Spring 2014

Finance Policy Quarterly Update

1. Introduction 3

2. Accounting 4

FRS 102 and the housing SORP 2014Board guide on social housing finance

3. Regulation 9

Discussion paper on introducing regulatory feesValue for Money

4. Leadership 11A new vision for the sector

5. Investment 12

The 2015 – 2018 investment programmeThe London housing strategy Federation submission to the 2014 budgetThe new rent settlement

6. Treasury 16

CLIP - Institutional Consortium funding optionLease and leaseback funding option from Aviva

7. Welfare reform 18

Welfare reform impact assessmentUniversal Credit

8. Taxation 20

New VAT PE FrameworkHelp to Buy agentsCost Sharing Exemption guidance changeChoice Based LettingsChanges to tax relief available for fixtures in buildingsOTS report on employee benefits and expenses

9. Pensions 23

Local Government Pension Scheme Pensions Tax AllowancesAbolition of contracting outAuto Enrolment

10. Awards 25

Housing Association National Accountancy Awards

11. Risk publication 28

Launch of “Risk management: A guide for housing association board members”

12. Seminars and conferences 2014 29

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Contents

Finance Policy

Quarterly Update

Spring 2014

Spring 2014

Introduction1

Since our last update the UK economy has continued on its upward trajectory, with most experts now

expecting growth to be in the region of 2.5% in 2014, after 1.9% growth in 2013, the fastest rate since 2007.

With exports continuing to disappoint and with businesses still hoarding cash the expanding UK economy has been driven by increased consumer spending. As real wages continue to decline it is no surprise that UK household debt recently reached a new high. The Bank of England’s recent decision to update its forward guidance to avoid the difficult decision of raising interest rates was therefore predictable.

The UK housing market grew by 5.5% in 2013, although if London’s regional variance of 12.5% growth and that of the south-east figures were stripped out, the growth is a more sobering 3.1% (according to figures from the Office of National Statistics). Finally, CPI has now fallen below the Bank of England’s target for the first time in over four years, at 1.9% for January 2014, although RPI increased slightly on the month before to 2.8%.

In this issue of the update we:• Provide an update on accounting

for impairment under FRS 102, which has invigorated the sector to respond in significant numbers to the survey on the housing SORP

• Alert you to the Homes and Communities Agency’s (HCA) exploratory paper on introducing regulation fees and the downgrading of 15 housing associations for inadequate value for money returns

• Launch ‘An ambition to deliver – housing associations unbounded’, a report on a vision for the sector over the next 20 years

• Highlight the new prospectuses from both the HCA and Greater London Authority (GLA) for the 2015-18 investment programme

• Explore two new sources of funding from pension funds

• Update you on our latest welfare reform impact assessment, produced by ourselves and IPSOS Mori

• Announce the launch of the updated VAT partial exemption framework for housing associations.

Joseph CarrPolicy Leader

Welcome to the Federation’s Finance Policy Quarterly Update

Introduction1

3Spring 2014

Financial Reporting Standard 102 (FRS 102) was published a year ago and comes into effect for financial

statements commencing on or after 1 January 2015 – meaning most housing associations have about a year until they will need to adopt it. Upon adoption of FRS 102, they will need to restate the previous year’s financial statements in FRS 102 for comparison. And in fact, housing associations that produce calendar-year accounts will need to restate accounts to include a period already gone, i.e. covering the first quarter of 2014. Work to restate financial statements should already have begun – more on this later.

The housing SORP 2014 has been written for consistency with FRS 102, interpreting its requirements for the housing association business model. A consultation exercise on the Exposure Draft to the housing SORP closed on 14 February 2014. Many of the issues raised in the response had been identified in the housing SORP pre-consultation exercise conducted in spring 2013. Consequently, an initial overview of the response held few surprises.

However, equally unsurprising, the main area of concern has centred on proposals for the assessment of impairment of social housing properties which the Federation has demonstrated would lead to a dramatic increase in impairment charges. The SORP Working Party and

the Federation are working constructively with the Financial Reporting Council (FRC) to amend and refine the proposals to produce accounting that is reflective of the sector’s business and ensures that there are no unintended consequences.

Current proposals for impairment Although the proposals for impairment were linked to FRS 102, strictly speaking they arose out of a change in perspective from the FRC in relation to the “planned internal subsidy” concept which the sector has become reliant on, rather than FRS 102 itself.

Where a housing association has decided to invest its own resources in a scheme that broadly goes to plan, it has used the “planned internal subsidy” concept to ensure that the scheme is not impaired. Although previous SORPs have spelled this out and the FRC (or its predecessor) had endorsed the approach, during the discussions on FRS 102 and the proposed SORP Exposure Draft (ED) the FRC firmly rejected the “self-assessment” approach. Instead they argued that transactions between housing associations enabled a reasonably objective assessment to be derived of what social housing properties were worth. Furthermore, the sector has a valuation methodology that is widely used in the sector (EUV-SH) which by definition provides an estimate of what one housing association was prepared to pay for a social housing property under normal

Introduction1

Conversion to FRS 102-style accounting

FRS 102 and the housing SORP 2014

2Accounting

4 Spring 2014

conditions (its fair value). Consequently, we should use EUV-SH as the main tool for deciding whether or not a scheme was impaired.

In response to significant concerns raised by the sector to the proposals on impairment, and in addition to the consultation on the ED, the Federation hosted a series of six sounding boards around the country during January 2014 to explore with the sector the impact of the proposals for impairment. The Federation also issued a survey canvassing the views of members on the likely impact of the proposals on housing association businesses - In particular, the likely impact on the ability to deliver much needed new affordable homes.

How did the sector respond to the consultation?The short answer is very negative indeed – as the Federation’s survey confirmed:• Housing associations responding

accounted for 1 million homes or 40% of the sector’s stock.

• A third believed the proposals would be problematic, but were unable at this stage to share a full impact assessment.

• A third thought the proposals would do significant damage to prospects for the development of social housing and could undermine the perception of the sector with investors.

• If replicated across the sector, this would mean housing associations cutting programmes by in excess of 35%. Members who forecast a scaling back of delivery indicated cuts of between 20% and 80%.

• The impairment charge on new developments would be some £800m per annum, andthe impairment of existing assets could exceed £2bn.

• Gearing ratios would increase on average by about a fifth making loan covenant compliance for some more challenging.

