In December 2012, the Pension Protection Fund (PPF) published its finalised determination and associated documents relating to the 2013/14 PPF levy. 

The main aspects (including the PPF’s levy estimate of £630 million and the deadlines for submission of information to the PPF) are consistent with the drafts issued for consultation in September 2012; see our previous speedbrief for further details.  The key changes from last year’s regime relate to PPF contingent assets.  These changes are summarised below.

Parent company guarantees: strength of guarantor

Last year, the PPF introduced measures aimed at testing that guarantors under PPF parent company guarantees (Type A contingent assets) were “good for the money” and would actually be able to meet their obligations if called upon to do so.  The result was that many guarantees were not re-certified. 

However, the PPF became aware of cases where guarantees continued to be certified where the guarantor’s financial strength was questionable.  In particular, the PPF cites examples where the guarantor’s net assets looked substantial in its accounts but the guarantee had no value once the sponsoring employer failed (which is when the guarantee would be called upon).

As a result, the PPF has now decided to provide guidance to trustees so that they can assess the value of a guarantor in the same way the PPF does.  Trustees are encouraged to carry out their consideration of the certification in line with this approach.  A key point is that the value of the guarantor should be discounted if it would be affected by the insolvency of the scheme’s sponsoring employer.  The PPF plans to publish case studies to assist schemes.

Trustees are told that a formal covenant review may well be appropriate (particularly where the contingent asset is being used as part of a recovery plan) but they do not necessarily need to undertake such a formal review.  If they do not, however, similar considerations ought to be addressed and the results documented.

If trustees conclude that the guarantor does not offer full protection up to the level implied by the levy reduction, an alternative “work-around” is available.  Trustees may certify the contingent asset for a fixed sum, at a value consistent with the amount they have judged the guarantor to be worth. This can be done even where the underlying guarantee is not limited to a fixed sum.

Other changes relating to contingent assets

The PPF has clarified the basis of valuation for security over property (Type B(ii) contingent assets).  This is likely to have arisen as a result of the determination of the Deputy Pension Protection Fund Ombudsman described in our previous speedbrief.

The credit rating requirement for bank guarantors and custodians has also been relaxed from AA- to A-.  This is designed to make it easier for schemes putting in place bank guarantees (Type C contingent assets) or security over assets (Type B contingent assets) to find a suitable bank or custodian.

Comment

The most notable change from last year’s regime relates to guarantors under parent company guarantees.  The PPF is seeking to ensure that any levy reduction granted as a result of putting in place a guarantee reflects an equally significant reduction in risk for the PPF.  This is a difficult balance, described in the PPF’s policy statement as “one of the trickiest levy related issues the Board has had to contend with”.

As trailed in its consultation papers, the PPF will be taking a more rigorous approach in relation to certification of guarantees.  Previous language relating to “giving the benefit of the doubt” is now notably absent. 

The process of putting in place or re-certifying a PPF parent company guarantee is likely to prove more time consuming than in previous years.  The deadline for certification of contingent assets is 5pm on 28 March 2013 but schemes should begin this process well ahead of that date.