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Pensions Update – PPF contingent assets: certification/recertification by 30 March 2012

22 February 2012

Many defined benefit occupational pension schemes have in place contingent assets which are registered with the Pension Protection Fund (PPF) as a way to reduce the scheme's risk based PPF levy.  Some schemes may be in the process of putting a new PPF contingent asset in place in order to reduce the 2012/2013 PPF levy.  For all such schemes it is important to be aware of the deadline for registration of new PPF contingent assets, or recertification of existing PPF contingent assets, which is 5pm on Friday 30 March 2012. 

The recertification process should be started as soon as possible, especially if an existing contingent asset is to be amended, as:

• a fresh legal opinion may be required; and  
• the provider may have to comply with a notice period specified in the amendment provisions of the security agreement.

If a new PPF contingent asset is not registered, or an existing one is not recertified by the deadline, then they will not be recognised for the purposes of calculating the risk based PPF levy for 2012/2013.

New certification requirement for Type A Guarantees for 2012/13

The PPF now requires that all Type A Guarantees (both new and existing guarantees) from 2012/13 should reduce the risk of compensation being payable to an extent that is proportionate to the levy reduction secured.

Therefore, the PPF are asking trustees to certify on Exchange that "they have no reason to believe that each guarantor, as at the date of the certificate, could not meet its full commitment under the contingent asset."

The PPF have confirmed that in order to give this certification trustees are not required to undertake a covenant review of the guarantor; however, they are expected to take proportionate and reasonable steps to reassure themselves as to whether the guarantor has sufficient value in its business to meet the amount guaranteed.

This may mean that where it is obvious to the trustees that the guarantor can meet the amount guaranteed, they will not need to take any steps to actively review the position. However, if it is not so clear cut the trustees should take steps to obtain information allowing them to consider the following:

• the value of the guarantee for levy purposes; and
• such information as is available to the trustees regarding the position of the guarantor.

The PPF's guidance  provides a non-exhaustive list of information which the trustees could review in order to consider the two points above. Please click here for the guidance.

As well as the trustee certification, the PPF will also carry out its own investigations (by considering publically available financial information) into the strength of the guarantor and may decline to recognise a guarantee which does not meet its requirements for financial strength despite the trustees providing the required certification.

Other changes for the levy year 2012/13

There have been a number of changes to the requirements for funding guarantees which qualify as PPF contingent assets:

• there is now greater scope for who can be a guarantor, as the definition of employer's associate has been widened; and
• due to the new requirement in relation to the financial strength of the guarantor, trustees can certify a lower amount than the face value of the asset if they have any concerns over the guarantors' financial strength.

There have also been some changes to how contingent assets are recognised in respect of multi-employer schemes. 

Contingent asset already in place - recertification

Certificate

The trustees must renew their contingent asset certificate via Exchange by 5pm on 30 March.  The certificate will be pre-populated with the information submitted by the trustees last year. 

If the contingent asset has been amended, the trustees will need to submit a copy of the amended agreement, or the amending document, as appropriate.  In addition, the trustees may need to submit a fresh legal opinion.  This is particularly the case if the amendment would call into question the provider's capacity to enter into the amended agreement. 

Details of the required documentation are available on the PPF website, in the Contingent Asset Appendix to the PPF Determination.  Please click here to be taken to this document.

New contingent asset - registration

The requirements to register a new contingent asset with the PPF depend on the type of contingent asset being put in place. Details of the requirements are available on the PPF website, in the Contingent Asset Appendix to the PPF Determination.  Please click here to be taken to this document.

We can provide further advice if you are in the process of putting in place a new PPF contingent asset.  Given the strict PPF deadline ending at 5pm on Friday 30 March 2012, you should contact us as soon as possible if you require advice.

Please contact your usual OC adviser or Joe Webster for further assistance on any of the issues covered in this update.

 

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These materials are written and provided for general information purposes only. They are not intended and should not be used as a substitute for taking legal advice. Specific legal advice should be taken before acting on any of the topics covered.