This very helpfully provided the SORP Working Party with a strong mandate to open up further discussions on the theory set out above. Because of the potential impact on social housing delivery, the issue has been closely monitored by the HCA, Department for Business, Innovation and Skills, the Department for Communities & Local Government, HM Treasury, Moody’s and a range of other stakeholders, all of which have been in in-depth discussions with the Federation.

Amendment to the proposals for impairment The FRC too has responded positively, recognising that more work needs to be done and providing some useful ideas on how the approach might be changed to produce a more meaningful outcome that provides a truer and fairer view of the sector’s business. There are positive developments in the following areas:• social housing property is developed

for social benefit• new social housing property should not

be subject to routine impairment and • the assessment of impairment should

reflect the value in use of social housing property held for its service potential.

These features are missing from the current proposals even though provisions in FRS 102 can accommodate a measure of service potential in the assessment of impairment. The proposals for impairment are being amended to incorporate changes in this area as well as changes to the definition of a cash-generating unit and clarification on impairment triggers.

Discussions with the FRC are still very much ongoing but this is a helpful development for the sector. There are a number of potential approaches being explored. Although the precise details are not yet clear, it is likely that the guidance included in the final housing SORP will be less prescriptive and will include a number of different approaches depending on the circumstances. It is

2 Accounting

5Spring 2014

also highly probable that the current emphasis on EUV-SH as the primary test for impairment will be considerably downscaled so that it will still have a role to play in some circumstances, but other routes are potentially available.

The FRC has indicated that, given the extent of these changes and the importance to the accounting, it will be necessary to re-issue the guidance on impairment alone for a further, shorter period of consultation. Nonetheless, this will take time.

At this stage, it is important to sound a cautionary note – nothing has yet been concluded and, in fact, some significant hurdles still remain. For instance, the revised guidance on impairment will need to be reviewed by he Accounting Council at the FRC before it can be issued to the sector for further consultation.

What happens next?It is taking the SORP Working Party a little time to produce new guidance which, in many ways, is breaking new ground on a subject not covered in much depth by FRS 102 or by any of the other draft SORPs currently in existence. As already stated, the revised guidance will have to be reviewed the Accounting Council of the FRC on 10 April – before it can be issued for consultation. The additional consultation exercise will last for two months. With a fair wind, this should then lead to a final SORP being published during September 2014, subject to the post-consultation SORP successfully traversing three further committees of the FRC over the summer/early autumn.

How can I progress my planning for FRS 102 with so much uncertainty?As indicated above, most of the other changes set out in the SORP ED look as if they will be reflected in the final SORP. Generally, the response on other areas was in agreement with the proposals set out in the ED, although a few additional items for commentary have been suggested as well as considerable rephrasing. Nevertheless, much of the FRS 102 transition process is not linked to whatever the housing SORP will finally say, but arises from FRS 102 itself. FRS 102 is not changing, other than in respect of the important proposed changes set out in FRED 51 and FRED 54. This therefore means that, with a few exceptions, much of the preparatory work can start now without waiting for the finalised SORP.

In any event, the SORP Working Party is planning to maintain a dialogue with the sector so that as we close down the remaining issues, information is shared. It is clearly not ideal, but unfortunately does seem to be the only route open to us at this stage. Finally, the Federation will be hosting a series of housing SORP 2014 roadshows in the autumn after the SORP is published with the aim of illuminating some of these issues – details to follow closer to the date.

2 Accounting

6 Spring 2014

Consultations on financial instrumentsFRED 54The Financial Reporting Council (FRC) recently launched Financial Reporting Exposure Draft (FRED) 54: Draft Amendments to FRS 102 – Basic financial instruments. FRED 54 brings a more pragmatic, less rules-based approach to financial instruments. For example, indexed linked debt, previously defined as ‘other’, disclosed at fair value and subject to marked to market adjustments under FRS 102, will now be defined as basic and held at amortised cost under FRED 54.

The consultation closes on 30 April 2014 and the SORP Working Party will be submitting a response on behalf of the sector. The short, easily digestible consultation paper can be found here.

FRED 51Another consultation on accounting for financial instruments in FRS 102 ended on 14 February 2014. This FRED seeks to amend the areas of FRS 102 that relate to hedge accounting by bringing a more practical approach to accounting for financial instruments. For instance, organisations will now be able to apply hedge accounting when this reflects their own risk management strategies.

This similarly short consultation paper can also be found on the FRC’s website.

2 Accounting

Contact Joseph Carr, Policy Leader, 020 7067 1094 or joseph.carr@housing.org.uk.

7Spring 2014

It primarily aims to act as a guide for housing association board members as they perform vital governance roles

for their organisations, but will also be of use to non-finance executives, housing association staff and newcomers to the sector. Jonathan Pryor, Partner at Smith & Williamson LLP, has been commissioned to write this publication.

It will be acknowledged that while some board members may find finance issues challenging, others may have a greater understanding of the issue. The publication will therefore avoid taking for granted existing knowledge but will layer on details for those with more experiences.

The publication will replace the existing 2011 guide, “Understanding financial statements: An overview of accounts for social housing providers”, to reflect FRS 102 and the housing SORP 2014, which will shift housing associations to a new financial reporting framework from 1 January 2015. Whereas the existing guide focuses on explaining how information is presented in audited financial statements, the new publication will include a wider range of finance issues.

The publication will explain and cover, among others, these key areas:• The accounting framework and

accountants role within that framework• Internal financial information• External financial information• Audited financial statements• The role and value of financial

advisers and• Other financial issues, such as treasury,

loan covenants, and taxation

The Federation has commissioned a publication that will provide guidance on the key principles of social housing finance and accounting in a straightforward and easy-to-understand manner.

For further information contact Arnon Leung, Policy Assistant, 020 7067 1070 or Arnon.Leung@housing.org.uk.

Board guide on social housing finance

2 Accounting

8 Spring 2014

33Discussion paper on introducing regulatory fees

The Social Housing Regulator (SHR) is considering charging housing associations for the regulation of

social housing assets and we invited John O’Mahony, Assistant Director at the SHR, to introduce their proposals.

On the 10 February 2014 we published an important discussion paper about funding regulation by charging fees to providers.

This hasn’t come out of the blue. The Housing and Regeneration Act 2008 gave us the power to charge fees. It is common practice for regulated bodies to pay for the cost of regulation. It also makes a lot of sense given the benefits that providers receive from regulation such as increased lender confidence and access to grant.

