Contingent assets 2012/13: is your guarantor good for the money?

Introduction

The PPF has strengthened the certification requirements for Type A contingent assets1 in response to concerns that, under the previous arrangements, some guarantors did not have the financial resources to meet their guarantee obligations.

Key points

Trustees of schemes with Type A contingent assets must certify that they “have no reason to believe that each guarantor, as at the date of the certificate, could not meet its full commitment under the contingent asset” (the “Certification”).
The PPF expects trustees to take “proportionate and reasonable steps” to reassure themselves as to whether the guarantor has sufficient value as a business.
The Certification is drafted in negative form to avoid trustees having to confirm that they are absolutely certain of the guarantor’s ability to meet its obligations.

Background

The PPF levy is divided into two parts:

the scheme-based levy, which takes account of a scheme’s liabilities relating to its members; and
the risk-based levy, which takes account of a scheme’s funding level and the risk of its sponsoring employer becoming insolvent.

There are a number of steps that can be taken to reduce the risk-based element of the levy including making deficit reduction contributions, investment de-risking, and the use of contingent assets.

Certification of guarantor strength

PPF research indicated that some schemes have guarantors who would not be able to meet their obligations under a contingent asset if called upon to do so. This meant that the risk reduction provided by the asset was of limited or no value to the PPF, and the corresponding reduction in the PPF levy was unjustified.

To address this, for the 2012/13 levy year onwards, trustees must give the Certification in relation to both new and existing contingent assets. It is open to trustees to give the Certification in respect of:

a sum which is lower than the full amount guaranteed; and
some but not all of the guarantors, i.e. only those who the trustees consider able to meet their obligations.

The PPF has done this for two reasons. First, it recognises that it can be useful for trustees to agree guarantees for a higher sum than they know the guarantor(s) could meet. This might, for example, make a group company guarantor more likely to support a scheme’s participating employers in order to avoid the guarantee being called upon.

Second, it acknowledges that it could cause difficulties if employers and trustees were required to consider amending the guarantee every year to take into account the extent to which the guarantor(s) could offer support.

Assessing the guarantee: PPF guidance

The trustees, having taken appropriate advice, need to satisfy themselves as to the suitability of the guarantor. The PPF suggests that the trustees consider the value of the guarantee for levy purposes as well as available information on the guarantor’s position2, such as:

its most recent accounts;
its ability to borrow money;
making enquiries of its financial director and obtaining an assurance as to the strength of the guarantor compared to the sum guaranteed.

As the focus is on the guarantor’s position at the date of the certificate, trustees are not required to take into account the likelihood of future events. However if trustees are aware of any particular circumstances as at the date of the certificate indicating that the insolvency of an employer is imminent, they should have regard to them when considering the guarantor’s position.

The PPF states that a covenant review will not normally be required but might be appropriate if the information obtained causes the trustees concern.

PPF assessment

The provision of the Certification does not mean that the contingent asset will automatically be accepted. The PPF will perform its own assessment of the guarantor’s strength.

If the PPF considers the guarantor to be of limited strength, the trustees must provide further evidence supporting their conclusion that the contingent asset should be recognised. The PPF expects that it would make any request for further information during the first part of the summer during the relevant levy year.

Action

Employers and trustees who have or are intending to use guarantees for PPF purposes should get in touch with their usual Sackers contact as soon as possible as the certification process must be completed by 30 March 2012.

1 Parent or group company guarantees
2 The Certification must be given on the basis of information actually received by the trustees, not on the basis of attempts to obtain the information.