Employers and trustees who use a guarantee or charge to reduce their pension scheme’s Pension Protection Fund (PPF) levy may need to re-execute that guarantee/charge in order for it to be taken into account in calculating the scheme’s 2019/20 PPF levy.
The PPF provides protection for members of DB pension schemes whose sponsoring employer becomes insolvent. It is funded in part by an annual levy payable by DB pension schemes.
Schemes can reduce their levy by certifying a contingent asset with the PPF. There are three types of contingent asset:
- Type A – group company guarantee
- Type B – charge over cash, UK real estate or securities
- Type C – letter of credit/bank guarantee
In order to be capable of certification, the contingent asset must meet strict requirements. These include a requirement that the contingent asset is executed using the PPF’s standard form documents. Contingent assets must be re-certified annually.
In January 2018, the PPF introduced new standard form documents for Type A and Type B contingent assets. Where an existing Type A or Type B contingent asset was entered into before 18 January 2018 and limits the liability of the guarantor/chargor by reference to either a fixed cap or the scheme’s liabilities subject to a fixed cap, the contingent asset must be re-executed if it is to be taken into account in calculating the scheme’s 2019/20 levy.
The PPF has written to trustees of schemes who certified a Type A or Type B contingent asset in the previous five levy years to advise them of this requirement. However, many employers may not be aware of the requirement. There is of course no obligation to re-execute any existing contingent asset. If it is not re-executed, an existing contingent asset will continue in force, but will not be taken into account in calculating the scheme’s PPF levy.
The main changes to the standard form documents for Type A and Type B contingent assets are:
- Changes to the way in which the liability of the guarantor/chargor can be capped.
- Changes to the amendment and release criteria to make it clear that the parties can make amendments by mutual agreement at any time.
- Addition of wording to clarify that the benefit of the contingent asset passes to any future trustees of the scheme.
A re-executed contingent asset will need to be submitted to the PPF with the same documents and confirmations as for a “new” contingent asset. However, the PPF will accept “refreshed” versions of existing legal opinions and of some guarantor strength reports/financial reviews.
All required online documents and confirmations must be submitted to the PPF by midnight on Sunday 31 March 2019. The accompanying hard copy documents must reach the PPF by 5pm on Monday 1 April 2019.
Should employers and trustees wish to re-execute an existing contingent asset, we would recommend that the re-execution process is started sooner rather than later to ensure that all the necessary documents etc. can be obtained in good time for this deadline.