If fees are introduced we want to make the system as simple as possible. Our statutory objectives and fees powers set out in statute have provided the starting point for developing our approach. And our initial conclusions are that a one off fee for registration and an annual fee based on the number of social housing units owned would be the best approach.

But we do recognise fee charging would require a rethink on how we are held to account by the sector. If providers are paying for regulation it is only right to expect greater challenge on areas where we can be more efficient and effective. In

addition, whilst we must be operationally independent we would expect input from stakeholders in setting our priorities.

If we go ahead with fees, the very earliest they might be implemented is April 2015. If this happens we will let providers know how much the cost will be in October to allow them to budget.

We do understand the prospect of fees may be viewed as an additional financial burden. Over the next few weeks and months we will work with the sector to develop our thinking and get the approach to fees right if they are implemented.

The economic context provides an interesting backdrop to this debate. On the one hand we are clear that we must minimise the cost of regulation – whether the bill is picked up by the taxpayer or the sector. On the other hand, the period of austerity has already changed the social housing market, and will continue to do so. So we also need a regulator equipped to deal with this new complexity, and we are not surprised this tension has been a key feature of the debate to date.

The discussion document can be found on the HCA’s website.

The consultation closed on 21 March 2014

Regulation

9Spring 2014

To answer the last question first, Value for Money (VfM) has been brought to the fore by the decision of the social

housing regulator, in February 2014, to downgrade 15 housing associations from G1 (the highest standard of compliance with the Governance standard) to G2 (the second level of compliance). This is a powerful warning, because G2 is the lowest rating that means that an organisation is compliant with the Regulatory Framework; a rating of G3 or G4 would mean non-compliance and this would be likely to involve regulatory enforcement action, damage to the organisation’s reputation, and potentially a breach of lending covenants.

The regulator’s decision is based on a requirement, found in the Regulatory Framework, for providers to publish annually a “robust self-assessment which sets out in a way that is transparent and accessible to stakeholders how they are achieving value for money in delivering their purpose and objectives”. The first such assessment was required by 30 September 2013, and the downgrades were based on the regulator’s view that providers had failed to comply or had done so inadequately.

Indeed, the regulator has made no secret of its view that the overall standard of the

self-assessments was disappointing and that the list of 15 offending organisations could have been extended significantly. In effect, the sector is on notice to raise its game when the next round of assessments are required on 30 September 2014.

But is that all there is to it? Is there nothing more to the VfM issue than a need to comply with regulatory standards, and a failure, at least in the regulator’s view, of some organisations to do so?

The Federation argues very strongly that VfM is of immeasurably greater importance than a mere regulatory requirement: indeed, that it goes to the heart of what housing associations are seeking to achieve. Fundamentally, it is about each association’s getting the most out of whatever resources are available to it in order to deliver on its social purpose. The consequence of failure to achieve VfM is that scarce resources are not being employed to best effect; and this is far more serious than an adverse judgment by the regulator. Indeed, even if there were no such thing as a social housing regulator, VfM would still be of paramount importance.

Value for moneyWhat it is, why it matters, and why everyone’s talking about it all of a sudden

For more information contact John Bryant, Policy Leader, 020 7067 1082, john.bryant@housing.org.uk

3 Regulation

10 Spring 2014

Leadership

The Federation launched the report ‘An ambition to deliver – housing associations unbounded’ at the

Leaders’ Forum event in London last month.

The report sets out a new vision for the housing association sector for the next 20 years. We envisage by 2033 housing associations owning and managing more than double the number of homes we do currently, setting our own rent, deciding who lives in our homes and selling a greater number of homes too. It is about what housing associations large and small can do to build homes and communities but we have also included some steps Government can take that would help us deliver this vision.

This report is the result of the research and engagement we have undertaken over the last 12 months. By sharing ideas at lively debates and sparking discussion through challenging blogs, we began to

look at what our world could look like by 2033. Emerging from these discussions was the confidence that our work over the next 20 years could make even more of a lasting and significant impact on people’s lives than it did over the previous 20 years.

We are asking housing associations to support the overall vision for the sector and sign up to achieve ‘An ambition to deliver’. Over the coming months we will be running a number of events and debates across the country to engage with as many members as possible about the vision and role housing associations can play over the next 20 years.

You can read the report and sign up to delivering the vision on our HotHouse website.

4A new vision for the sector The Federation launched the report ‘An ambition to deliver – housing associations unbounded’ at the Leaders’ Forum event in London last month.

For more information, contact Catherine Ryder, Head of Policy, 020 7067 1096, catherine.ryder@housing.org.uk

11Spring 2014

XXXX Regulation

3

The prospectus for the 2015 – 2018 investment programme was published by the Homes and Communities

Agency (HCA) in January. £1.7bn of funding is available for homes at affordable rent outside London for the three year programme. Approximately 75% of the funding will be allocated upfront, with the remainder being available for future bidding once the programme is underway. Grant will be allocated on a scheme-by-scheme basis with 50% paid at start onsite and 50% on practical completion. Initial bids for the 2015 – 2018 programme close on 30 April. The Federation has welcomed the HCA’s response to feedback from the current programme but we have raised concerns that some aspects of the new programme may discourage housing associations from making ambitious bids. Some housing associations may decide not to participate at all as the grant on offer does not warrant the restrictions and expectations set out in the prospectus.

The prospectus focuses on value for money and cross-subsidy, in particular the disposal of stock in high value areas, as was expected, but the greater level of scrutiny implied is concerning. While conversions and disposals will be important, housing associations and their boards are the only ones who can determine the economic value of their homes and how this meets their business objectives. The prospectus also sets out what is expected to be built in the new programme, including a focus on one and two bedroom properties. While we agree there is often a need for smaller properties, this must accurately reflect what is required in local communities, informed by robust assessments, not Government policy.

The Federation will continue to work with Government and the HCA to raise our concerns on the programme and seek clarity where necessary. You can read our member briefing on the new investment programme on our website.

For more information, contact Adam Morton, Policy Leader, 020 7067 1077, adam.morton@housing.org.uk

Investment5

The 2015 – 2018 investment programme

12 Spring 2014

For more information, contact Rhona Brown, Policy Officer, 020 7067 1145, rhona.brown@housing.org.uk

In November 2013 the Mayor published Homes for London, the London Housing Strategy in draft for consultation.

