Media Briefing Note: PPF levy and guarantees - the going gets tough . . .

LONDON, 26 January 2012 - The time of year is approaching for filing guarantees with the PPF to obtain a reduction in the PPF levy.  For the first time, the PPF will be asking pension scheme trustees to confirm that they have no reason to believe that the guarantor can't meet its commitments under the guarantee.  This raises some potentially difficult issues for trustees that require careful handling. 


Contingent assets may be put in place to shore up a scheme's funding position (and so reduce the amount of the scheme's PPF risk-based levy) without the sponsoring employer having to put extra cash into the scheme. 

The PPF recognises three types of contingent asset:

  • Contingent assets recognised by the PPF
  • Guarantees by parent/group companies or undertakings
  • Security over cash, real estate and securities
  • Letters of credit and bank guarantees

Putting them in place

If a contingent asset is to be recognised by the PPF it must be:

  • put in place using the PPF's standard form documentation;
  • supported by various associated documents, including a legal opinion and confirmation that the benefit to the company providing the contingent asset has been considered and established; and
  • submitted to the PPF in hard copy by 5pm on 30 March 2012.

In addition, the trustees must submit a contingent asset certificate via the Pension Regulator's on-line Exchange system.  The trustees will need to certify the assets each year to allow the PPF to take it into account when calculating the PPF levy.

New certification requirements

From this year, where trustees are certifying guarantees, they must confirm they have "no reason to believe that each certified guarantor, as at the date of the certificate, could not meet its full commitment under the contingent asset".  It is understood that the PPF were becoming concerned that guarantees were being put in place to reduce the amount of the PPF levy where there was no prospect of the guarantor being able to meet its commitments under the guarantee. 

The new requirement raises issues for trustees and employers alike.  Trustees will be concerned to understand what they should do to satisfy themselves that they can give the certification.  Employers will be concerned to make sure that trustees have the appropriate information and that their enquiries are proportionate and appropriately focused.  The PPF has issued some helpful guidance for trustees on what they should be doing.  Points to note include:

  • the presumption is that trustees should be able to make the certification.  It is only where there are "clear grounds not to" that trustees should not certify;
  • the PPF acknowledges that in some cases the position may be so "clear cut" that trustees need not take any active steps to confirm the position (and this could be because it is clear that the certification can or cannot be given);
  • the PPF does not generally expect trustees to undertake a covenant review although if they have concerns about the situation this may be appropriate;
  • the PPF suggests that trustees may want to consider the options set out below;

Options suggested by the PPF

  1. Review the guarantor's most recent accounts (and take account of any post balance sheet events)
  2. Consider the guarantor's ability to borrow
  3. Make enquiries of the guarantor's financial director and obtain an appropriate assurance
  4. Seek confirmation from the guarantor's directors
  5. Seek financial information from the guarantor
  6. Consider the liquidity of the guarantor's assets (although only where the guarantor's circumstances mean this is likely to be an issue)
  • the PPF are content that there may be a time lapse between the position stated in any information reviewed (eg  the most recent company accounts or the latest PPF valuation) and the date of the certification;
  • trustees should not certify where they have sought information and been unable to obtain it: certification should only be given on the basis of information actually obtained.

A helpful change

One helpful point to note is that from this year, it will be possible to certify an amount lower than the face value of the contingent asset: eg a buy-out guarantee need only be certified to cover the amount required on the PPF valuation basis.  This could be helpful to trustees and employers in light of the new requirements.

A practical approach

We suggest that where possible, employers take a lead in the process and provide trustees with a package of documents early on. 

In our view, trustees could certify if:

  • a director of the guarantor has given a signed statement containing appropriate confirmations; and
  • the trustees (or their advisers) have looked over the guarantor's last available accounts and there is nothing obviously inconsistent with the director's statement (having regard to the latest relevant valuation).

If trustees are not confident in reviewing the accounts themselves, they may consider asking their usual covenant adviser to briefly review them.  Alternatively, the guarantor could ask their external accountants to provide a letter of comfort addressed to the trustees confirming the position. 

If the above does not provide adequate comfort to the trustees, they should consider asking their usual covenant adviser to assist them in a more detailed review.

Get on with it . . .

The key message is that if employers want a guarantee to be taken into account by the PPF, they will need to work collaboratively with trustees.  They should start this process as soon as possible to maximise the chances that the certification can be given.

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