Pension schemes: Pension Protection Fund and contingent assets

Pension schemes: Pension Protection Fund and contingent assets

Published:

Author: Suzanne Burrell

The Pension Protection Fund has published its Levy Determination for the 2012-2013 levy year. The estimated levy is £550m, the lowest the PPF has set

Detailed information can be found at: the PPF's Levy Determination page on its website.

Contingent assets: Certification as to guarantor resources

One key change in the procedure for certifying contingent assets is that trustees must certify that the resources of the guarantor are sufficient for it to meet its obligations under the guarantee.

This requirement will apply to both new group company guarantees as well as to the recertification of existing guarantees. Trustees will need to confirm that they have no reason to believe that the guarantor, as at the date of giving the confirmation, could not meet its full commitment under the contingent asset.

This change reflects the PPF's concerns that some schemes were using guarantors who had favourable Dun & Bradstreet ratings, perhaps because the guarantor had no trading history, but where there was no corresponding reduction in risk.

The PPF, with this new certification requirement, is concerned to ensure that only those contingent assets which reduce the risk of compensation becoming payable are recognised.

The PPF says that trustees need to satisfy themselves as to the adequacy of the guarantor's resources and sets out some pointers on acceptable steps for trustees to take when considering whether they can give the new certification.

The PPF acknowledges that in some cases it may be so clear cut that the trustees do not need to take specific steps to ascertain the guarantor's financial position.

The PPF is not necessarily expecting a full covenant review, and instead highlights the following as possible sources of information which the trustees might rely on:

  • the guarantor's most recent accounts
  • the guarantor's ability to borrow money
  • enquiries of the guarantor's finance director and obtaining an assurance as to the strength of the guarantor compared with the guarantee
    confirmation from the guarantor's directors
  • liquidity of the guarantor's assets

The PPF will also be carrying out its own investigations as to guarantor strength. Trustees should keep a record of the steps taken in case the PPF wants to see what they relied on in giving the certification.

Contingent Asset Guidance: Definition of associate

The PPF has broadened the definition of 'associate', so that a company that does not fall within the definition laid down by section 435 of the Insolvency Act 1986, might still be an 'associate' for the purposes of acting as guarantor.

A guarantor will be an 'associate' if the contingent asset is given by reason of a pre-existing legal or commercial relationship between the guarantor and one or more scheme employers. A guarantor will not be an 'associate' where the relationship has been created for the purpose of enabling that person to give the contingent asset.

Risk-based levy: Investment Risk

2012/13 is the first levy year when investment risk is taken into account when calculating the risk-based part of the levy.

In submitting Scheme Returns, care should be taken in ensuring that the asset breakdown supplied is accurate, particularly when allocating assets to the 'other' category. Assets categorised as 'other' will be subject to a 22% reduction in their deemed value.

Next steps

Trustees should be considering the following actions:

  • ensuring that the Scheme Return record of investments is split accurately
  • if a guarantee is already in place, steps to investigate the strength of the guarantor should be started
  • for a new guarantee, Trustees should satisfy themselves that they will be able to give the resource certification

For more information and assistance, please get in touch with your usual pensions contact.