The Pension Protection Fund (PPF) has published its determination for the levy year 2021 to 2022, following its autumn consultation.
Ordinarily, the PPF considers matters across the levy triennium with a view to keeping the rules relatively stable on a triennial basis. However, in considering the impact of COVID-19 on schemes, the PPF wishes to take a more flexible approach with the aim of switching back to a multi-year approach in 2023/24.
One change this year is that Dun and Bradstreet will be producing the insolvency risk scores used in calculating the levy. Where companies have previously self-submitted reports to Experian, these will now need to be provided to Dun and Bradstreet.
The 2021-22 levy estimate is £520m which is £100m lower than last year. This is attributed both to the PPF’s strong financial position at the start of the pandemic in terms of its balance sheet and its defensive investment strategy.
A small scheme adjustment has been introduced so that schemes with less than £20m of liabilities will see a factor of 0.5 applied to the (uncapped) calculation. This reduction will taper so that a full levy is paid by schemes with £50m of liabilities. The PPF has indicated that this is a long-term change and not simply a one-off in response to current economic conditions. Additionally, the risk-based levy cap is to be reduced to 0.25% of liabilities. Currently it is 0.5%.
Easements enabling flexibility in payment of levy invoices were introduced in response to the economic challenges of the COVID pandemic. The PPF has indicated that it will announce its policy on COVID easements for 2021-22 in advance of levy invoices being issued in the autumn.
Certification of contingent assets
Existing contingent assets must be recertified by 31 March 2021 with any supporting documents submitted by 1 April 2021. The same timescales apply for new contingent assets. It continues to be the case that where a contingent asset was not certified in the last 5 years, then it needs be treated as a new submission.
The requirements regarding certification and re-certification of contingent assets is largely unchanged. Trustees are required to consider and certify a fixed cash sum, even if the underlying contingent asset does not itself contain a fixed sum. This amount is known as the realisable recovery and in determining the amount that could be recovered from a guarantor, Trustees need to take account of the impact of scheme employer insolvency on the guarantor’s own resources. A formal guarantor strength report is not needed where the levy saving is below £100,000 but trustees should ensure that they keep copies of the evidence and any advice relied on when determining the realisable recovery.
When recertifying type B(ii) contingent assets (real estate), trustees should ensure that it is on the basis of a valuation which is less than 15 months old at the recertification date. Where a full valuation has previously been submitted, trustees can choose either to submit a full valuation or a desktop valuation, in either case, less then 15 months old.
Asset backed funding arrangements (ABCs)
Certification of an ABC may either be on the basis of credit for the ABC value or to seek to credit for ABC payments. The Certificate of the ABC’s value is required to be on the lower of fair value and the stressed insolvency value, requiring valuation from an appropriately qualified valuer.
ABC assets based on real estate require a certificate of title or such other appropriate evidence of title such as a summary report on title. This includes ABCs where the asset is a loan note backed by real estate.
Corporate Insolvency and Governance Act 2020
The PPF considered the impact of the Corporate Insolvency and Governance Act 2020, particularly the potential for certain creditors to obtain super priority and levy fund adjustments for entities entering into a moratorium or restructuring plan. The PPF’s conclusion is that allowance should be made for the potential effect of creditors with super priority.
The contingent asset guidance has been updated to help schemes consider whether a change in credit priority needs to be taken into account when certifying the realisable recovery in relation to the scheme. Trustees should consider the potential for certain creditors to obtain super priority if the guarantor suffers an insolvency event or proposes a restructuring plan within 12 weeks of a moratorium ending. The contingent asset guidance sets out a flowchart in Appendix 2 which is designed to assist with assessing whether the impact of potential super-priority debt on insolvency following a moratorium should be considered.
In respect of the moratorium process, the PPF has said that it is minded to apply the levy based on an insolvency of score of 10 but that it will not apply a 100% insolvency risk score. The PPF highlights that so far no scheme sponsors or guarantors have entered into any new arrangements under the insolvency legislation and they’re not aware of any on the horizon.
Brexit and jurisdiction clauses
The PPF also highlights the impact of Brexit in the context of jurisdiction clauses. Following expiry of the transition period, the UK has signed up to the Hague Convention on Choice of Court Agreements (the Hague Convention). However, the Hague Convention only applies to exclusive jurisdiction clauses. Previously the Recast Brussels Regulations applied to both exclusive and non-exclusive jurisdiction clauses. The risk is that from 1 January 2021, it may be harder to enforce judgement attained in the UK for standard form PPF contingent assets in an EU member state.
The PPF is amending its standard form contingent asset documents to enable the parties to choose between non-exclusive or exclusive jurisdiction clauses. Additionally, it has it updated its guidance on contingent assets to confirm that amendment to an existing contingent asset agreement to include an England/Scotland/Northern Ireland exclusive jurisdiction clause is a permissible change.
There is no requirement by the PPF to re-execute contingent asset agreements, but you should check whether any existing agreements contain an non-exclusive jurisdiction clause where there is an overseas guarantor, particularly where that guarantor is based in the EU.
Trustees should start considering what information and advice they need in order to certify or recertify any contingent assets in relation to their scheme, in particular, in order to determine the realisable recovery figure and to obtain any updated valuations which are needed.
Consideration should also be given to updating any agreements where the guarantor is an EU entity and the guarantee contains a non-exclusive jurisdiction clause.
For further information please contact Suzanne Burrell or your usual Shoosmiths contact.