Trustees and employers who wish to put in place and/or re-certify a Pension Protection Fund (PPF) contingent asset in time for the 2017/18 levy year should act now.
A contingent asset is an asset that is not immediately available to the person in whose favour it is granted, but which will become available if one or more specified events occur. In relation to a pension scheme, the most likely events are the scheme's employer becoming insolvent or the scheme failing to meet a specified funding level.
The PPF recognises contingent assets in its calculation of a scheme's risk-based levy. This is calculated according to the risk that the employer will become insolvent and the level of underfunding in the scheme. Using a contingent asset reduces the risk of one or other of these factors and, in many cases, reduces the levy payable.
A contingent asset may also help mitigate the financial burden on a scheme's employer if cash resources are limited. Also, if cash is not immediately available, a contingent asset funding arrangement helps the trustees to spread credit risk. Types of contingent asset include group company guarantees, charges over various types of assets and letters of credit.
The creation of a contingent asset requires the execution of a legal document which can take a variety of different forms. However, the PPF only recognises contingent assets created using its standard form documents, which must be submitted to the PPF for approval and certified by the trustees as meeting the PPF's criteria.
Certification (or re-certification) must be done via Exchange, the Pension Regulator's online portal. For a contingent asset to be recognised in the 2017/18 levy year it must be submitted and certified, or re-certified, by midnight on 31 March 2017.
Unlike in previous years, where final levy rules are made available in December, the draft levy rules will remain in draft form and the PPF has confirmed its intention to publish final levy rules by 31 March 2017.
The PPF has, however, confirmed that (aside from possible changes or new rules for schemes which cease to have a substantial employer following a restructure) the draft levy rules can be relied upon as they will not be changed between now and final publication.
A notable change for the 2017/18 levy year is the introduction of an opportunity to notify Experian where a change in accounting standards impacts specific components of the levy calculation. This follows the introduction of FRS 101/102 (to replace UK GAAP) and should help those schemes that see a change in their levy which is caused by the change to accounting standards. A certificate and guidance on its use will be available from the PPF shortly.
This will depend on the nature of the contingent asset being put in place. Giving a parent company guarantee could adversely affect the guarantor's ability to borrow in the future or could increase the costs of extra borrowing. It may also affect how external rating agencies assess the guarantor, which could impact on its value. This is particularly relevant when the trustees consider the guarantor's strength.
Charges over real estate, cash or shares may be attractive for an asset-rich business. However, trustees need to ensure that assets are not subject to a prior or level ranking security interest. Likewise, sponsoring employers need to check whether they are able to grant further charges or charges which rank in preference to an existing lender's security.
Trustees also need to be mindful that they should take reasonable steps to ensure that any contingent asset put in place is capable of being enforced and realised by the trustees. Trustees should take proportionate steps to make this assessment; proportionality should be determined by the individual scheme's circumstances and/or the size of the guarantee/asset to be put forward.
For assistance putting in place a new guarantee or asset or help recertifying an existing one, please get in touch.
This publication is intended for general guidance and represents our understanding of the relevant law and practice as at January 2017. Specific advice should be sought for specific cases. For more information see our terms & conditions.