The consultation sets out the Mayor’s policies to increase the supply of housing of all tenures to levels not seen since the 1930s, in order to meet the needs of London’s growing population, particularly to support working households. It sets out an ambition to build at least 42,000 new homes every year for the next ten years, including a minimum of 15,000 affordable and 5,000 for long-term market rent. The strategy sets out what should be done in four key areas - finance, product, land and quality.

The Federation consulted widely with members including the G15, G320 and our member practitioner groups to produce a response reflecting the views and recommendations of the housing association sector in London. We welcomed the strategy and support the Mayor’s ambitious targets for increasing the numbers of much-needed homes of all types and tenures across London. We also made a series of key recommendations, including that the Greater London Authority (GLA) should hold a focused discussion of how best to deliver unprecedented levels of house building via the London Housing Bank, housing zones and other innovative forms of development finance.

Alongside the draft housing strategy, the GLA also published the funding prospectus for the Mayor’s housing

covenant. This is essentially the London investment programme for 2015 – 2018. £1.25bn of funding is available for homes at affordable rent in London for the three year programme. 40% of homes are expected to be for low cost home ownership and 60% for affordable rent. Affordable rent will be made up of capped rents, essentially social rent aimed at households in greatest housing need, and discounted rent, homes at 80% of market rent aimed at working households.

The Federation has welcomed the GLA’s response to feedback from the current programme and the more flexible approach to working with housing providers. We have urged the GLA to maintain a flexible and open dialogue which will help housing associations deliver the maximum new affordable homes for London. There are issues around rent levels and nominations that need addressing by the GLA. The GLA are currently negotiating framework agreements with each borough, setting out the principles of how the rental products will work in each area, but it is unlikely that these will be available before the deadline for bids.

Initial bids for the 2015 – 2018 programme close on 10 March.

You can read our response to the draft housing strategy on our website.

5 Investment

The London housing strategy

13Spring 2014

5 Investment

For more information, contact Catherine Ryder, Head of Policy, 020 7067 1096, catherine.ryder@housing.org.uk

The Chancellor’s Budget on 19 March set out plans designed to secure the recovery and build a resilient

economy. The Budget sets out the next steps in the government’s long-term economic plan: continuing to reduce the deficit and debt, promoting growth, including increasing housing supply, and focusing on fairness.

The Budget included a number of measures that have implications for the housing market and housing associations:• An extension of the Help to Buy equity

loan scheme to 2020• A new garden city in Ebbsfleet• A cap on welfare spending• Other smaller scale measures designed

to increase housing supply. Responding to the Chancellor’s Budget, National Housing Federation chief executive David Orr said: “We welcome the Chancellor’s focus on housing and the announcement of a new garden city, but we think the budget is a missed opportunity. Measures like Help to Buy are likely to stimulate demand for housing but the Budget does not go far enough to boost the supply of homes needed to meet that demand.”

To read our full member briefing on the Budget 2014, please visit: www.housing.org.uk/publications/browse/budget-2014-member-briefing

In February we sent the Chancellor our budget submission, outlining a small number of recommendations for three key areas where progress could be made to ensure the delivery of affordable housing:1. Release more land for affordable

homes2. Increase borrowing capacity of housing

associations to help them build more homes

3. Extend Government guarantees to increase housing associations’ access to finance for new development

While the Chancellor did take some steps in the Budget to increase supply, like a new garden city, we were disappointed that he did not include measures designed to deliver homes more quickly at little or no cost to the tax-payer. Taken together, our proposals would have led to a significant and immediate boost to the supply of affordable homes.

Combined, the measures in the budget are intended to deliver 200,000 new homes by 2020, but we believe this is largely accelerating planned housing supply rather than generating additional homes that would not otherwise have been built.

Federation response to the 2014 Budget

14 Spring 2014

5 Investment

The Department of Communities and Local Government consultation on the new social housing rent

settlement from 2015-16 closed on 24 December in 2013. The consultation invited views on the proposed rent policy and set out changes to the current rent settlement, namely: • Moving from annual increases in weekly

rents of RPI + 0.5% to CPI + 1%• Removing the flexibility available to

increase weekly rents by an additional £2 per week where the rent is below target rent

• Making clear the rent policy does not apply where a household has an income of at least £60,000 per year.

In our consultation response we welcomed the certainty that an index-

linked ten year rent settlement provides for housing associations. However, we raised significant concerns about the consequences and legal implications of removing the ‘rent convergence’ element of the rent settlement.

We continue to talk to Government and the regulator in more detail about the new rent settlement and continue to press for a solution to ending rent convergence to ensure the viability and capacity of housing associations is not seriously compromised.

You can read our consultation response on our website.

For more information, contact Catherine Ryder, Head of Policy, 020 7067 1096, catherine.ryder@housing.org.uk

The new rent settlement

15Spring 2014

A consortium of approximately 100 life insurance companies, investment banks, pension and sovereign wealth funds is introducing their

Capital Lease Infrastructure Programme (CLIP) to the UK social housing sector. CLIP has been operating successfully, worldwide, for six years and is a viable and rapid alternative to traditional social housing financing models.

The consortium members are obliged to demonstrate to their policy and stake-holders that they are investing prudently on their behalf. They do this by ensuring that their investment manager looks at the credit agency rating first. Most mid to large-sized UK housing associations will qualify for the ‘acceptable’ investment grade rating that the consortium requires. A simple application form, together with documents showing the project is shovel-ready, i.e. where the only missing element in the project is the funding itself, circulates the offer around the entire consortium. Approved projects will then receive a Letter of Intent, describing the intent to deliver funds, within five working days. From that point it is a matter of standard institutional due diligence, leading to 100% funding within 90 to 120 days.

Key differences between CLIP and current financing models • The housing association does not need to provide

any reserve accounts to cover revenue shortfalls.• No restrictions. If the project needs to be

adjusted to meet changing circumstances as it progresses, for example substituting a number of flats for individual dwellings, this can be done without reference to the funder.

• No covenants are required.

• No supervision, audits or other intrusions are required from the funder.

• No requirement for equity contribution from the housing association or their construction partner.

• The funder requires no equity participation in the development.

• The capital is leased at a fixed rate to include interest, wraps, fees and all other costs and charges. Pre-spent soft-costs can be included in the loan amount.

