It was no surprise the Pensions Regulator’s latest DB code recognised the potential value to both schemes and sponsors of contingent assets where trustees agree "to accept more risk than can be supported by their available employer covenant”.
Asset-backed contributions get a few paragraphs of their own in the code too, and are acknowledged as having the potential to “improve a scheme’s security by providing access to valuable assets or cash flow which were previously out of reach”.
Neither of these funding support mechanisms escapes, however, without some cautionary words from the regulator on the need for trustees to unpack and understand the true value and complexities of what may be on offer.
Of course, as well as helping to reduce scheme funding risks, having an arrangement such as a parent guarantee or ABC in place may also have a positive impact on the amount of Pension Protection Fund levy that has to be paid.
This, in turn, means the PPF needs to be satisfied with the value that can be placed on it. The deadline for schemes to meet the annual certification requirements is now less than 10 weeks away.
Asset-backed contributions get a few paragraphs of their own in the code too, and are acknowledged as having the potential to “improve a scheme’s security by providing access to valuable assets or cash flow which were previously out of reach”.
Neither of these funding support mechanisms escapes, however, without some cautionary words from the regulator on the need for trustees to unpack and understand the true value and complexities of what may be on offer.
Of course, as well as helping to reduce scheme funding risks, having an arrangement such as a parent guarantee or ABC in place may also have a positive impact on the amount of Pension Protection Fund levy that has to be paid.
This, in turn, means the PPF needs to be satisfied with the value that can be placed on it. The deadline for schemes to meet the annual certification requirements is now less than two months away.
Source: PPF
The change from ratings provider D&B to Experian has inevitably produced winners and losers among levy-payers compared with previous years, although it is clear the overall effect ought to be a more bespoke mapping of schemes’ risk to the PPF.
A higher bar?
What also seems pretty clear is that for this levy year, the process of certification is going to be somewhat more demanding in respect of both contingent assets and ABCs – though the PPF would probably claim that, in some respects, the height of the bar has simply been made more explicit rather than raised.
It is difficult to escape the conclusion that the process is now likely to require more of their time and attention
It stresses in its latest policy statement for example, that in its view, certification of “realisable recovery” reflects “what trustees should already have been doing in previous levy years when assessing the strength of a guarantor”.
Trustees should bear in mind that they could still be asked to submit or explain the basis of their decisions in more detail.
The PPF makes clear in its guidance that it expects to “select a proportion of contingent assets for detailed review” and has also “retained the discretion to require the trustee to provide the full documentation and details relating to any ABC arrangement in respect of which an ABC certificate has already been submitted”.
From the PPF’s perspective, the changes are intended to ensure the value of the arrangement being certified is accurately reflected in the levy calculation.
But from a trustee’s viewpoint, it is difficult to escape the conclusion that the process is now likely to require more of their time and attention.
Tony Hobman is chair at covenant advice provider Lincoln Pensions
