The Pension Protection Fund ("PPF") has set its 2009-2010 levy scaling factor at 2.22. The scaling factor affects the amount of the risk-based element of the PPF levy. This represents a retreat by the PPF in the face of criticism from the pensions industry following its announcement in the summer that the scaling factor would be 3.77. Nevertheless, the PPF has said that higher levies are its preferred way of dealing with long-term cost pressures arising from the economic downturn.
As a result, and following last year's significant increases in the risk-based levy, many employers and trustees may be considering putting in place a PPF compliant contingent asset to reduce the amount of the risk-based levy that they will have to pay. But what is a contingent asset and how do you put one in place?
What is a contingent asset?
A contingent asset is an asset that will produce cash for a pension scheme if certain events happen; in particular, if the sponsoring employer suffers an insolvency event. The PPF will take account of three types of contingent asset for the purposes of determining a scheme's risk-based levy:
- Guarantee by parent/group company (Type A0
- Security over cash in a bank account, real estate or securities (Type B)
- Letter of credit or bank guarantee (Type C)
Of these, the parent/group company guarantee (Type A) and security over cash or real estate (Type B) have been the most popular options.
How do you put a contingent asset in place?
The legal and other supporting documents relating to the contingent asset must be lodged with the PPF by 31 March each year. The PPF only takes account of contingent assets which are substantially in the PPF's standard form documentation (as published on the Pension Protection Fund website .)
Amendments are permitted only in limited circumstances. Trustees must lodge with the PPF a document highlighting any amendments to the PPF standard. They must also certify to the PPF that the documentation complies with PPF requirements for the relevant type of contingent asset.
In each case, the documentation must be accompanied by a legal opinion from a firm of solicitors addressed to the trustees of the scheme and confirming certain specified matters. These matters vary according to the type of contingent asset but include confirming the legal effect of the documents, that any changes to the PPF standard documents are not to the detriment of the trustees and, in the case of Type B contingent assets, that they have been properly registered.
The employer and the trustees will need separate legal advice.
How long does it take to put a contingent asset in place?
The time taken to deal with the legal requirements for a contingent asset will depend on the type of asset chosen and on other factors e.g. whether the guarantee is to be given by a foreign company, the number of employers whose liabilities are to be guaranteed, how much preparatory work has been done by the employer and trustees, whether all the information necessary is readily available or whether any negotiations are required with a bank.
Based on our experience, we believe that employers should allow an absolute minimum of six to eight weeks in relation to Type A and Type C contingent assets and 12 weeks in relation to Type B contingent assets.
Accordingly, if you are considering utilising a contingent asset you should seek legal advice as a matter of urgency if the following deadline is to be met.
When must the contingent asset documentation be filed with the PPF?
The deadline for submitting trustees' certificates and other contingent asset documentation to the PPF is Tuesday 31 March 2009 (by 5pm).
The initial cost of putting in place a contingent asset is likely to be between £6,500 and £10,000, again depending upon the type of contingent asset and how much preparatory work has been done by the parties. However, this initial expenditure can pay for itself in year one in the reduction of the risk based levy. In following years, only limited steps are required to re-certify the asset and therefore only nominal costs will normally be incurred.