PPF consultation on contingent assets will create 'winners and losers'

This follows a first consultation on its methodology for calculating the levy between the 2018-19 and 2020-21 periods, which took place in March 2017.

The highly technical paper focuses on Type A and Type B agreements. Type A agreements concern group company guarantees, while Type B contingent assets relate to charges.

If you’re signing up any form of uncapped guarantee, you’re writing a bit of a blank cheque

Stephen Scholefield, Pinsent Masons

In the 2017-18 levy year, there were 428 uses of Type A contingent assets, compared with 132 Type B and 14 Type C. Type C contingent assets take the form of bank guarantees, and are not due for a substantial update by the PPF.

The paper responds to concerns over the interpretation of wording in various standard form contingent asset agreements, concerning the cap placed on guarantor liability.

PPF redefines the cap

According to the paper, “the consultation draft moves the cap into a new capped recoveries clause to remove any doubt as to the intention of the parties; namely, that the fixed cap is not reduced as a result of any subsequent deficit top up payments made by the employer, the guarantor, or another guarantor”.

It added that allowing a fixed cap to erode before insolvency would create a risk that the guarantor makes payments that the employer is able to make. This means the cap could be completely eliminated on insolvency – and the scheme would be no better off from having the contingent asset.

The paper explained further: "If the guarantor makes payments that the employer is unable to make, there is a similar risk that the effect of the guarantor’s intervention is to defer the insolvency of the employer."

Matthew Brownnutt, senior associate at Mercer, said that confusion had arisen over the wording with regard to employers making payments into their scheme.

It “may have meant that those [payments] would be offset from any capped amount, whereas the intention is that that cap applies when there’s an insolvency within the scheme [or] when one of the employers becomes insolvent and the PPF or the trustees try and claim on their guarantee”, he said.

In this scenario, the guarantee offered would be effectively watered down by payments in advance, Brownnutt explained. The new wording is designed to avoid this.

The PPF has reviewed five interpretations of the fixed liability cap within the paper. It recommended an agreement that covers ongoing demands and insolvency demands, but one that attaches the fixed cap solely to insolvency demands and so does not erode.

Reconsider lifting a cap on certain contributions

Stephen Scholefield, partner at law firm Pinsent Masons, said: “It becomes quite difficult to articulate precisely what the ideal solution is.”

He said on face value, drawing the distinction between pre-insolvency and post-insolvency contributions was a sensible approach. He contended, however, that removing a cap from ongoing contributions could place a significant burden on employers.

“Saying that pre-insolvency contributions should be uncapped under the guarantee is probably something that lots of employers will struggle with, because if you’re signing up to any form of uncapped guarantee, you’re writing a bit of a blank cheque,” he said.

Hugh Gittins, partner at Eversheds Sutherland, said that the PPF needs to avoid creating “perverse incentives” with its fixed cap recommendation.

“Any payments that have been made before insolvency would not be taken into account at all and the full cap would continue to apply. There’s a risk… that could create incentives on the part of guarantors not to pay up until an insolvency has happened,” he added.

The consultation invites further study on multi-employer schemes, across partially segregated schemes and 'last man standing' schemes.

There will be winners and losers

The consultation comes on the back of revisions to the levy from the 2018-19 period onwards. Trustees that get a levy saving of £100,000 or more per year from having contingent assets in place will have to commission a guarantor strength report.

Rhidian Williams, partner at Quantum Advisory, said there were “some quite significant changes”, some of which would have a big impact on individual sponsors and schemes.

“There’ll be winners and losers… and some people could see some quite dramatic changes in their levy,” even though they might not feel their risk rating should change, he warned.