The Pension Protection Fund (PPF) is consulting on a proposal aimed at providing greater certainty on when it will exercise its powers to disclaim onerous contracts or substitute a reasonable term or condition in its place.

Section 161 and schedule 6 to the Pensions Act 2004 gives the PPF these powers where it has assumed responsibility for a pension scheme.

The PPF says that it may wish to disclaim a contractual term that:

  • restricts the liability of a third party contracting with the trustees; imposes unreasonable fees on the trustees or PPF;
  • imposes financial penalties when there is a transfer to the PPF;
  • changes on a transfer; or
  • imposes a penalty on cancellation or termination.

The PPF says that uncertainty on when PPF will use its power has led to some fund managers making the transfer of a scheme an additional trigger in contract termination clauses.

The PPF does not generally believe that such clauses are in the trustees’ or managers’ best interest. As a reaction to such practices the PPF is proposing to endorse standard wording that could be entered into the agreements between trustees and counterparties. The effect of this wording is intended to be that the contract will only terminate because of a scheme transferring into the PPF if the PPF does not notify the fund manager that the it will not use its powers under section 161.

The PPF will consult until 8 May 2009.