It’s PPF contingent asset season for pension schemes – dust off the old and bring in the new

Chris Jackson

Christmas is over for another year and, with the last mince pie eaten and New Year’s resolution forgotten, everyone seems finally to have come back to work for a rest.  Sadly there won’t be much time to rest for those pension schemes whose sponsoring employers are considering putting PPF contingent assets in place, the most popular by far being Type A guarantees.  The deadline of 5pm on 30 March 2012 for submitting the paperwork might seem very far away but don’t be fooled by that*. 

One of the key reasons for an employer to put a Type A guarantee in place is obviously to reduce the PPF levy.  The trick is to find the right entity to give the guarantee.  The PPF has made some changes to make this easier and some to make it harder in this year’s levy determination, published in December 2011:

1. The range of people who can provide contingent assets has increased.  Previously, only a party who satisfied the Insolvency Act definition of being ‘connected’ or ‘associated’ to a scheme employer could provide a PPF-compliant contingent asset.  The PPF has now widened this to include persons who have a “pre-existing legal or commercial relationship” with an employer. 

This new easement is likely to be used only rarely (it is unlikely that anyone who doesn’t fall within the ‘connected’ and ‘associated’ definition would want to provide a contingent asset, though the PPF says that it does happen).  If an employer does want to use it, build extra time into your timetable as the employer will have to establish to the trustees’ satisfaction (and possibly the PPF’s) that there is such a relationship.  

2. The trustees must certify that they have no reason to believe that each guarantor of a Type A guarantee could not meet its full commitment under the contingent asset.  This requirement applies equally to existing guarantees, and trustees will look to be provided with evidence that this is the case, or in some cases may have to change guarantors or rely on only some of multiple guarantors.

The reason for putting a PPF-compliant guarantee in place is to replace the (more likely) risk of insolvency of the sponsoring employer with the (less likely) risk of insolvency of the guarantor when calculating the levy, thereby reducing the levy.  However, under changes to the levy formula for 2012/13, insolvency scores are grouped into 10 bands.  Therefore, not only must the risk of the guarantor’s insolvency be less than the employer’s, it must be sufficiently less to place it in a different band to the sponsoring employer.  Employers may need to look carefully at their D&B scores to work out which potential guarantors are appropriate.

By the time the employer has prepared all of their officer’s certificates and the trustees have received and considered their legal opinion, there is less time than you think to put a new PPF-compliant contingent asset in place.  It is worth seeing if you can instruct your legal advisers by the end of January.  It is possible to put a new contingent asset in place in less time than this, but acting early will help minimise stress in the run up to 30 March 2012.

* The same deadline applies to re-certifying existing PPF contingent assets

Chris Jackson is a senior associate at Allen & Overy LLP.

Comments published on Pensions Talk do not necessarily reflect the views of Allen & Overy or its clients.

Read comments below or add a comment

Leave a comment