As the Tui pension scheme works ahead of time to certify its contingent asset and reduce its PPF levy, Ian Smith and Anna Lyudvig analyse the process
Schemes including Tui are working hard to cut the cost of their annual risk-based levy to the Pension Protection Fund (PPF) by certifying their contingent asset agreements.
There are three types of assets employers can give schemes to increase their security and reduce the levy they pay to the PPF:
Guarantees and undertakings provided by the parent or group company (type A);
Security over cash, property, equities and bonds (type B);
Letters of credit or bank guarantees (type C).
All contingent deals (see box right) need to be certified using the Pensions Regulator’s Exchange system by 5pm on March 30 for the chance of securing a lower risk-based levy.
Due to changes around the certification process, and a tightening to the PPF's judging of what merits a reduced levy, schemes have been urged to reconsider these assets.
If necessary, they should re-open negotiations with their sponsoring employer to agree an asset that does qualify under the new criteria, in order to reduce their levy bill.
Tui group pensions manager Nick Duncan said the scheme was working on certifying its contingent asset at the moment.
Last year, the employer offered its Thomson and First Choice brands as collateral against its deficit.
“It is fairly early days,” he said. “It is on our radar and we are going through it.”
Duncan added it was too premature in the process to work out what the saving to the scheme’s risk-based levy would be as a result of the contingent asset arrangement.
But the reduction was one of the key incentives for the scheme and employer to complete the deal, he added.
He said: “It is certainly something that was one of the benefits.”
This year’s key changes
There are four main changes to the process this year:
A wider definition of guarantor to encompass pre-existing legal or commercial agreements;
Trustees will now need to certify they “have no reason to believe” each guarantor could not meet its “full commitment under the contingent asset”, for type A assets;
Schemes will be able to enter the value of an asset they estimate for levy purposes rather than its market value, for type A assets;
In multi-employer schemes, only employers with a higher levy rate than the guarantor’s will substitute their rate. Those with a lower rate will be unchanged.
Negotiations may need to be re-opened with the employer to find a guarantee that does qualify for a reduction
Chris Collins, chief policy adviser at the PPF, said the lifeboat fund had tightened its evaluation of the value of contingent assets and had introuced the third change above to allow schemes wiggle room in the value they put on these assets.
He said: "There was a feeling the contingent asset might have a fair amount of value but not as much value as reflected in the levy payment."
Every single scheme that has a contingent asset in place should give thought to how the changes affect them, Collins added.
"Others will want to get a copy of the accounts and perhaps talk to their accountant about what the deficit is on the scheme," he said.
The change for multi-employer schemes was "quite a relaxation", he said, bringing in some schemes that formerly had not been able to benefit from reductions in the past.
Where, before, one employer out of a set could see its levy rise once the guarantee had been factored in, he added, now the change will only kick in for those sponsors with a higher levy rate.
Scheme specifics
Simon Kew, a senior manager at Jackal Advisory, said the length of the certification process depended on the nature of the asset.
He said: “A huge multi-national company with guarantees being given by several corporate entities would be more complex and time-consuming than a UK-based employer with a simple, enforceable pledge from a UK parent.”
The schemes that will have “major issues”, he added, are those that have received a parental guarantee in the past via a holding company, which in itself has no ability to support the guarantee.
“This scenario may no longer qualify for the reduction in levy,” Kew added.
“So negotiations may need to be reopened with the employer to find a guarantee that does qualify for a reduction – if that is something the trustees and employer have a desire to do.”
[SPVs] are the more efficient way of simultaneously providing the cash needed to fund the deficit and giving the scheme security
John O’Brien, principal in Mercer’s financial strategy group, said the use of special purpose vehicles was one of the key developments among schemes and sponsors.
Typically, scheme trustees will become partners of the new vehicle. The company would pour in money with the interest providing an income to the scheme.
He said: “Around 30-40 of these deals have been done and this is the more efficient way of simultaneously providing the cash needed to fund the deficit and giving the trustee of the scheme security.
"Companies like Tui used brands, so the value of the brand has been ringfenced and royalties were charged to the company that uses the brand over time.
"The royalties became the payments that go into the scheme. In case of a failure to pay, the scheme would have a security.”
