17/12/08 Contingent Assets and PPF Levy
17 December 2008
Why use contingent assets?
In these troubled times, it is more important than ever for trustees to explore all the options open to them to improve the security of their members’ benefits. One way of doing this, particularly where additional cash contributions are not possible, is to seek the agreement of the sponsoring employer that the trustees should have the benefit of some other assets should the employer default on its obligations to the scheme. The Pensions Regulator terms these “contingent assets” and encourages trustees to use these where appropriate.
Putting in place a contingent asset can be a win/win outcome for the trustees and employer – with the benefit of the contingent asset, the trustees may be able to agree a more aggressive investment strategy, and more realistic (as opposed to excessively prudent) funding basis, and the contingent asset can also serve to reduce the cost of the scheme by reducing the PPF risk based levy.
What does the PPF require?
To count for PPF purposes, the form the documentation must take, and the advice and processes the trustees must follow, are prescribed, and the contingent asset must be certified to the PPF by 31 March 2009. Contingent assets not documented or processed in accordance with PPF requirements can still serve a valuable role in improving security, but will not be taken into account by the PPF for levy purposes.
The PPF recognises:
Parent (or other group company) guarantees of the employer’s obligations.
Trustees receiving a charge over UK land.
Trustees receiving a charge over a bank Trustees receiving a charge over stocks or shares.
Bank guarantee/letter of credit in favour of the trustees.
We have assisted clients in putting the various types of contingent asset in place, including registration with the PPF. Given the 31 March deadline, and the procedures which need to be followed to put the contingent asset in place in a format acceptable to the PPF, clients considering a contingent asset should reach a decision on this and get the process underway immediately. This will be particularly important where eg approval from a parent company is required, surveyors need to be instructed to value land, or a third party such as a bank or custodian of shares is involved.
Recertifying existing contingent assets
For trustees who have an existing contingent asset approved by the PPF, this can again count for 2009/2010 levy purposes provided it is re-certified to the PPF by 31 March 2009. The PPF has promised to produce a pre populated form on its website for use in these cases but will not be reminding trustees to recertify. Positive action is required. However if there has been any change to the situation or the value of the contingent asset, then further work would be required and we would be happy to assist.
Checklist
If you are considering using a contingent asset, we would be pleased to discuss the process with you and to assist the trustees or the employer (as appropriate) in the process. A checklist of questions regarding the levy and contingent assets you may wish to ask yourselves, your lawyers and the scheme actuary is:
1.Has the 2008/2009 levy been correctly calculated?
2.Do we want to appeal it (strict 28 day time limit)?
3.Is all the information in the Scheme Return correct and up to date?
4.What is estimated 2009/10 levy?
5.Do you want a contingent asset?
6.What sort?
7.Do you want to recertify or extend an existing contingent asset?
8.Is a deficit reduction certificate appropriate?
9.How can you maximise the employer’s D & B failure score at 31.3.09?
10.Should you prepare a new PPF valuation before 31.3.09?
For more information please contact any of our Pensions team or;