure that the cessation debt in either or both schemes was avoided as this could be a very significant sum and frequently many times the level of any advantage to be gained from the merger.  

If successful this, and the merger expected to complete in March 2011 between Vicinity and Contour, also in the North-West, could be a pioneer solution for the sector especially if as part of the process the pension issues have been effectively resolved.

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