The Pension Protection Fund has published its appendix and guidance on valuing and certifying ABCs for levy purposes. Asset Backed Contribution arrangements (ABCs) are becoming a more common way of funding pension schemes and managing deficits.
Under an ABC, scheme trustees and another employer group entity become partners in a Scottish Limited partnership. Payments are made from the partnership representing distributions of profit (or return of capital). These payments are generated by an income producing asset which is owned either by the limited partnership, a second limited partnership or an entity within the employer's group which has issued a loan note to the limited partnership.
The PPF starting point is to exclude the value attributed to an ABC in the scheme asset data. It will then add back in the ABC value but calculated on an insolvency, rather than a going concern, basis. Where the ABC arrangement is recognised by the PPF, the value certified will be used to reduce the level of underfunding applied in the calculation of the risk based levy.
When the trustee does not want to receive credit for the ABC in the risk based levy calculation but does want to ensure the amount deducted from assets in the valuation is accurate as well as obtaining recognition ABC payments actually made, the trustees will need to submit an ABC certificate which just covers the relevant information.
Initially the PPF had said that only the ABC arrangements where the underlying asset was real estate would be recognised. The PPF has reconsidered this and will recognise other ABC assets. However, the PPF has said it will focus on ensuring that the valuation of the ABC arrangement is on an appropriate basis. Additionally, valuers will be required to recognise a duty of care to the PPF in their reports. Legal advice on the enforceability of the ABC will also be needed and this legal advice will also need to accept that the PPF may rely on the advice given.
In certifying the ABC value, trustees must use the following procedure:
- The ABC value must be contained in a valuation prepared by a professional valuer on behalf of the scheme trustee, the trustee LLP or the second LLP.
- The valuer must be an appropriate professional who meets the criteria set out in guidance issued by the PPF and who has appropriate indemnity cover in place.
- The valuation must be in writing and state the assumptions on which it is based.
- The valuer must have been supplied with appropriate legal advice which provides a summary of the legal structure and enforceability of the ABC and the trustees' rights under it. The legal advice must meet the requirements set out in guidance issued by the PPF.
The ABC value stated in the certificate must be the lower of the Fair Value and the Stressed Insolvency Value. Fair Value is the value attributed in the latest scheme accounts. The Stressed Insolvency Value is the amount which the scheme trustee could reasonably rely on receiving pursuant to rights under the ABC arrangement in the event that all Employers and certified guarantors suffered an insolvency event.
Where the ABC consists or includes real estate, or where the limited partner or the entity which has issued a loan note to the trustee limited partner a certificate of title in respect of that ABC asset is also required. This must be dated no earlier than seven days before the date on which the ABC arrangement came into effect.
This is the first year in which this valuation process has been adopted by the PPF so it will be interesting to see what changes are made to the process in subsequent years.
The PPF guidance can be found here. The deadline for submitting the ABC Certificate and any supporting documents is 31 March 2015.
For more information please contact Suzanne Burrell or your usual pensions contact.
This document is for informational purposes only and does not constitute legal advice. It is recommended that specific professional advice is sought before acting on any of the information given.