• The cost-of-funds is dependent on the credit agency rating, with the actual rate for the transaction taken from a spread of recent bond issues with an equivalent rating. A £50m transaction may carry the same rate as one of £500m.

• The term can be up to 25 or 30 years, with pre-agreed early exit thresholds if required.

• There is no need for roadshows or other private placement and bond issue commitments and costs.

42 UK housing associations already have credit ratings and can deploy them immediately into CLIP financings. Those that do not can apply to Moody’s, S&P or Fitch directly (the UK CLIP representative will provide contact details on request).

David Rose

6Treasury

For further information on the CLIP funding option please contact David Rose d.rose@equilitycapital.com or 01568 611 196.

Capital Lease Infrastructure Programme – Institutional Consortium funding option

16 Spring 2014

17Spring 2014

The nature of pension-fund backed productsPension-fund backed financial products are focused on the cash-flows generated from property assets and not on the value of security pledged.

Aviva Investors, through their Return Enhancing and Liability-Matching (REaLM) Social Housing Unit Trust, worked closely with Derwent Living to jointly establish a pension-fund backed financing solution with no restrictive covenants, no business limitations, low on-going reporting requirements and the ability to seamlessly substitute properties. This long-term (35+ years), fully amortising (repayment of interest and capital) product combines the efficient use of assets, typical for pension-fund-backed financing, with the operational flexibility (i.e. the ability to substitute properties) which puts the housing association in the driving seat.

Risk mitigation using the real estate pension fund approachSynchronising cost and income cash flowsA natural alignment of interest exists between index-linked social rental income and indexed returns required by pension funds.

The conservative nature of pension funds manifests itself through their aim to improve the operating surpluses of housing associations. Aviva Investors purposefully restrict lease rent indexation to a fraction of the gross rent increases (i.e. limiting financing payments to CPI + 0.5% within a CPI + 1.0% rent regime).

Pricing and principal repaymentThe all-inclusive, low initial yield and ability to monetise over 100% of EUV-SH make benchmarking against standard bank borrowing difficult. Any comparison needs to incorporate foregone opportunity costs from raising less capital

when other financing is based on a minimum security cover of 1.XX x EUV-SH.

However, with no refinancing risk, future finance directors will not face the challenge of repaying bullet maturities in potentially adverse interest rate environments.

Risk of material adverse events and breach of covenantsPension funds apply a common sense approach in managing financial covenants. The funder and the housing association share common objectives – to ensure that tenants remain in their homes and continue to pay rent on time. The value of the security becomes secondary, so long as the properties maintain their ability to generate the net rents required to service the financing obligation.

Conclusion1. Real estate pension funds offer an asset-

efficient, low-cost alternative to the fixed-income orientated, covenant-heavy, and security-focused financing approach historically employed by housing associations. The fully amortising Aviva structure eliminates refinancing risk without impacting on affordability.

2. The synergy between social/affordable rents and the investment objectives of the real estate pension funds can facilitate attractive, project-based finance that boosts the supply of housing by creating an opportunity gain over debt funding.

Martin Zdravkov

For further information on Aviva’s offer please contact Martin Zdravkov, Martin.Zdravkov@avivainvestors.com, or 020 7809 6024.

6 Treasury

Lease and leaseback funding option from Aviva

Welfare

Read the full report

Arrears• On average two-thirds of tenants

affected by the bedroom tax are currently in arrears and of these, three-quarters have seen their arrears increase since 1st April 2013.

• Associations estimate that on average over a third (38%) of all those currently affected by the bedroom tax are in arrears due to a failure to pay the shortfall –suggesting that around 72,000 housing association tenants in England are in arrears because of this.

• Over half (53%) of associations report an increased difficulty in rent collection because of the bedroom tax and nearly two-thirds (65%) of associations with ten percent or more of their tenants affected say they have seen a significant rise in arrears.

• Total outstanding arrears across the sector are estimated to have risen by 11% between April 2013 and the time of the survey. This rise follows a drop in arrears in the first three months of 2013, which most likely is a result of an increased focus on rent collection ahead of the introduction of the bedroom tax.

• Since 1 April 2013 the overall average number of tenants in arrears has risen by 7%, from 1,165 per association to 1,245 per association.

Additional spend• On average, housing associations with

tenants affected by the bedroom tax spent an additional £73,250 each in the year prior to April 2013 and expect to spend on average an extra £109,000 per association in the current year to the end of March 2014.

Development• Overall only 14% of housing

associations developing new homes under the Affordable Homes Programme say that the introduction of the bedroom tax is making it harder for them to deliver their commitments. However, this rises to 23% of the largest housing associations – who are delivering approximately two-thirds of the programme.

• Three in ten associations say that the bedroom tax will make it harder to deliver new homes after 2015. A third of associations with planned development programmes have either changed or plan to change their programme to give greater prominence to smaller one and two bedroom properties.

Welfare reform impact assessmentThis report is part of the Federation’s ongoing programme of research. It is based on a survey of housing associations and presents the impacts of the reforms in the six months from April 2013.

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18 Spring 2014

19Spring 2014

Universal Credit timetable

For more information contact Pippa Bell, Policy Officer, 020 7067 1174, pippa.bell@housing.org.uk.

Further information on the timetable for the roll out of Universal Credit was announced in December 2013,

giving housing associations some clarity on the numbers of tenants they might expect to see on Universal Credit over the next few years.

The current Universal Credit service will be expanded and develop functionality so that claims will be taken from couples in the summer and from families in the autumn. Once this has been tested in the ten live Universal Credit areas

(Tameside, Wigan, Warrington, Oldham, Hammersmith, Rugby, Inverness, Bath, Harrogate and Shotton), roll out will be expanded to cover more of the north west of England. Universal Credit should be available in all parts of Great Britain during 2016, with the majority of existing claims migrating to the new benefit in 2016 and 2017.

7 Welfare

Taxation

Deloitte appointed as Federation tax advisor

The Federation is pleased to announce that with effect from 1 April 2014, it has appointed Deloitte

as its professional tax partner. Deloitte will be engaging with our members over the coming months to review the way in which the Federation and Deloitte should engage with members on tax issues and to identify areas where additional support may be beneficial, whilst continuing to contribute to our current programme of conferences, forums, events and publications. We would like to thank our previous tax advisers KPMG for their excellent service over the last 6 years. KPMG will continue to advise the Federation on pensions. For more information visit the tax section of the Federation website.

