Will your scheme's parent company guarantee hold up as a levy-reducing asset?

A recent Pension Protection Fund (PPF) Ombudsman decision concerns a situation where the scheme trustees considered that a guarantee given to the scheme by a holdings company provided good protection for the scheme in the event of the insolvency of the employer, but the PPF disagreed and refused to recognise the guarantee for levy purposes. The trustees appealed to the PPF Ombudsman, who has held that the PPF’s decision was correct.

This decision concerned the PPF levy guidance for 2013/14 which has been significantly updated since. Trustees need to be aware that the PPF are required to apply a more stringent test when assessing guarantor strength than the trustees will have used in order to certify the asset. There is therefore likely to be a gap between the trustees’ assessment of the position and that of the PPF. However the PPF has published helpful guidance on how it applies the test since the circumstances of this decision, and on the thought process that the trustees need to go through when considering the impact of employer insolvency on a guarantor. Trustees should therefore now be less likely to experience the discrepancy that occurred in this case, provided they follow the PPF’s new guidance when certifying a contingent asset. We provided more details on this in our update on certifying a contingent asset earlier this year.

To accept a guarantee as a contingent asset, the PPF must be satisfied that it reduces the risk of compensation being payable from the PPF in the event of employer insolvency, and that the resulting reduction in the scheme’s levy was reasonably consistent with the level of reduction in risk. In this case the PPF did not consider that the guarantor met this requirement. In particular it was concerned that the guarantor’s net asset value mainly related to its investment in the scheme employer, and that therefore if the employer suffered an insolvency event, the guarantor would not have sufficient non-employer related assets to repay its obligations under the guarantee.

The trustees provided material in an attempt to demonstrate that there were additional assets available to the guarantor on the insolvency of the employer, notably cash held by another group company and value in a joint venture. However at both review and on reconsideration the PPF found the evidence provided to be insufficient.

The PPF Ombudsman held that the PPF’s decision was correct. It found that at all stages the PPF gave full reasons for its decision, and that its decision was not beyond the bounds of reasonableness.