Consultation on the third PPF Levy Triennium –2018/19 – Sackers’ response to consultation

Background

The PPF is consulting on how it intends to develop the PPF levy for the next three year period, or triennium, which starts in 2018/19.

In this response

Section 8 – Small schemes
Section 9 – Deficit-Reduction Contributions (DRCs)
Section 10 – Parental Guarantees (Type A contingent assets)
Section 11 – Good Scheme Governance

Section 8 – Small schemes

Question 9 –Do you have suggestions of improvements and simplifications that would particularly help smaller schemes?

Smaller schemes would benefit from clear guidance on when it would be possible for them to obtain
information which can be used for PPF purposes alongside that needed for the day to day running of the scheme. For example, whenever a valuation is obtained, they could ask the actuary to comment on the PPF position.

Section 9 – Deficit-Reduction Contributions (DRCs)

Question 10 – Do you support our proposals to amend the approach for calculating certifies DRC amounts? If so, which factors do you consider should be used to allocate schemes between the two options (a) and (b) (which could include applying a single option to all schemes)?

We support your proposal and agree that a simplified process would benefit all, and in particular smaller, schemes.

In our opinion option (b) (which would allow schemes to certify the contributions paid under a scheme’s recovery plan as the corresponding DRC to be certified for levy reduction purposes) is preferable. This would allow schemes to streamline procedures and reduce costs.

Further, we also support the proposal within option (b) to relax the certification requirements in certain cases, specifically where the certified DRC amount does not exceed £1 million and can be directly obtained from the scheme’s recovery plan. Again, this would particularly benefit smaller schemes as they would be able to meet the requirements (ie certification by a scheme trustee / sponsoring employer) without incurring additional costs.

Section 10 – Parental Guarantees (Type A contingent assets)

Question 11 – Do you have views on the proposed requirement for a guarantor strength report to be held by the trustees at the time of certification of Type A contingent assets? Do you have views on the proposed threshold of £100 million and are any alternatives we should consider?

We think the introduction of a guarantor report is sensible and consider that the proposed £100 million threshold for certification strikes a reasonable balance.

Question 12 – Do you have suggestions on what updates to the contingent asset guidance you would expect from us to help them to meet the guarantor report requirements?

Primarily the guidance needs to be clear. We anticipate that the PPF will explain what it expects the report to say and would suggest it mirrors the approach for ABCs. We would also suggest the PPF makes clear how trustees with guarantees which are below the threshold should approach and evidence the certification process.

In particular, the PPF should make clear who it expects to give the report. Certain of the issues which the PPF says it would expect to see addressed are legal; others fall within the remit of covenant advisers. We need the PPF to explain how it expects these aspects to fit together. For example, the legal advisers could provide legal statements on appropriate issues to the covenant advisers for them to factor in to the report.

We would also suggest providing trustees with the option of giving an updated, rather than a new, report in subsequent years, in line with the ABCs regime, to allow costs to be minimised where possible.

Question 14 – Do you support the proposal to allow trustees to certify different realisable recovery amounts for parental guarantees (Type A contingent assets) which have more than one guarantor?

Yes, we support this proposal.

Question 15 – Do you have any suggestions on the drafting of the current standard form Contingent Asset documentation? Do you foresee any practical difficulties in re-executing agreements? Do you have views on issues to consider in setting a timeframe for re-execution?

Drafting of the current standard form agreements

There are a couple of areas to highlight:

1.	Amendment and release criteria: the current drafting in the Type A guarantee is not as clear as it could be:
	1.1	Clause 9(d) states that consent cannot be unreasonably withheld if the trustees are satisfied that the proposals meet the criteria in paragraph 3 of Schedule 2;
	1.2	Paragraph 3 of Schedule 2 says that the trustees’ consent must not be unreasonably withheld if the proposals satisfy the formulae in that schedule; and
	1.3	Clause 9(e) provides that if the proposals satisfy the criteria in paragraph 3 of schedule 2, the trustees shall implement the proposals. This could be interpreted as meaning that if the formulae in that paragraph are satisfied, the trustees have to comply with the guarantor’s request even if they have other reasonable grounds for refusing consent.
	If the intention is that trustees should be able to withhold consent on reasonable grounds even if the formulae in paragraph 3 of Schedule 2, this should be clarified.
2.	Representations: there are no contractual consequences in the contingent asset documentation for misrepresentation. A misrepresentation would therefore only appear to be of value if, at the time the guarantee came to be called upon, the trustees were not able to recover amounts under it due to a misrepresentation and instead were able to recover damages based on that misrepresentation. As a result of the above, contingent asset providers may not be incentivised to either ensure the representation is true and correct or remedy the misrepresentation. Under banking documents, an unremedied misrepresentation typically gives the lender the right to accelerate the loan. This focuses the company’s mind on both ensuring that the representation is true and correct when given and means that the company is incentivised to remedy it if that is not the case. We are not advocating that a misrepresentation should result in an acceleration of any pension obligations but we suggest that thought is given to how to encourage contingent asset providers to remedy any misrepresentation – remedying a misrepresentation such that the trustee would be able to recover under the guarantee when called upon appears far preferable to making a claim for damages when the trustees find out that they are unable to recover under the guarantee due to a misrepresentation. We also query whether any real benefit is obtained by applying the representations to all subsidiaries of a guarantor when the trustees only have a claim against the guarantor. We have seen on occasion, particularly in relation to large corporate groups, that a parent company has refused to enter into the Type A guarantee because of this (and the daily repetition of those representations).

Practical difficulties in re-executing agreements

Timing

We expect that if the revised agreements are published in December 2017, it is unlikely to be practically possible for all contingent asset agreements to be re-executed and certified by 31 March 2018.

We do not believe that the age of the existing contingent asset document will be a deciding factor in the length of time it will take to re-execute the documentation and that the period for re-execution should apply to all contingent asset arrangements irrespective of age.

Type B contingent assets

In respect of Type B contingent assets, care should be taken not to prejudice security that has “hardened” for the purposes of insolvency legislation. When security is granted, there is a “hardening period” of 2 years. If the grantor of the security becomes insolvent within that 2 year period, the security may be vulnerable to challenge.

If the grantors of Type B contingent assets were required to execute new documents, this would trigger the commencement of new hardening periods which is not in the interests of trustees or the PPF.

If any amendments are required to be made to the Type B contingent asset documentation, we therefore suggest that these are implemented by way of an amendment deed or an amendment and restatement of the existing document.

However, if the effect of the amendments is that, in substance, new security is being granted, the amendment and/or restatement of existing documents may lead to the security being ineffective altogether.

Any amendments to the Type B contingent asset documentation should be very carefully considered in light of this.

PPF rules

Whatever approach is ultimately taken, Rule G.3 (Cancellation, amendment and replacement of Contingent Assets) of the Determination, the Contingent Asset Appendix and the Contingent Asset Guidance will need to be reviewed and potentially updated in order to ensure that they work with that approach.

Timeframe for re-execution

We suggest that a timeframe of six months is more appropriate. However, this could result in the documents being amended / re-executed after the deadline for certification so consideration needs to be given to how to deal with this in terms of any levy reduction.

Question 16 – Do you have views on the options we set out on how we might better reflect the level of risk of the structure of loan note ABCs in the levy?

Each ABC with a loan note is likely to be different. It is not necessarily the case that a loan note ABC is closer in nature to a Type A guarantee. In our experience, loan notes will often place restrictions on the loan note issuer, which do not exist in a Type A guarantee. For example, loan notes may contain restrictions on indebtedness, granting security, paying dividends and a requirement to maintain net assets in the loan issuer at a particular level, all of which are designed to seek to ensure that the issuer has sufficient funds to repay the loan note to the ABC vehicle. There are no equivalent provisions in a Type A guarantee.

In our view it would be difficult to apply a ‘one size fits all’ approach to this.

Section 11 – Good Scheme Governance

Question 17 – Do you have views and / or evidence on the extent to which good governance leads to a reduction in risk, of one or more of the factors allowed for in legislation, to the PPF? If so, are there particular aspects of governance that should be focused on for the purposes of awarding any levy discount?

While we are of the view that effective governance is valuable and that it should be recognised and rewarded, we think that it is important that good governance and tangible benefit to the PPF can be quantified. In our opinion, factors which are already included in the levy calculation, such as funding, risk-reduction measures, investment strategy and employer strength) are influenced, to an extent, by whether or not a scheme is well-governed.

However, raising governance standards is important. Given TPR’s current focus on governance through its 21^st century trustee campaign we think that it would make sense to link this proposal with the work TPR are doing. Changes to the legislative framework and / or in regulatory approach might make measurement of the impact of good governance on PPF-risk a more viable possibility in future.