New VAT PE Framework

The latest version of the Framework for Housing Association Partial Exemption Special Methods (VAT PE Framework)

has now been successfully negotiated with HM Revenue and Customs (HMRC) by the Federation and its tax advisers KPMG. After the agreement of the updated VAT PE Framework in November 2013, it is now available on the Federation’s website.

The original VAT PE Framework was launched by HMRC and KPMG in March 2010 and the latest version extends the guidance in respect of both partial exemption and the VAT treatment of other housing association activities.

The updated VAT PE Framework includes:• More detail on when a Partial

Exemption Special Method (PESM) is required

• More detail on what PESMs commonly include, along with 4 worked examples

• The issues associated with identifying an appropriate PESM and ways to address those issues

• The steps that HMRC expect a housing association to take when seeking approval for a PESM

• Guidance on the VAT treatment of other housing association activities including rechargeable repairs, developments and charges for garages.

The Federation together with KPMG continue to meet with HMRC to discuss feedback from both the sector and HMRC to ensure that the Framework remains of benefit to both parties. Typically the meetings are used to discuss what is working well, feedback on what is not working well and why, how improvements can be made and new issues that require consideration and incorporation into the framework. Members are encouraged to feedback via the Federation. The Federation via KPMG is also willing to assist those members address obstacless in the agreement of their special partial exemption methods.

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20 Spring 2014

21Spring 2014

Help to Buy agents

For those housing associations that have been appointed by the HCA as Help to Buy agents, consideration

will need to be given to the tax treatment of the agents fees they receive for the provision of this service. For corporation tax purposes the provision of Help to Buy agent services is likely to constitute a trading activity. If this is an activity undertaken by a charitable housing association it will be necessary to conclude on the legal question of whether this is a charitable or non-charitable trade. The fact that these services do not relate to a scheme that is effectively only available to charitable beneficiaries however might point towards this being a non-charitable trading activity for a charitable housing association.

With regards to the VAT consequences of housing association’s acting as Help to Buy agents, agents should ensure that they are treating the income they receive from the HCA correctly. KPMG have corresponded with HMRC on the Federation’s behalf and HMRC’s opinion of the VAT liability of the activity appears to be that:• Zone agency services are standard

rated• Loan arrangement services are exempt.If you require any further information in connection with the tax and VAT treatment of Help to Buy activity including details of the correspondence with KPMG then please contact them via the Federation Helpline. Details of how members can access this resource are available from the members section of our website. You will need to register and log in to use this service.

Cost Sharing Exemption

Members should note that HMRC has updated its guidance in connection with the Cost Sharing

Exemption. Although the guidance has been redrafted, the content does not appear to have materially changed and the key tests for whether the exemption is met remain unchanged. The latest guidance is availale on the HMRC website.

Choice Based Lettings

Late last year HMRC confirmed to the CIPFA VAT Committee that Choice Based Letting participation

fees charged to housing associations by a local authority acting as a Local Housing Authority are outside the scope of VAT. Some local authorities had been treating such fees as subject to VAT at the standard rate, triggering an irrecoverable VAT cost for the housing associations participating in the service. Many local authorities have now revised their treatment prospectively to treat future charges as outside the scope and have been repaying housing associations for VAT previously over-charged.

8 Taxation

Changes to tax relief available for fixtures in buildings

The rules regarding capital allowances for fixtures are changing. From 1 April 2014 tax relief will not be available to a purchaser of

property regarding the fixtures within that property unless the vendor has ‘pooled’ the fixtures for capital allowances. Fixtures include items such as heating, air conditioning, electrics, lighting and water and can represent a significant proportion of the cost of a property. If the vendor does not ‘pool’ the expenditure no tax relief will ever be available for the fixtures to the purchaser and this could diminish the value of a property.

Please note that it is not possible to claim capital allowances on fixtures inside individual dwelling-houses. Therefore these new rules will mainly be of relevance in relation to head office properties or residential buildings, e.g. blocks of flats, which have significant communal areas. If you consider that your organisation has such properties and these may be sold in the future we recommend you talk to your tax adviser about the new rules and the potential implications for your organisation.

Office of Tax Simplification publishes report on employee benefits and expenses

The Office of Tax Simplification (OTS) has published its second report into the complexities that exist in the current

legislation and guidance for tax and National Insurance Contributions (NIC) on employee benefits and expenses.

The report sets out an undertaking by the OTS to look at the tax and NIC rules in relation to the taxation of employer-provided living accommodation. This will be particularly important to members who employ residential scheme wardens and caretakers and the Federation will make representations to the OTS in relation to the impact of any changes on the sector. The timing of the review has not yet been confirmed, but once this has been made clear we will be in contact to obtain your views.

In addition to a detailed review of living accommodation and termination payments, the main recommendations set out in the report include the voluntary payrolling of benefits, changes to PAYE Settlement Agreements and the definition of trivial benefits, simplifying National Insurance, changes to the travel and subsistence rules and abolishing the £8,500 threshold for completion of P11D forms. The latter may be a welcome simplification although consideration will need to be given to part-time employees and volunteers to make sure they are not adversely impacted.

The report has been submitted to the Chancellor and Treasury ministers to decide which recommendations will be taken forward and there may be some feedback in Budget 2014. A more detailed article and a link to the report can be found on the Federation website.

For more information contact John Butler, Finance Policy Officer, 020 7067 1177, john.butler@housing.org.uk.

8 Taxation

22 Spring 2014

23Spring 2014

31 March 2013 valuation

The initial results of the Local Government Pension Scheme (LGPS) actuarial valuation are being

issued and as expected, for many housing associations there are high deficits.

We would encourage opening a dialogue with your LGPS and joining forces with the other housing associations in the same LGPS to argue the case for recognition of the strong covenant provided by housing associations at future valuations.

The Federation, in conjunction with KPMG, is reviewing the impact of the valuations on the sector and will publish its findings in the coming weeks.

LGPS 2014

From 1 April 2014 the benefit and structure of LGPS will change. To see the details of these changes click on

the link.

The financial impact will vary significantly between different participating employers depending upon the membership profile and could lead to an increase in costs.

The Federation has responded to the call for evidence on the future structure of the LGPS and the response to this consultation is expected shortly. We will update you on this in the next edition of this newsletter.

