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Why use contingent assets?

In these troubled times, it is more important than ever for trustees to explore all the options available to them to improve the security of their members’ benefits. One way of doing this, particularly where additional cash contributions are not possible, is to seek the agreement of the sponsoring employer that the trustees should have the benefit of some other assets should the employer default on its obligations to the scheme. The Pensions Regulator terms these “contingent assets” and encourages trustees to use these where appropriate.

Putting in place a contingent asset can be a win/win outcome for the trustees and employer – with the benefit of the contingent asset, the trustees may be able to agree a more aggressive investment strategy, and a more realistic (as opposed to excessively prudent) funding basis. The contingent asset can also serve to reduce the cost of the scheme by reducing the PPF risk based levy.

What does the PPF require?

To count for PPF purposes, the form the documentation must take, and the advice and processes the trustees must follow, are prescribed, and the contingent asset must be certified to the PPF by 31 March 2010. Contingent assets not documented or processed in accordance with PPF requirements can still serve a valuable role in improving security, but will not be taken into account by the PPF for levy purposes.

The PPF will accept three types of contingent asset:
 Type A: Parent (or other group company) guarantees of the employer’s obligations;
 Type B: Trustees receiving security over UK land, stocks or shares, or cash; and
 Type C: Bank guarantees or letters of credit in favour of the trustees.

We have assisted clients in putting the various types of contingent asset in place, including registration with the PPF. Given the 31 March deadline, and the procedures which need to be followed to put the contingent asset in place in a format acceptable to the PPF, clients considering a contingent asset should reach a decision on this and get the process underway immediately. This will be particularly important where, for example, approval from a parent company is required, or surveyors need to be instructed to value land or a third party such as a bank or custodian of shares is involved.

Re-certifying existing contingent assets

For trustees who have an existing contingent asset approved by the PPF, this can again count for 2010/2011 levy purposes provided it is re-certified to the PPF by 5 pm on Wednesday 31 March 2010 (via the pre populated “Exchange” system, the Pension Regulator’s online registration service). If trustees wish to re-certify security over land, trustees may also need to provide an updated valuation. The PPF will not remind trustees to re-certify and therefore positive action is required. If changes to an existing contingent asset have been made, the trustees must provide a legal opinion that changes do not have a materially detrimental effect. Therefore, if there has been any change to the situation or the value of the existing contingent asset has changed, further work would be required and we would be happy to assist in the re-certification process.

Checklist

If you are considering using a contingent asset, we would be pleased to discuss the process with you and to assist the trustees or the employer (as appropriate) in the process. A checklist of questions regarding the levy and contingent assets you may wish to ask yourselves, your lawyers or the scheme actuary is:

1. Has the 2009/2010 levy been correctly calculated?

2. Do we want to appeal it (strict 28 day time limit)?

3. Is all the information in the Scheme Return correct and up to date?

4. What is the estimated 2010/11 levy?

5. Do you want a contingent asset?

6. What sort?

7. Do you want to re-certify or extend an existing contingent asset?

8. How can you maximise the employer’s D & B failure score at 31 March 2010?

9. Is the D & B failure score based on accurate and up to date information, thereby ensuring the 2011/2012 levy will be accurate?

10. Should you prepare a new PPF valuation before 31 March 2010?

11. Can a deficit reduction certificate be submitted to, for example, account for contributions since the last PPF valuation?

For more information please contact David Hosford, or any member of Pitmans’ Pensions Department.

(High Court – 19 and 20 November 2009)

Overview
In this case, the Court was asked to decide whether an “Employment Cessation Event” (“ECE”) had occurred in respect of Cemex UK Marine Limited (“Cemex”), a participating employer in the Merchant Navy Officers Pension Fund (“MNOPF”).

Cemex had ceased to employ active members of the MNOPF, but still employed individuals who were eligible for membership and a deferred member. If an ECE had occurred, Cemex would have become liable for a statutory debt under Section 75 of the Pensions Act 1995 (“Section 75”) of approximately £20 million.

Background
The MNOPF is a multi-employer final salary scheme providing benefits for Officers of the Merchant Navy. It closed to new members in 1996, but the Trustee retained a discretion to admit new members subject to its consent.

On 28 November 2005, Cemex ceased to employ any active members of the MNOPF when its last remaining active member reached normal retirement date but continued in employment and chose not to draw his pension until a later date.

Between 28 November 2005 and 1 April 2006, Cemex employed four Officers who were not members of the MNOPF but who were eligible to apply to become members subject to the Trustee’s consent.

On 1 April 2006, Cemex employed another Officer who was at all material times an active member of the MNOPF.

“Employment Cessation Event”
A Section 75 debt occurs under a multi-employer final salary scheme such as the MNOPF where an ECE arises in relation to one of the employers.

Before 6 April 2008, an ECE occurred if an employer ceased to employ persons “in the description of employment to which the scheme relates at a time when at least one other person continues to employ such persons.” The meaning of this has been debated, but the generally held view was that this meant that a debt was triggered when an employer ceased employing active members of the scheme in question.

With effect from 6 April 2008, the definition of ECE was changed and now occurs “on the date on which (a) an employer has ceased to employ at least one person who is an active member of the scheme, and (b) at least one other employer…continues to employ at least one active member of the scheme.” (There is, however, provision for a 12 month period of grace in which an employer who ceases to employ any active members can commence to employ another active member and avoid the occurrence of an ECE.) The current trigger is therefore now clearly cessation of active membership.

Issues Before the Court
Cemex asked the Court to decide whether an ECE had occurred on 28 November 2005 in relation to it when:

(a) it employed Officers who were not members of the MNOPF;

(b) it employed an Officer who was a deferred member of the MNOPF and past normal retirement date;

(c) it intended to employ in the near future an Officer who was an active member of the MNOPF.

The Trustee maintained that an ECE had occurred but Cemex maintained that it had not.

Judgment
The Court held that an ECE had not occurred in relation to Cemex on 28 November 2005. The reference in the Section 75 legislation to “employing persons in the description of employment to which the scheme relates” did not cover active members only. The relevant description was a description of the employment and not the status of the member: if the employer had anyone who was an employee in the description of the employment, then the employer remained an employer for the purposes of the legislation.

Consequently, the answers to (a) and (b) above were negative, as in both cases Cemex employed the Officers in question.

However, the Court decided that as regards (c) above, an intention by Cemex to employ in the near future someone who was an Officer and an active member of the MNOPF was not enough by itself to prevent an ECE occurring if Cemex did not have any other employees who met the requirements of the legislation.

Comment
Employers of schemes where an ECE was triggered under the old legislation which applied before 6 April 2008 on the basis of cessation of active membership and who have not paid any Section 75 debt, should now revisit the situation to check if (a) or (b) above applies which would effectively mean that no Section 75 debt had arisen as there would be no ECE. Following the Cemex case, if the employer in question still continued to employ individuals who were eligible to join the scheme even on a discretionary basis, it could still be liable for a future Section 75 debt.

For more information please contact David Hosford or Rosamund Lee, or any member of Pitmans’ Pensions Department.

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