The Pension Protection Fund will publish in October the conclusion of its consultation on making the certification of contingent assets more transparent, after around half a sample of type A contingent assets failed a stress test.
Lawyers have said that proposed changes could increase the cost and time spent by trustees getting guarantees for this type of asset.
Our advice to trustees when pursuing a type A contingent asset is to be realistic about what the group or company can guarantee
Ben Seth, Pitmans
The pensions lifeboat’s annual report said that after guidance to levy payers was issued in 2012-13, putting into place certification guarantees of contingent assets, a sample of contingent assets were tested for guarantor strength. Around half of the type A assets failed.
A PPF spokesperson said: “It is to be expected that many of those that we had identified from public data as questionable were rejected, however in addition a smaller number of those selected randomly were also rejected.”
The spokesperson added it was for this reason further proposals for change were made for the 2015-2016 levy.
In the consultation paper on the PPF levy for 2015 to 2018, there was a case for removing the recognition of type A contingent assets for future levy years.
However, the consultation stated this would “represent a significant departure from our policy of recognising risk-reduction measures” and could result in higher levies for those with a viable guarantor.
The PPF spokesperson added: “Whilst we recognise that many contingent assets are of real value, contributing to reducing risk to trustees and ourselves, we should only recognise those contingent assets where the reduction in risk they offer is consistent with the reduction in levy they would obtain.”
In the consultation paper issued in May the pensions lifeboat stated that the new scorecards, which assess parental strength or weakness may “reduce the incentive for putting contingent assets in place”.
The consultation explored other possibilities, which include:
Realisable recovery: As there are cases when trustees do not know the value that will be placed on contingent assets, “one possible solution is to require trustees always to certify a fixed amount which they are confident the guarantor could pay if called upon” known as the realisable recovery.
Trustee certification: A change to the wording of the trustee certification is being proposed. It will “take into account the requirement to certify the realisable recovery”.
Risk score: An appropriate method of adjusting the guarantor’s insolvency risk score has been investigated. This would take into account “the potential liability they are taking on by acting as a guarantor”.
The PPF spokesperson said the conclusions of the consultation will be published in early October.
Impact on trustees
The recertification of type A guarantees have been tightened in recent years, but this has led to increased expectations of trustees.
Jeremy Goodwin, partner at law firm Eversheds, said the PPF is trying to make a firm link between the additional security provided and the effect that has on the risk-based levy.
“The way that this guidance is put together and the relevant certificate, for example, provided by the trustees, will have a real impact in terms of costs and time and hassle,” he said.
“It is a little bit of 'death by a thousand cuts' at the moment, in terms of one set of guidance being given for one set of guarantees…The PPF needs to make sure this is it.”
Some schemes may have to seek the advice of external covenant assessors to check whether the guarantees are suitable.
Andy Lewis, senior associate at law firm Hogan Lovells, said: “Trustees may have found they needed increasingly sophisticated analysis in order to get comfortable giving the statements the PPF requires each March, and it’s clear this is still the direction of travel.”
Lewis added that proportionality is key for future guidance. “In the end, there is a cost-benefit decision associated with the recertification process,” he said.
Ben Seth, solicitor at law firm Pitmans, said the proposed changes may cause trustees to focus on whether the amount being certified is realistic.
“Our advice to trustees when pursuing a type A contingent asset is to be realistic about what the group or company can guarantee in a worst case scenario, because that is the time when the trustees will most likely need to call on the guarantee,” he said.