LGPS De-participation

As a result of increasing costs, a number of associations are looking at possible options to exit

LGPSs. However, many believe that they are trapped into the scheme due to the possibility of large de-participation debts.

We recommend that housing associations considering de-participation review their Admission Agreement and the options to negotiate with their LGPS around the exit terms which could make it acceptable to you.

Pensions Tax Allowances

The Annual and Lifetime tax allowances are reducing from 6 April 2014 and this will draw more

individuals into paying tax on their pension as it builds up and when an individual retires.

Broadly, anyone expecting a pension of over £60,000 at retirement or an increase in their pension in the year of over £2,500 should be reviewing their provision to see if tax is payable. Lifetime Allowance protection can be put in place but you need to make a decision on this by 6 April.

Local Government Pension Scheme

Pensions9

Abolition of contracting out

Contracting out will be abolished with effect from April 2016. This will lead to an increase in defined benefit scheme

contributions of around 2-3% of earnings. Associations will need to factor this increase into their budgets from 2016 onwards.

For those associations that have their own defined benefit scheme, they should be thinking now about how these associated cost increases can be mitigated, for example, through changes to scheme design.

Auto enrolment

2014 will see many housing associations implementing auto enrolment for the first time. This can

be a long process, and so we recommend that you consider the implication for your payroll systems, cash and staff communication at least six months before your staging date.

For more information contact John Butler, Finance Policy Officer, 020 7067 1177, john.butler@housing.org.uk.

9 Pensions

24 Spring 2014

10Awards

Most Effective Financial Risk Management Approach Sponsored by Zurich Municipal

Winner: CHPThis entry impressed the judges as the organisation had a strong focus on risk management, not just financial but operational too. The risk management culture is embedded in all its operations, and the results are evident through their strong financial performance, consistently delivering value for money and financial capacity to build more homes. This organisation goes above and beyond planning for future risks and, for example, started preparing for the bedroom tax and welfare reform more generally, well in advance of its implementation. They have established a methodical and robust approach to identifying those tenants that may be affected and to the try to provide the support they need.

Outstanding Finance Communications Sponsored by 24housing

Winner: Cestria Community HousingCestria Community Housing demonstrated how a small team really punched above its weight. They met all the entry criteria and their entry made a lot of sense. They got the message across very well and communicate information in a clear, understandable format. The judges liked the real time reporting and thought the use of video technology to support finance system users was a great innovation that reduced the amount of time the team spent training colleagues.

Achieving Best Value for MoneySponsored by This Housing

Winner: Sovereign Housing AssociationSovereign Housing Association demonstrated that it has achieved an ambitious set of organisational objectives very cost effectively. They implemented a 4 year strategic plan with value for money at the heart of it. Their entry was solid and professional and showed they had a true understanding of the environment the organisation is working in. The judges were particularly impressed by the introduction of a more efficient group structure, its asset management policy and efficiency savings.

Housing Association National Accountancy Awards

Congratulations to the 2014 winners which were announced at the awards ceremony on Tuesday 18 March at the National Motorcycle Museum.

25Spring 2014

Best External Professional AdvisorSponsored by Save Britain Money

Winner: KPMGKPMG has provided fantastic services to the sector. They identified risks, achieved significant savings and strived to ensure the housing association is on the best possible footing moving forward. They have saved many of the 150 LSVT’s, tens if not hundreds of millions of pounds of VAT. These housing associations have then been able to channel these savings to deliver their core priority services to tenants.

Measurement of Social Return on InvestmentSponsored by Baker Tilly

Winner: Circle Housing The judges decided Circle Housing employed the most effective methodology for demonstrating the benefits derived from resources it has invested in the community. Their entry was focussed and well defined and they have developed a model for measuring social return on investment which has the potential to be fully accredited and patented for use across the sector. The tool enables them to measure the impact of investment after a defined period and ensure the money they do invest has the most benefit fir their customers.

Financial InnovationSponsored by Housing Partners

Winner: Saffron Housing TrustThis entry stood out from the rest as showing real innovation. The winner is a small organisation that managed to set a spark alight within the sector and has helped to open up the bond market for other housing associations. The bond issue managed to save over £1.2million and the deferred drawdown feature represents an innovation that was largely untested in the social housing sector until the winning organisation proved that it was possible.

Best Board ReportSponsored by Beever and Struthers

Winner: Affinity SuttonAffinity Sutton demonstrated how the sector can represent their board reports in an understandable way. This entry showed a very honest and simple message and they not only meet minimum accounting and regulatory requirements but they go much further, presenting disclosures, benchmarking and risk analysis. The judges admired how they told it how it is and had a balance between good and bad. They also thought this was the best example of a housing association presenting thought provoking information.

Best NewcomerSponsored by Documotive

Winner: James Hubbert, Yarlington Housing GroupThe judges thoroughly enjoyed reading this entry as it was brilliantly written. The best newcomer for this year has shown real enthusiasm and had taken on a number of responsibilities within the organisation and provides a first class service. His chief executive said: “He is such a popular member of the team. He manages to find time to organise social activities for staff and always puts himself forward for our community projects, as well as working and studying. When he sleeps is a mystery to me but I bless the day that he chose to join Yarlington…” Praise indeed.

10 Awards

26 Spring 2014

For information about sponsorship of the HANAAs 2015 please contact Julian Hurst at Foremarke on 020 8877 8898 or Julian.hurst@foremarke.uk.com

See more at: http://www.housing.org.uk/get-involved/housing-association-national-accountancy-awards/hanaas-2014-winners#sthash.R3OHyvP4.dpuf

10 Awards

27Spring 2014

Finance Director of the YearSponsored by RP Assure

Winner: Waqar Ahmed, L&QThe finance team have made great strides under Waqar’s leadership. He is passionate about growing his own talent and leading by example with an internal customer survey and a realignment of internal resource to meet customer need. This year’s finance director of the year is altruistic and is an inspirational leader. They have taken calculated risks and they have paid off and their housing association is strong and innovative in the sector. “Someone who made finance interesting” and apparently “an accountant with a sense of humour.” This is an exceptional individual – “he makes the world a better place.”

