Anthea Whitton, partner at law firm Eversheds Sutherland, explains how contingent assets can benefit sponsoring employers and scheme trustees.
Key points
Contingent assets can benefit sponsoring employers and trustees by reducing contribution obligations, increasing scheme security and reducing the PPF levy
It takes time to put a contingent asset in place – plan well in advance
Contingent assets used to reduce the PPF levy must be recertified each year
One way to address this is for the employer to offer the trustees a contingent asset, which is an asset that will only be called on if one or more specified events take place.
There are three main types of contingent assets, as classified by the Pension Protection Fund:
• A group company agrees to stand in for the sponsoring employer by guaranteeing the employer’s liabilities if it is unable to meet them; or
• A sponsoring employer, or another group company, provides the scheme with security over assets – such as a charge over cash, securities or real estate – to be called on if the sponsoring employer does not meet its obligations to the scheme; or
• Letters of credit or bank guarantees are secured in favour of the trustees. These pay out, for example, on failure to pay contributions or insolvency.
If you want to rely on a contingent asset, plan ahead, because they take time to negotiate
How can contingent assets help?
The PPF recognises contingent assets in calculating the risk-based part of the annual PPF levy.
A suitable contingent asset will protect the scheme in the case of employer insolvency, reducing the likelihood the scheme will fall into the PPF and therefore reducing the levy amount.
To be recognised for risk-based levy purposes, contingent assets must be put in place using PPF standard form documents.
Non-PPF-style contingent assets can still be used, but can only be taken into account in relation to scheme funding – not the PPF levy.
The Pensions Regulator also recognises contingent assets that meet certain criteria as a support to the scheme’s technical provisions and recovery plan. An appropriate contingent asset can reduce the sponsor’s immediate payment obligations.
There are a few things trustees should look out for when it comes to contingent assets. First, they will need to take steps to satisfy themselves as to the financial strength of the guarantor or value of the security.
Second, they will need to assess what claims over the guarantor or security might rank ahead of the trustee’s claim.
They must also understand what triggers payment and what triggers the release of the contingent asset.
For the arrangement to be legally enforceable, the company giving the guarantee or security must demonstrate that it benefits from supporting the pension scheme.
Contingent assets used for PPF purposes must be submitted via the regulator’s exchange system, and the PPF must be supplied with a range of documents relating to the form and value of the contingent asset, including a legal opinion on its enforceability and limitations.
Plan ahead
If you want to rely on a contingent asset, plan ahead, because they take time to negotiate and put in place.
If a non-UK company is providing the contingent asset this takes yet more time, and legal opinions are needed from both the UK and non-UK country.
Contingent assets used for PPF purposes have to be recertified every year. Again, make sure you plan for this in good time.
Employers and trustees of schemes that already benefit from contingent assets should be aware the PPF plans to require that existing contingent assets of the first two types are amended or re-executed on a new standard form in order to receive levy recognition.
Fresh legal opinions and board resolutions might need to be obtained.
The PPF is keen for the change to happen as soon as possible, ideally by March 31 2018, and the final proposals are expected in the next couple of months.
Anthea Whitton is a partner at law firm Eversheds Sutherland
