In our stop press published in November 2011, we highlighted a newly proposed certification requirement from the Pension Protection Fund (PPF) in relation to Type A contingent asset guarantees. The PPF published its ‘Guidance in relation to contingent assets’ in mid-December 2011 (the Guidance).
Norton Rose LLP responded to the initial consultation document “The 2012/2013 Pension Protection Levy” (the Consultation), expressing concerns that the new requirement for trustees to certify the ability of guarantors to pay amounts owed under a Type A guarantee on an annual basis would be a difficult hurdle for trustees to overcome.
The Guidance contains a revised certification requirement that trustees “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”. This form of certification is intended to be less onerous for trustees than the original Consultation proposal that “…guarantors could be expected to meet their full commitment if called upon to do so at the date of the certificate”.
This certification requirement will apply to both new and existing Type A guarantees and must be complied with for the PPF to recognise the guarantee in calculation of the PPF risk-based levy.
The PPF states in the guidance that a covenant review will not be required in most circumstances. However, the onus remains on trustees to take such ‘proportionate and reasonable steps’ to ensure that assets have intrinsic value to satisfy themselves that the certification can properly be made.
The PPF recommends that, as a minimum, trustees should consider:
- the maximum liability under the guarantee;
- the funding position of the scheme;
- the accounts to assess net assets and profitability;
- whether guarantor can borrow money;
- obtaining information from a guarantor’s directors to support public documents; and
- the liquidity of a guarantor’s assets.
Notwithstanding the PPF’s assertion that the revised test should be easier for trustees to satisfy, we consider this is potentially onerous for trustees, who could ultimately face criminal sanction under s195 of the Pensions Act 2004, if they are held to have knowingly or recklessly provided misleading information. We will be issuing a briefing providing more details on this topic by the end of February 2012.
In the meantime, trustees who are intending to certify or re-certify a Type A guarantee by this year’s deadline of 5pm on 30 March 2012, should consider what steps may be required to put the trustees in a position to make the requisite certification, and what information may be required from scheme employers.
To view stop press as a pdf