This update looks at employer insolvency risk, last man standing schemes and contingent assets, following the publication of the Pension Protection Fund's Levy Estimate for the 2015/16 levy year.
The PPF estimate for 2015/16 is £635 million. This represents a reduction from 2014/15 of around 10%. Levy estimates for the following two levy years anticipate that there may be further reductions.
2015/16 will be the first levy year where employers will be assessed by reference to the PPF specific measure of insolvency risk, as designed by Experian.
A separate update on the PPF process for certifying asset backed contributions is also available.
Employer insolvency risk
A PPF-specific measure of insolvency risk has been adopted. This is designed to reflect the differences between average UK businesses and a typical pension scheme sponsor. Employers within the PPF environment will then be assessed by reference to the score card which applies to their category of employer.
There are 9 different categories ranging from large/complex, group companies - with different score cards depending on the group size, independent (ie not part of a group), not for profit, non-filing and any which do not fall within one of the other eight categories. As with the existing regime, employers will then be put into a levy band depending on their specific insolvency risk. This will govern the levy payable.
For guarantors under a type A contingent asset, the PPF will apply an adjustment to a guarantor's levy band to reflect the impact of the amount guaranteed on the guarantor's own gearing.
Last man standing schemes
The way in which the levy is calculated for last man standing schemes will also change. Currently there is a fixed reduction of 10% in the risk-based levy for a last man standing scheme. This reflects that the risk of entry into the PPF is regarded as being lower for a last man standing scheme.
A last man standing scheme is a scheme where there is no partial termination of the scheme when an employer ceases to participate, whether due to insolvency or otherwise. In such a scheme, when the last participating employer experiences an insolvency event is when that scheme would enter into a PPF assessment period.
The PPF will, after 31 March 2015, be writing to all schemes certified on their scheme return as last man standing schemes. Schemes will be required to confirm that they have received legal advice confirming that the scheme rules do not contain any requirement or discretion for the trustees to segregate assets when an employer ceases to participate.
For schemes certified as last man standing, the levy reduction will no longer be a fixed 10% reduction. The reduction applied will reflect the concentration of membership between different participating employers.
Contingent assets, both new and existing, will still need to be certified before 5pm on 31 March 2015 for recognition in the 2015 levy year. Additionally, the PPF has updated its standard form documents. For all Contingent Assets entered into after December 2014, the updated standard forms should be used. These are available on the PPF website. One key change for type A contingent assets is that a fixed amount will need to be certified.
From 2015/16, trustees will be required to provide a statement as to the amount of the 'realisable recovery' amount and confirm that they are reasonably satisfied, having made all reasonable enquiries into the financial position of each certified guarantor, that each certified guarantor could meet the realisable recovery in full, having taken account of the likely impact of the immediate insolvency of all the employers (other than the certified guarantor where that certified guarantor is also an employer).
The realisable recovery must be a fixed cash sum and should be the lower of:
- Any cap defined by reference to a fixed amount in the guarantee, and
- An amount no greater than that which the trustees are reasonably satisfied that each certified guarantor could meet if called upon to do so.
- The amount certified as the realisable amount can be lower than the amount covered by the guarantee. Therefore trustees are able to change the realisable amount each year without making any formal amendments to the terms of the guarantee.
The adjustment to a guarantor's levy band by the PPF means that where trustees certify the largest fixed amounts they consider possible for a guarantee, this may impact on the guarantor's levy band.
When certifying that the guarantor could meet the realisable recovery amount, trustees should not place value on a guarantor's investments in the scheme employers unless they are confident that the value would survive employer insolvency. In considering the effect on the guarantor of employer insolvency, the PPF suggests that the impact could include the following effects (although it does say that this is not an exhaustive list):
- Reduction in value of employer shares or investments held by the guarantor
- Loss of inter-company debts owed by the employer
- Impact of any cross-guarantee
- Loss of an important supply to the group
The PPF also says that trustees should think carefully about the type, location and ability to realise, the guarantor's assets. Where the guarantor's assets consist of intangible assets such as brand value or consist of inter-company accounts and investments, the trustees should consider whether the assets are likely to deliver any real value to the guarantor if the employer becomes insolvent.
The PPF suggests that trustees may wish to obtain a letter of comfort from the guarantor about its financial position. The PPF will be looking at some schemes to examine the process followed in making the certification. While the PPF always recognises that trustees are not required to obtain a full covenant assessment of the guarantor, a detailed review in some form is likely to be needed.
The deadline for submitting new contingent assets and for certifying existing contingent assets 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.