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The Pension Protection Fund and Contingent Asset Certification 2012/13 – New Requirements and greater flexibility.

Background

In recent years Contingent Assets have become an increasingly common method by which sponsoring employers have managed the cost of occupational pension schemes, the availability of a contingent asset to a scheme’s trustees usually resulting in a reduction in the Pension Protection Fund levy, a cut in the funding level a scheme needs to aim for or both.

To ensure that an existing contingent asset or a new contingent asset is recognised by the Pension Protection Fund (“PPF”) for the 2012/13 levy year Trustees need to recertify the existing contingent asset or certify the new contingent asset via the Pension Regulator’s online Exchange service by no later than 5 pm on 30 March 2012.

Before they commence this process both trustees and employers should be aware that the PPF has introduced a new requirement for certification with regard to Type A contingent asset (guarantees from other group companies) and has announced new proposals on how it intends in future to analyse the strength of guarantors in relation to the guarantees that they provide.

The Revised Contingent Asset Guidance 2012/13

The PPF Final Levy Determination for 2012/13 was published on the 13 December 2012 and includes a number of key changes on how the PPF shall approach Contingent Assets from 1 April 2012.

1. The Board of the PPF has introduced a new requirement for both the certification of new Type A contingent assets and the recertification of Type A contingent assets for the levy year 2012/13. For these assets certified on the Exchange no later than 5 pm on 30 March 2012 Trustees will now have to certify 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 guidance confirms that trustees will not usually be expected to conduct a covenant review for each certification. However, the PPF does expect the trustees to take “proportionate and reasonable steps” to reassure themselves as regards the guarantor’s financial standing “as at the date of the certificate”.

As a minimum we recommend that trustees should note this new requirement and make a formal decision on whether further information or advice is required with regard to the financial strength of the guarantor.

2. For the levy year 2012/13 trustees now have the option of certifying a lower amount than the face value of the Type A contingent asset, or of only reporting the most substantial guarantors if they do not feel that can provide the new certification as highlighted above.

This more flexible approach by the PPF recognises that the re-certification of contingent assets could be difficult in those circumstances where the guarantor’s position has changed. However, Trustees should approach this option with caution and seek advice if they consider this approach as the PPF retains the discretion to refuse the partial recognition of a contingent asset.

3. From 1 April 2012 the PPF will commence its own analysis of guarantor strength based on publicly available financial information, comparing it with the deemed value of a Type A contingent asset for levy purposes. If the PPF consider the guarantor to be of limited strength, it will seek additional evidence from the trustees, before deciding whether to reject a contingent asset.

In this first year the PPF will give the benefit of the doubt to schemes and their guarantors and will only challenge guarantees where the guarantor’s net assets are somewhat below the sum guaranteed. It is the PPF’s expectation that requirements for future years will be tightened.
 
4. The definition of “Employer’s Associate” has been amended so that an entity which satisfies the PPF Board of a sufficiently strong connection to an employer, independent of the existence of the contingent asset, would be recognised as an associate. This represents a relaxation of the PPF’s former requirement that the guarantor to a contingent asset must be an “associate” of a scheme employer as defined in section 435 of the Insolvency Act 1986 and will allow more companies to provide Type A contingent asset guarantees.  The new definition can be found at paragraph 4 of the Contingent Asset Appendix.
 
If you are preparing to recertify a Type A contingent asset or plan to enter in to a new Type A contingent asset for the levy year 2012/13 we would be happy to review the new PPF requirements in respect of your specific requirements. Please contact Pitmans Pensions team or your usual Pitmans contact.

David Hosford
Partner
T: +44 (0) 118 957 0363
E: dhosford@pitmans.com
 
David Loosemore
Solicitor
T: +44 (0) 118 957 0240
E: dloosemore@pitmans.com