“I ain’t afraid of no ghost!” I hear you say. Well, if you’re a pension scheme trustee with a ghost guarantor, maybe you should be!
The Pension Protection Fund contingent asset regime’s been with us for a few years now. Underfunded pension schemes get lower PPF levies if they’ve got a funding guarantee from a guarantor that has a lower insolvency risk than the scheme’s own sponsoring employers. But it’s come to the PPF’s attention that some guarantors mightn’t be quite what they seem – the ghost guarantors!
Insolvency risks are based on Dun & Bradstreet company failure ratings. The vagaries of the D&B system mean that companies with little or no trading history can have very favourable D&B scores. So, even a shell or service company could have a great D&B score and net a PPF levy reduction. But, when it comes to the crunch and the guarantee needs to be called upon, you might as well ask Greece for a tenner.
So the PPF’s taking action. Its Chief Policy Adviser, Chris Collins, and its legal team ran a “Contingent Assets Surgery” for the Association of Pension Lawyers earlier this week and their message on the point was clear: the PPF’s going to be performing its own analysis of guarantor strength, comparing it with the deemed value of the contingent asset for levy purposes. Primarily, it’s going to consider publicly available financial information.
Slimer - surprisingly liquid assets for a ghost
It’s also going to look to the trustees: trustees certifying new guarantees or re-certifying existing ones by 31 March 2012 are going to have to be able to say that their guarantor’s good for the money.
The PPF’s said that if it’s so “clear cut”, trustees shouldn’t have to take “specific active steps” to investigate the guarantor’s ability to pay. However, what counts as clear cut isn’t in itself that clear. Checking accounts for the guarantor’s net asset position is the first suggestion from the PPF but, as they note, you might have to look further – e.g. into liquidity – as a great net asset position isn’t much good if you can’t realise the asset at the time you need to pay the pension liability. Advice: amongst other things it’s probably worth getting get some written comfort from the guarantor’s finance director – a paper trail is nearly always a good idea.
If trustees determine that the guarantor’s only good for part of the money then this year, for the first time, they have the ability to certify only up to that amount.
But if a guarantee isn’t re-certified this year for a particular guarantor because the guarantor turned out to be too ghostly to count, would the PPF look into the reasons? Would they hound down the schemes with ghost guarantors and seek to recoup past levy reductions?
Hopefully not – for this year at least the PPF is more likely to accept the adjustment as evidence of a change of creditworthiness, rather than as an admission that the guarantor was never good for the money in the first place. But if you’ve got any concerns – “Who’re ya gonna call?” Ghostbusters? Maybe not. I’d suggest A&O.
Stephen Beattie is an associate at Allen & Overy LLP.
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