Contingent Assets 2013/14: Revised guidance on certification of guarantor strength

Introduction

The PPF has revised its contingent assets guidance (the “Guidance”) for the levy year 2013/14 with the aim of giving schemes “a better steer” on what to consider when planning to use guarantees as contingent assets.

In this Alert:

• Key points
• Certification of guarantor strength
• Assessing guarantor strength
• Should the trustees’ assessment go further than the Certification requires?
• Recertification

Key points

• The revised Guidance clarifies that, in deciding whether they can give the Certification (see below), trustees should consider the impact that the scheme’s employer(s)’ insolvency would have on the guarantor.
• The PPF does not prescribe how the trustees’ should assess the strength of the guarantor, stating only that “proportionate steps” should be taken.

Certification of guarantor strength

Since the levy year 2012/13, trustees of schemes with Type A contingent assets1 must certify that they “have no reason to believe that each certified guarantor, as at the date of the certificate, could not meet its full commitment under the contingent asset as certified” (the “Certification”).2 This aims to ensure that the reduction in risk provided by the contingent asset justifies the corresponding reduction in the PPF levy.

The Certification is deliberately drafted in negative form to allow trustees to “be comfortable…rather than certain” that the guarantor could meet its full commitment under the guarantee if called upon to do so.

Assessing guarantor strength

Most changes to the Guidance are intended to improve its clarity. However, one significant change is that the PPF has confirmed that, in considering a guarantor’s strength, the trustees must recognise that the guarantee would only be likely to be called upon in the event of an insolvency of the pension scheme’s sponsoring employer. This aims to prevent the certification of assets where the failure of the scheme’s employer would render the guarantor unable to meet its commitment.

The PPF advises trustees to assess the guarantor by reference to its standalone position and, where it is part of a group, on a consolidated basis. However, trustees are warned to take particular care when considering resources which are only indirectly available to the guarantor. The PPF recommends trustees only seek guarantees from companies which are independently able to meet their commitment.

As for last year, trustees may determine how they wish to evaluate the guarantor’s financial capability. The Guidance only requires them to take “proportionate steps” and recognises that “what is proportionate will depend on their individual scheme’s circumstances and the size of the guarantee being given and the complexity of intra-group arrangements”. However, the PPF cautions that any assessment of a guarantor is likely to involve an “element of judgment” and “it would be appropriate for trustees to exercise a degree of prudence in assumptions about the value of businesses”.

Should the trustees’ assessment go further than the Certification requires?

While the PPF may align the two in the future, its assessment of a contingent asset is currently more stringent3 than that required of trustees in giving the Certification. In order to manage the risk that the PPF will take a different view of the adequacy of the guarantor and reject the contingent asset, the Guidance explains that trustees may either:

• certify the asset for a fixed sum for PPF levy purposes, at a value consistent with the amount they consider the guarantor to be worth; or
• carry out their analysis on the same basis as the PPF.

Recertification

Where trustees have previously carried out a review of the guarantor that is consistent with the Guidance, it will generally be acceptable for them to update that review by reference to what factors may have changed.

Change in guarantor strength

The PPF’s general position is that weakening contingent asset cover is an unacceptable change. However, “where a scheme has put in place a guarantee in all good faith, but subsequently, the guarantor’s position changes, the PPF appreciates that the scheme should not automatically suffer if they change their guarantors to keep in line with [its] requirements”. The Guidance notes that the PPF’s approach is likely to become stricter but, for now, it will take into account all the circumstances when making its decision, including the fact that the reduced cover is a “good faith” attempt to keep within the rules about guarantor strength.

Change in guarantor

The Guidance advises trustees that TPR would expect a covenant review to be undertaken in relation to any new guarantor and that they should therefore consider whether one is required.

Action

The Guidance now contains a lot of useful detail which will help with certification and may change the approach taken. Employers and trustees who have or are intending to use guarantees for PPF purposes should get in touch with their usual Sackers’ contact; an early start to this process is always advisable! The deadline for certification / re-certification of contingent assets is 5pm on Thursday 28 March 2013.4

1 Parent or group company guarantees
2 Please see our Alert:”Contingent assets 2012/13: is your guarantor good for the money?(12 January 2012)
3 The PPF takes into account the “underfunding risk” of the scheme, i.e. the potential size of a scheme’s claim on the PPF
4 For full details of the key dates and deadlines for the 2013/14 levy year, see our Alert: “2013/2014 PPF levy consultation” (20 November 2012)