PPF assessment speeding up means changes to ISDAs

Chris Jackson

Following changes to the law earlier this year, it should be quicker for some pension schemes whose sponsoring employers have gone insolvent to go through their Pension Protection Fund (PPF) assessment period.  This is to be welcomed, but the wording of the derivative contracts which some trustees enter into with banks (known as ISDA contracts) will have to be changed as a consequence.

Two changes to legislation were made earlier this year that should hopefully speed up the PPF assessment period for some schemes.  Firstly, the requirement that there must be at least a 12 month assessment period before the PPF can take over a scheme has been removed.  Secondly, the PPF is no longer obliged to undertake a specific assessment period valuation (a s.143 valuation), and may instead choose to make a determination of whether the scheme’s assets are above or below the value of the compensation that the PPF would be obliged to pay if it took over responsibility for the scheme.

The result of the above changes is that it is expected that schemes which are very clearly underfunded (or overfunded) will be able to move through the assessment process more quickly, and hopefully at a lower cost.

The PPF’s power to make a determination, instead of undertaking a valuation, will have a knock on effect for ISDAs entered into with pension scheme trustees.  Rob Tellwright and I have posted on Allen & Overy‘s Pensions Talk blog previously about the PPF’s powers to disapply or substitute any term in a contract taken over from the trustees that it thinks is onerous (see Hedgehogs, ISDAs and the PPF, and The PPF, onerous terms and ISDAs: from hedgehogs to elephants).  One fear is that the PPF could, in theory at least, use this power to disapply transactions where it was out of the money and keep ones where it was in the money. 

Following a consultation led by the PPF, the market has settled on inserting an event of default (EOD) or additional termination event (ATE) which applies at a specific stage in the process, broadly, if the PPF’s valuation shows that assets are less than PPF liabilities.  However, it will cease to apply if (before the bank triggers the EOD/ATE) the PPF issues a binding deed stating that it will not exercise its powers to disapply onerous terms if it takes over the scheme.

Existing EODs/ATEs in ISDAs will apply only where the PPF undertakes a valuation, and not a determination.  Banks will most likely look to address this in ISDAs to include the new determination process.  The deed which the PPF enters into will also be expected to change to include the new determination process.  This should essentially seek to put banks and trustees in the position they were in before the law changed earlier this year.

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.

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