The rules on contingent assets are broadly as for last year but there are developments to note. Recertification can take longer than expected if there have been changes in relation to an asset.
Trustees and sponsors should be preparing for the recertification of contingent assets that are to remain in place with a view to levy advantage for the 2018/19 year. If there have been changes in relation to a contingent asset, recertification may take materially longer than otherwise.
Broadly, the rules around contingent assets are as for last year, but there are developments to note.
The PPF remains closely interested in the substance of the group company guarantees.
The PPF has issued new versions of its standard form agreements for group company guarantees and security over real estate. These have to be used for new contingent assets entered into on or after 18 January 2018.
Where there is a fixed cap element to an existing group company guarantee or a security over real estate, the PPF expects to require these to be re-documented using the new agreements before recertification in a year’s time for the 2019/20 levy year.
Some schemes may want to consider moving to the new form of agreement early.
What are the new developments?
Guarantor strength reports
In a further tightening on the substance of guarantees, if a group company guarantee is expected to achieve a levy saving of £100,000 or more, the trustees are, in practice, required to submit a guarantor strength report to the PPF. This is a detailed report prepared by appropriate professional advisers e.g. covenant advisers. Its objective is to demonstrate that the guarantor could meet a certified "realisable recovery" (a figure the trustees certify to the PPF as the minimum value of the guarantee). The PPF gives a non-exhaustive list of issues it expects such a report to address.
Individual realisable recovery
Where multiple guarantors are party to the same guarantee, there is a new option. In the past it was a requirement that each guarantor be certified to be able to meet the full realisable recovery on its own. This meant the weakest guarantor set the value of the guarantee. Here is the basic form of certificate on realisable recovery:
“The Trustees, having made reasonable enquiry into the financial position of the certified guarantor, are reasonably satisfied that the Certified Guarantor, as at the date of the certificate, could meet in full the Realisable Recovery certified (and where this certificate covers multiple Certified Guarantors, that they can each meet in full the Realisable Recovery certified), having taken account of the likely impact of the immediate insolvency of all of the relevant employers (other than the Certified Guarantor where that Certified Guarantor is also an Employer).”
The new alternative is that an individual realisable recovery figure can be certified in relation to each guarantor. In this case, a separate contingent asset certificate is required for each guarantor. The aggregate realisable recovery will then be taken into account for the levy.
Reduction and replacement of contingent assets
The rules around reduction in, and replacement of, contingent assets are clarified and more fully explained in the PPF’s guidance.
Standard form agreements
New standard form agreements
The PPF recently issued new versions of its standard form agreements for a group company guarantee and a security over real estate. These aim to put beyond doubt that routine funding payments to a scheme do not erode any fixed cap (a set amount of money) on what the trustees can recover under the old form agreements. The PPF disagreed with this reading when it was proposed but, in the interests of certainty, has now moved to counter it by issuing revised documents.
Its plan is to require schemes with a fixed cap on a guarantee and or security over real estate to adopt the new form of agreement for levy year 2019/20. That plan could change but that may unlikely given the work the PPF has done on its agreements over a substantial period.
Moving to the new standard form agreements early
Depending on the views of scheme sponsors, guarantors, chargors and trustees, existing contingent assets with a fixed cap element could be moved onto the new form agreements early.
Moving early is prime facie attractive to scheme members and trustees (and the PPF into the bargain) because it closes the possibility of the eroding cap argument being made in earnest – e.g. in court proceedings – against the old form agreement.
Guarantors and sponsors, on the other hand, might prefer not to switch because the eroding cap argument would work in their favour if it came to the point.
PPF Guidance on contingent assets
Trustees and sponsors should read the PPF’s guidance in relation to contingent assets generally and on any topics applicable to their particular scheme.
The general deadline for recertifying a contingent asset online is Saturday 31 March 2018 (Easter weekend). However, there are other deadlines too.
The PPF gives this link to key dates for the 2018/19 levy.
Scheme sponsors and corporate data
Scheme sponsors should ensure corporate data used in the calculation of the levy is up to date e.g. that held by Experian, Companies House and other data sources the PPF uses.