Does your contingent asset meet the PPF’s new requirements?
Lewys Curteis contributed to the writing of this blog post
Contingent assets are a popular method for reducing the size of schemes’ Pension Protection Fund (PPF) levies. Since the availability of a contingent asset makes a scheme less likely to enter the PPF, the PPF gives schemes credit in the form of a reduced PPF levy.
The PPF now appear to be monitoring contingent asset certifications in more detail, indeed we have seen a number of cases where certifications of parent or group company guarantees have been rejected in respect of the 2014/15 levy year.
With the PPF‘s deadline for contingent asset certification – 31 March 2015 – fast approaching and the more stringent requirements implemented by the PPF following its recent consultation, employers and trustees will be eager to ensure that any certification is suitably rigorous to avoid the PPF rejecting the certificate.
Changes to certification requirements for guarantees
The two main changes to certifying guarantees compared to previous levy years are as follows:
- Certifications will need to be made on the basis of a fixed amount, known as the ‘Realisable Recovery’. In previous years, it was possible to certify contingent assets in relation to a proportion of the scheme’s deficit, e.g. the full buyout debt.
- Changes have been made to the certification wording to which trustees will be required to attest. Specifically, trustees must certify that they have “made reasonable enquiry into the financial position of each certified guarantor, 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 of the immediate insolvency of all of the relevant employers”.
The PPF’s decision to only allow certifications of fixed amounts is intended to ensure that trustees are aware of the financial commitment of the guarantor(s) at the date the certificate is signed. In cases where the guarantee was not expressed as a fixed amount, the PPF was concerned that trustees did not know how much the guarantor(s) would be on the hook for, and would find it difficult to assess their ability to pay.
PPF’s guidance – what trustees need to do
While the certification is the responsibility of the trustees, it is in the employer’s interests to engage with the trustees to get it right as a rejection could mean a significant increase in the PPF levy. To assist trustees with completing the certification for guarantees, the PPF has issued a note on its experience so far. The PPF is focusing on how the trustees have assessed the amount certified, in particular in the event of an insolvency in the corporate group.
In previous years, some rejections have occurred due to the trustees concluding, without investigation, that the guarantor could meet its obligations under the guarantee due to the size of the guarantor exceeding the size of the guarantee. The PPF has made it clear that this is not sufficient.
Trustees should also consider the impact of an insolvency event on the wider corporate group. For example, is the insolvency of a sponsoring employer likely to result in difficulties for the guarantor? Would this be expected to lead to a lower amount being available to the scheme?
Trustees will need to keep detailed records of any analysis or evidence that justifies their decision to certify the contingent asset at a given level – this will be crucial if the PPF has any concerns in relation to the true value of the contingent asset certification. The PPF suggests that some trustees may wish to obtain advice from third parties where the position is not clear, or for critical assumptions.
The PPF has also set out some examples of more detailed questions to give an idea of the types of issues employers and trustees should be considering. The issues will vary from scheme to scheme but this list is a good starting point for assessing how thorough any analysis should be.
For the 2015/16 levy year, the certification – and any hard copies of documents – must be received by the PPF by 5pm on 31 March 2015. The PPF is unlikely to give partial credit where it feels the trustees have certified an amount which is too high. Trustees and employers should check that their certification is likely to meet the PPF’s requirements as soon as possible.
Key points:
- new stringent requirements apply to certification of guarantees
- trustees should focus on the 'realisable recovery' in the event of insolvency
- the deadline for certification is 5pm on 31 March 2015