Finance Team of the YearSponsored by Canaccord

Winner: The Wrekin Housing TrustThe judges took a lot of time weighing up all the various strengths but they thought the winning entry showed the team delivered excellent customer service. Working in close harmony with the rest of the organisation and delivering the appropriate information to decision makers at the right time in the right way. This team constantly strives to improve processes and has developed new systems to make life easier for users. Their use of real time reporting has really revolutionised the way the organisation operates and they are deemed worthy winners.

Outstanding Lifetime ContributionSponsored by SDS

Winner: Jack Stephen, Thames Valley Housing AssociationThis special award honours the outstanding contribution of an individual to finance in the sector. Jack has spent 19 years with their current housing association and has seen the number of homes it owns increase from 5,000 to 15,000 and turnover increase from £7.7 million to £82 million. He has used his broad experience gained from outside the sector to be truly innovative in his current organisation and put Thames Valley Housing Association at the leading edge of shared ownership.

Jack gives back to the community, as a chair of governors at a school and as chair of trustees of a homeless charity, relentlessly working to improve the lives of the disadvantaged.

Leading the sector’s SORP Working Party on accounting issues, Jack has been very statesmanlike in his stewardship and the way he goes about conflict resolution. Jack demonstrates real skill and an in-depth understanding of the business and is a worthy winner of this award.

The National Housing Federation would like to thanks all of the entrants to this incredibly tough competition, and convey special thanks to the judging panel, for whom this was no simple task:Deborah Shackleton, Former Chief Executive, Riverside GroupMark Davie, Head of Social Housing, M&GMaria Hallows, Audit Partner, Beever and StruthersKate Allen, Property Correspondent, Financial TimesKeith Ward, Director, Social Impact Services, Baker Tilly

Tilden Watson, Practice Leader Strategic Risk, Zurich Risk Engineering

Risk publication

Housing associations provide two and a half million homes for more than five million people, managing and developing high

quality affordable accommodation for rent and for sale. Whilst this brings many challenges it also brings opportunities. To permit the successful management of both, it is critical that boards possess the requisite skills and experience to govern housing associations and ensure risk management processes are robust and effective. The successful deployment of these risk management processes is the key to intelligent risk-taking as boards strive to protect the assets of their association and optimise their potential.

Underpinning this, the social housing regulator in England, the Homes and Communities Agency (HCA), expects housing associations to meet high standards of risk management and is clear that responsibility for this resides with boards.

To ensure boards are equipped with these requisite skills the National Housing Federation has commissioned Zurich Municipal to produce a practical guide on effective risk management for housing associations. This guide is targeted primarily at board members and senior managers, but may also be of interest to risk specialists new to the sector.

Risk management is about managing a business successfully in all situations and for all outcomes. It’s about achieving goals and overcoming business threats by implementing a process that is capable of spotting and navigating obstacles as they arise. Consequently, every business needs to develop its own unique approach to risk management that fits with the organisation’s purpose, attitude to risk, size, business mix, funding stream, financial capacity, level of reserves, location, demographics etc. To facilitate this, the layout and content of this

guide has been designed to provide a practical guide to the process of risk managing housing associations, with each chapter ending with a ‘key learning’ points box. To aid readability the guidance has three separate parts:

Part I – Risk management – why do it: This section starts by explaining what risk management is, why it is so important to businesses, the board’s role and responsibilities and the regulatory requirements for sound risk management.

Part II – Risk management – who and how: This covers the fundamentals of how to do risk management and who does what. In particular, this includes an explanation of the risk management framework, the risk management policy and provides a suggested risk management process, with tools and techniques.

Part III – Specialist areas: This final section adds on more advanced issues to the general principles of risk management described earlier. This part is, nonetheless, essential reading for board members as and when the occasion arises to apply the principles.

The purpose of this book is not for each and every Board member to become risks experts; it is designed for them to gain a good, practical, working knowledge and understanding of the risk management process. This, balanced with their practical sector experience and / or relevant professional skills, will enable their association to achieve its strategic aims and objectives, meet its regulatory obligations and to support the needs of its residents.

Launch of “Risk management: A guide for boards”

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For more information, contact John Butler, Finance Policy Officer, 020 7067 1177, john.butler@housing.org.uk.

28 Spring 2014

Seminars & Conferences

National eventsSORP ROADSHOWSOctober in London, York, Exeter, Birmingham and Manchester. Dates to be confirmed.The Federation contact is Emma Harrison, conference organiser,emma.harrison@housing.org.uk

TREASURY CONFERENCEWednesday 8 October 2014, LondonThe Federation contact is Gemma Halliday, conference organiser, gemma.halliday@housing.org.uk

RISK MANAGEMENT CONFERENCEJanuary to be confirmed, Birmingham Repertory TheatreThe Federation contact is Emma Harrison, conference organiser, emma.harrison@housing.org.uk

AUDIT COMMITTEE CONFERENCEThursday 29 January 2015, Birmingham Repertory TheatreThe Federation contact is Emma Harrison, conference organiser, emma.harrison@housing.org.uk

Regional finance forumsNORTH WEST FINANCE FORUMThursday 1 May 2014For further details contact Wendy Taylor on Wendy.Taylor@housing.org.uk

YORKSHIRE and HUMBERSIDE FINANCE FORUMThursday 8 May 2014For further details contact Sean Flynn on sean.flynn@connecthousing.org.uk

EAST MIDLANDS FINANCE FORUMTuesday 13 May 2014For further details contact Rob Griffiths on Robert.Griffiths@LONGHURST-GROUP.ORG.uk

NORTH WEST FINANCE FORUMThursday 11 September 2014For further details contact Wendy Taylor on Wendy.Taylor@housing.org.uk

EAST MIDLANDS FINANCE FORUMTuesday 23 September 2014For further details contact Rob Griffiths on Robert.Griffiths@LONGHURST-GROUP.ORG.uk

NORTH WEST FINANCE FORUMTuesday 4 December 2014For further details contact Wendy Taylor on Wendy.Taylor@housing.org.uk

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Spring 2014

The National Housing Federation is the voice of affordable housing in England. We believe that everyone should have the home they need at a price they can afford. That’s why we represent the work of housing associations and campaign for better housing.

Our members provide two and a half million homes for more than five million people. And each year they invest in a diverse range of neighbourhood projects that help create strong, vibrant communities

National Housing FederationLion Court25 Procter StreetLondon WC1V 6NY

Tel: 020 7067 1010Email: info@housing.org.ukWebsite: www.housing.org.uk

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