Pensions Update: PPF Guarantees - don't lose their value

In brief

A number of defined benefit schemes have employer guarantees which reduce their PPF levies. These have to be certified by the end of March each year. This year's certificate contains an important change and extra work may be needed to make sure you will still benefit from the guarantee.  And, be warned, the guarantee's value in reducing your levy is now conditional on the PPF's assessment of the guarantor.

In more detail

By way of background, the Pension Protection Fund (PPF) sets and collects a levy each year from all defined benefit schemes. This levy is set, in part, on an assessment of the risk that the employer sponsoring the scheme will become insolvent. If the employer's duty to fund the scheme is backed by a suitable guarantee from a related company, the guarantor's insolvency risk can be used instead.

So far, so good. But some scheme employers have used companies that have a very good credit rating but almost no trading substance. To counteract that when guarantees are re-certified in March 2012 the trustees will need to confirm 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 [ guarantee ]".

What information do trustees need to certify this? The PPF expects trustees to be proportionate and reasonable. So bigger schemes may be expected to do more; schemes with significant shortfalls in funding should do more. But where the trustees have recently undertaken covenant review work on the guarantor for, say, a valuation or an apportionment exercise then that is likely to be sufficient. The review will certainly need to factor in the guarantor's liabilities under any other pension schemes in which it participates or to which it has given or has proposed to give a guarantee.

The PPF does not expect this information to be supplied to it but if they investigate whether the confirmation was properly given they may want to see it. As ever in pensions, good record keeping and audit trails are recommended.

If the PPF is not satisfied that a guarantee does reduce risk it may decide not to give it any value in the levy calculation for the scheme. If they decide it has some value but not as much as on the face of its terms they can give it a reduced value for levy calculation purposes. They will also perform their own testing of the guarantor's financial strength.

For further information or tailored advice please contact your usual Fieldfisher adviser or one of our pensions partners, Michael Calvert, Partner or David Gallagher, Partner.