For levy year 2013/14 the Pension Protection Fund (PPF) is asking trustees to do more due diligence than in previous years in order to certify parent company guarantees.

While trustees will be familiar with the certification requirement which was introduced for the levy year 2012-13, the PPF’s Guidance this year calls for trustees to perform a critical assessment of the financial strength of the guarantor.

To ensure that an existing contingent asset or a new contingent asset is recognised by the PPF for the 2013/14 levy year trustees need to re-certify the existing contingent asset or certify the new contingent asset via the Pension Regulator’s online Exchange service by no later than 5pm on 28 March 2013.


For the PPF to recognise a Type A contingent asset group company guarantee, the trustees must certify the strength of the guarantor:

“The trustees 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 as certified.”

Certification is required for new and re-certified guarantees. While the PPF will not require trustees to conduct a covenant review for each certification, trustees are expected to consider the financial data available on the guarantor, and if they are not satisfied, to request further information of the guarantor.

In particular, trustees are required to consider the strength of the guarantor in circumstances where the employer in the scheme has suffered an insolvency event as this is the most likely instance that a guarantee would be called upon. Trustees should therefore consider the strength of the guarantor on the basis of its stand alone position as well as on a consolidated basis. The PPF is attempting to ensure that the guarantor is well resourced in its own right.

Trustees should be mindful that it is a criminal offence to knowingly or recklessly to give false or misleading information to the PPF.

PPF Assessment

On receipt of a certified guarantee, the PPF Board will conduct its own analysis of the guarantor strength in accordance with the levy rules (Levy Rule G2.3(2) of the Determination by the Board of the PPF 2013/14). The Board will compare the guarantor strength against the deemed value of the contingent asset for the purposes of the PPF levy.

In accordance with the levy rule, the PPF will only recognise a guarantee if it is satisfied that:

  • the contingent asset reduces the risk of compensation being payable in the event of an insolvency event occurring in respect of an employer.
  • the contingent asset’s recognition in the reduction of the levy is reasonably consistent with the risk reduction.

The guidance does not require the Trustees to take the same approach as the PPF. However, a consistent approach will increase the chances of the contingent asset being accepted, and the corresponding levy reduction being made.

One option for the trustees is to certify a guarantee for a fixed amount at a value consistent with the amount they have judged the guarantor is worth. This can be done even where the underlying guarantee is actually not limited to a fixed sum. This will reduce the risk that the PPF will place a different value on the contingent asset after they have assessed its impact of the amount payable on the scheme’s funding (i.e. considering the scheme’s stressed and smoothed positions).

Where it considers a guarantor is not good for the certified value of a guarantee, the PPF will normally reject it entirely.  But the PPF retain a discretion to give partial recognition as long as there was no intention to gain an unfair levy advantage. The PPF will select a sample of guarantees for close scrutiny and has warned that Trustees may not be granted the benefit of doubt that was given last year.

What action should Trustees take?

If you are preparing to recertify a Type A contingent asset or plan to enter in to a new Type A contingent asset for the levy year 2013/14 the Trustees should take immediate action to meet the 28 March 2013 deadline:

  • Carry out proportionate due diligence. Trustees should consider it reasonable to believe a guarantor could meet its commitment, but do not have to be certain. Trustees should request financial information from the guarantor where this is not available as they believe is necessary to satisfy the test.
  • Consider whether the guarantor’s covenant has changed since 2012/13 and whether it is appropriate to commission independent advice on the strength of the guarantor.
  • Maintain an audit trail of the information considered when assessing the guarantor strength as the PPF may require the provision of information relied upon.