The Pension Protection Fund (PPF) levy represents a significant cost to running a Defined Benefit (DB) pension scheme so the chance to reduce this, by putting in place “contingent assets” which reduce the effect on the PPF of a sponsoring company’s insolvency, is widely seized upon.
Three types of contingent asset are recognised by the PPF:
- Type A: guarantees given by a company or undertaking in the same corporate group;
- Type B: security given to the trustees over cash, real estate or securities; and
- Type C: letters of credit and bank guarantees.
Deadline day – 31 March
The deadline by when all the relevant documentation must be received by the PPF is 31 March 2016, but this year an early Easter (on 27 March) means trustees and employers need to be more organised than usual, even assuming that only bank holiday leave on Good Friday and Easter Monday affects those involved in the (re)certification process.
To be sure that meeting this deadline isn’t going to end in a frantic dash to get everything sorted, employers and scheme trustees need to start this process right away (if they haven’t already), discussing with their advisers the exact requirements, and ascertaining the availability of anyone (internally and externally) who will need to be involved over the run-up to 31 March.
In terms of the requirements that need to be fulfilled for a contingent asset to be taken into account by the PPF in setting an employer’s levy, the PPF sets out these in detailed guidance. If any of the requirements are not followed, the contingent asset will be rejected.
What is key in meeting the deadline is that the relevant certification must be received by the PPF via its online Exchange portal by midnight on 31 March. Additionally, where any contingent asset is certified for the first time, the required legal documentation in relation to that asset must also arrive at the PFF in hard copy form before 5pm on 31 March. That means it would be no good sending that documentation by post at 4pm on the deadline day.
Additional requirements in the certification process for the year 2016-17
A guarantee (a Type A ‘) is commonly given by another group company such as a parent company, guaranteeing the liabilities of the scheme’s sponsoring employer in order to gain a PPF levy reduction. Last year the PPF introduced an additional requirement which must be for a new Type A guarantee to be taken into account.
While the recertification process is generally straightforward, this year there are a number of requirements the PPF has imposed in relation to Type A guarantees, which apply equally to recertification of existing guarantees.
The PPF’s additional requirement, introduced in the 2015-16 Levy year for Type A assets, reflects its experience that many guarantees, when it actually seeks to rely on these, do not provide any significant additional recovery for the PPF. As a result (going beyond the previous requirement to certify that the trustees were not aware of any reason why the guarantor could not meet its obligations) trustees must specify a figure as to the ‘Realisable Recovery’ that they reasonably consider the scheme could make if it were to call on the guarantee.
The introduction of this requirement means that, before finally submitting the (re)certification documents to the PPF, the trustees (having taken such advice as they consider appropriate), need to consider and come to a formal decision on ‘Realisable Recovery’.
Given the possibility that the PPF might subsequently raise queries as to the trustees’ assessment of ”Reasonable Recovery, we consider it sensible for trustees to ensure proper minutes evidencing their decision-making process are retained, together with the advice they received in relation to this.
PPF’s publication on guarantor strength
The PPF have published a helpful explanatory document (dated January 2016) entitled ‘Contingent Assets – Guarantor strength’, which sets out how it analyses this strength, and what it considers as the relevant factors in that assessment, based on guarantees that it has rejected in the past.
In carrying out this analysis the PPF has clarified that it will not place any reliance on the value which a guarantor holds in the sponsoring employer unless the trustees are satisfied that this value would not be extinguished on the employer’s insolvency.
Simply put, the PPF’s concern here is that a guarantee would only be needed if the sponsoring employer is insolvent – in which case any guarantor’s investment in that employer may be worthless.
The fundamental requirement trustees must always keep in mind is that they must be able to show that the judgement they have come to is a reasonable one to have arrived at, having gone through an appropriate process.