Is your Scheme ready for certification by 31 March 2017?
The 31 March 2017 deadline for trustees to certify/re-certify contingent assets for the 2017/2018 PPF levy year is fast approaching and the process for guarantee certification is changing. Using a Group company guarantee (known as a Type A contingent asset) is a common way to achieve a potentially substantial levy reduction, by substituting the Experian failure score for the Employer with that of the Guarantor. However, The Pension Protection Fund is increasingly scrutinising and indeed rejecting guarantee submissions.
Deloitte has considerable experience in assessing the strength of Guarantors and whether they may withstand scrutiny from the PPF. Our team incorporates business review and insolvency experts giving us the capability to undertake robust credit analysis, assess the theoretical impact of the Employer’s insolvency on the Guarantor, and credibly estimate potential insolvency outcomes.
The key observations from our work in this area are:
- The change of the PPF’s insolvency risk provider from D&B to Experian has resulted in large swings in PPF levy for some schemes. Introducing a PPF-compliant guarantee from a stronger group company can be an effective way to mitigate large increases in the levy.
- It is important to ensure the amount certified is fully supported by evidence. Trustees are now required to certify a fixed cash sum, known as the Realisable Recovery. The PPF will expect Trustees to hold appropriate documentation demonstrating that the guarantor could pay the Realisable Recovery in the event of the Employer’s insolvency, and may reject guarantees outright where it believes there is insufficient evidence that the guarantor could meet the Realisable Recovery in full.
- Employer covenant reviews are rarely sufficient evidence for this purpose. Documentation held by the Trustee on the performance of the employer (such as a standard employer covenant assessment) is unlikely to be sufficient, given the focus of guarantee certification is on the strength of the Guarantor assuming the Employer is in insolvency.
- Demonstrating that the guarantee provides the Scheme with access to incremental value can be challenging. For example, does the Trustee hold a clear group structure chart clearly indicating the key trading/asset holding entities and group debt structure? Has the Trustee considered the impact of any intercompany balances between the Guarantor and the Employer (and subsidiaries)?
- Third party insolvency analysis is advisable when relying on an insolvency return from the Guarantor to cover the guarantee. It may be possible to demonstrate a guarantee would be recoverable in a scenario even where the insolvency of the Employer would also mean the Guarantor would be insolvent, but third party insolvency analysis would typically be required to support this.
While clearly there are a number of pitfalls that can result in guarantees being rejected, there are also opportunities for employers with low insolvency risk scores to reduce the PPF levy through appropriate use of guarantees. We provide tailored support, ranging from a quick sense-check of existing documentation through to reviewing the employer group structure and recommending an optimal PPF guarantee strategy.
Deloitte is also experienced in helping Employers to optimise their PPF levy position more generally. This includes analysis of data held by Experian and consideration of a wide range of mechanisms within the PPF levy framework that can be used to reduce the levy due.
We would be delighted to discuss how we can help you achieve maximum levy reduction through appropriate use of contingent assets – please do not hesitate to get in touch with us (click our names below for contact details).