With the continuing trend within the social housing sector towards mergers and co-operative forms of working, many RSLs are looking at setting up parent or service companies to provide centralised functions. These can be either administrative (eg. payroll, HR or IT), or other functions such as repairs or development work, which can most efficiently be carried out by a single team on behalf of a number of RSLs within a group. This all makes economic sense, and has been actively encouraged by the Housing Corporation.

However, a change of rules by SHPS (the Social Housing Pension Scheme) during 2006 has obstructed such moves. SHPS reviewed its employer admission criteria in light of new, stricter pension funding requirements and the introduction of the Pension Protection Fund, which is funded in part by a risk-based levy on defined benefit schemes.

As a result SHPS ruled that, in future, only RSLs with at least 100 housing units would be eligible for admission. The rationale for this – to ensure that financially weak employers cannot join, putting at risk members – is entirely understandable.

Faced with the difficulty of reconciling the needs of the sector with the responsibility of SHPS to manage risks appropriately, the obvious place to look for a solution was the example of the Local Government Pension Scheme (LGPS). The LGPS has been dealing with issues of this nature ever since the boom in public sector outsourcing began.

The LGPS approach is to allow private sector employers to participate in the scheme, but with suitable guarantees put in place to ensure that if a weaker employer defaults on its obligations to the scheme, another financially sound entity is obliged to meet the liabilities.

Practice differs between the various administering authorities, but the basic alternatives are either a guarantee from the original public sector employer whose staff have transferred to the private contractor, or a commercially provided bond from a bank or insurer.

Given Housing Corporation governance requirements, it is clear that providing cross-guarantees from the RSLs within a social housing group is not possible - except in cases where the group includes non-RSL corporate entities with a strong financial position.

A more viable alternative is for a formal participation agreement to be drawn up between SHPS and the new employer, backed up with a bond from a commercial financial services provider.

Often the bond can be arranged with the group's existing lender, as part of the package of financial facilities to be provided to the new employer.

The bond effectively acts as a guarantee, allowing SHPS to demand payment from the bond provider if and when the employer defaults on its obligations to SHPS.

To provide security for the lender, the employer will be required to enter into a general indemnity permitting the lender to recoup from the employer any monies paid out under the bond. In particular, the indemnity will commonly allow the lender to recover such sums from any accounts held by the employer with the lender.

Needless to say, there is also an up-front cost attached to the provision of the bond, which RSLs will need to factor in when deciding whether a restructure is financially viable.

Equally, since no bank or insurer will provide a bond which is unlimited in time or amount, the bond will need to be renewed periodically, and the level of security it provides will also have to be reviewed at intervals.

But these are practical issues which should be relatively easy to iron out now that there is a model which gets round the fundamental difficulty of principle.