Pensions update: certifying a contingent asset to reduce your scheme's PPF levy
Published on 10th Feb 2015
In our recent PPF levy update we explained a number of actions which trustees and employers could take to reduce their scheme’s PPF levy. One of those actions was putting in place a PPF qualifying contingent asset (or re-certifying an existing one).
In this update we explain the actions trustees need to take before 5pm on 31 March 2015 to certify or re-certify a contingent asset, so that it will count to reduce the scheme’s PPF levy for levy year 2015/16. This process should be started as soon as possible.
Contingent asset already in place – recertification
The trustees must renew their contingent asset certificate via Exchange by 5pm on Tuesday 31 March 2015. The certificate will be pre-populated with the information submitted last year.
If you did not certify your contingent asset with the PPF last year, you will still be able to re-certify it for this levy year, if (i) it was certified with the PPF between 1 April 2010 and 31 March 2014, and (ii) it has remained in place unchanged since the levy year it was last certified (or re-certified).
If either condition is not met, the contingent asset will need to be certified with the PPF as a new contingent asset (see the next section below).
Additionally, for Type A guarantees, trustees will need to certify a fixed amount, known as the ‘Realisable Recovery’. We have set out more details on what this means for trustees below.
If the contingent asset has been amended, the trustees will need to submit a copy of the amending document to the PPF (and may in some cases need to submit a new legal opinion). Additionally, the provider of the contingent asset may have to comply with a notice period specified in the amendment provisions of the relevant contingent asset document.
Details of the documents to be sent to the PPF for recertification are set out in the Contingent Asset Appendix. Please click here to be taken to this document.
New contingent asset – certification
The requirements to certify a new contingent asset with the PPF depend on the type of contingent asset being put in place. Details of the requirements are set out in the Contingent Asset Appendix. Please click here to be taken to this document.
We can provide you with further advice on the certification process, if you are considering putting in place a new PPF contingent asset. Given the strict PPF deadline ending at 5pm on Tuesday 31 March 2015, you should contact us as soon as possible.
Changes to contingent asset certification for levy year 2015/16
For those who have certified contingent assets before, please note that there have been a number of changes to certification for the coming levy year. We set out the most significant changes below:
template documents for each type of contingent asset which can be certified
with the PPF have been revised. Any contingent asset put in place after 17
December 2014 will need to use the relevant revised
|Trustees are required
to certify the ‘Realisable Recovery’. See below for more details.
|There have been
no significant changes to the certification / re-certification process of
Type B securities.
However, as the
In order to
C letters of credit
|Surety bonds can
now be certified as a Type C letter of credit. The standard template for a
Type C (ii) contingent asset can be accessed here.
Certifying the ‘Realisable Recovery’
As part of the certification / recertification requirements for a company guarantee the PPF will now require trustees to certify that “having made reasonable enquiry into the financial position of each certified guarantor [they] are reasonably satisfied that each certified guarantor, as at the date of the certificate, could meet in full the Realisable Recovery certified, having taken account of the likely impact the immediate insolvency of all the relevant employers.”
The ‘Realisable Recovery’ amount can be broadly summarised as the lower of:
- the amount which the trustees are reasonably satisfied that each certified guarantor could meet if the scheme’s participating employers were insolvent; and
- if the liability cap in the guarantee is limited to a monetary amount, that amount.
In order to assist trustees with their analysis, the PPF has published a briefing note which provides a guide to the thought process needed when considering the impact of employer insolvency on a guarantor. This is in addition to the usual PPF guidance on certifying contingent assets.
The PPF will test a substantial number of guarantees certified with it to assess whether the reduction in levy which results from the guarantee being certified, is consistent with the actual reduction in risk. In order to do this, it will ask trustees to provide it with the information and analysis that they have obtained to support the guarantor’s ability to provide ‘Realisable Recovery’.
The PPF will then ask an external financial adviser to review and provide its view on this evidence. If the PPF is not satisfied that the evidence supports the conclusion that the guarantor would be good for the ‘Realisable Recovery’, the guarantee will not be approved.
In order to reduce the risk that the PPF’s view differs to the trustees’, trustees may want to consider:
- whether they have sufficient expertise to gather and assess the relevant information to value each certified guarantor’s ‘Realisable Recovery’ and if not seek professional advice;
- certifying a lower amount than the face value of the guarantee (although in order to get the maximum reduction from the PPF levy, this amount would need to be the equivalent of guaranteeing 105% funding of the scheme on the section 179 basis); or
- only certifying the most substantial guarantor referred to in the guarantee, if they have any concerns about the strength of any of the other guarantors (as each certified guarantor must be able to individually cover the entire ‘Realisable Recovery’ amount).
If you would like further advice on anything covered in this update, please contact Joe Webster or your usual OC adviser.