Contingent assets can be of fantastic benefit to trustees and employers involved with defined benefit occupational pension schemes, particularly when cash is tight and employers wish to avoid the risk of over-funding a scheme.
On the one hand the trustees receive comfort in relation to the security being offered to them, and on the other hand the employer often benefits from a more flexible recovery plan/schedule of contributions. The contingent asset will only be triggered upon a certain event occurring, such as the insolvency of the sponsoring employer, or a failure by that employer to pay contributions due to the scheme.
Background to the PPF
The PPF is a lifeboat scheme set up under statute to support members (and their dependants) whose employers become insolvent and can no longer support their pension schemes. It is funded by way of a levy payable by defined benefit pension schemes which is broadly calculated by reference to the size of the deficit in the scheme and the risk of insolvency posed by the employer(s).
Another benefit for all involved can be a reduction to the PPF levy payable in relation to the scheme.
Where it is deemed that the Scheme is less underfunded as a result of taking the contingent asset into account the PPF rewards the parties for reducing the risk of the scheme entering the PPF by reducing the levy payment due. In order to benefit from this the security being provided must be:
- documented in a particular form (a PPF-compliant form) and comply with the PPF Rules in place for the year (the Rules are updated annually, usually in December); and
- registered and certified with the PPF by 31 March 2020.
PPF compliant security can fall into one of three different categories:
Type A: Guarantees from a parent or group company
Type B: Cash, UK real estate and securities
Type C: Letters of credit and bank guarantees
For any schemes which have:
- a sponsoring employer which is seeking to improve its cashflow by limiting its cash contributions to the scheme;
- a contingent asset which is not PPF compliant, but where the PPF levy is significant and there is interest in reducing future levies; or
- a PPF contingent asset
and a sponsoring employer which has assets over which it is prepared to offer the Trustees security, or a strong parent/group company we would urge you to consider whether putting a PPF levy in place would be of benefit.
Indeed, NOW is the time to take action- the deadline for Trustees of DB occupational pension schemes to certify their PPF contingent asset(s) is 5pm on 31 March 2020. Any attempts to set up a new contingent asset or recertify an existing PPF compliant contingent asset should be dealt with as a matter of urgency.
We are experts in this area and have guided many of our clients through the process, and prepared the necessary documentation. We also keep our clients updated with regards to any changes to the PPF’s requirements, for example, last year saw the introduction of a new requirement for trustees to obtain a guarantor strength report from a professional adviser where the certification of a Type A group company would result in a levy saving of at least £100,000. Along with Wedlake Bell’s expert Banking and Commercial Property teams we have helped many sponsoring employers save significant sums of money by putting in place:
- parent company guarantees;
- security over the offices owned by a group company;
- security over cash held in a separate account; and
- security over Escrow; and
- security over cheese (we joke not!) – this was an asset of the sponsoring employer.
If you’d like assistance with setting up a new contingent asset or ensuring an existing contingent asset is working as efficiently as it can for you please do get in touch.