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Contingent asset agreements - start getting ready for levy year 2007/08
The Pension Protection Fund's (PPF) guidance for the next levy year (2007/08) was issued in September and is available on its website at www.pensionprotectionfund.org.uk. The guidance covers existing contingent asset agreements which will require re-certification to be effective for levy period 2007/08 and new contingent asset arrangements. Experience has shown that these arrangements require a high degree of compliance (see below) and always take longer to complete than anticipated, and it is advisable to start planning ahead in order to be ready for 31 March.
The guidance splits out the various types of contingent asset in to three types: A, B and C (not to be confused with the Pension Regulator's guidance on clearance events, which refers to type A, B and C events). Type A contingent assets are parental guarantees; type B contingent assets are those involving security (ie security over land, securities and bank accounts); and type C contingent assets are letters of credit and bank guarantees. If the contingent asset is not within one of these types it will fail to qualify as a contingent asset recognised by the PPF and, accordingly, no reduction in the risk-based levy may be obtained in respect of it.
The guidance operates on three levels: guidance that applies to existing contingent asset agreements; guidance that applies to all new contingent asset agreements; and specific guidance in relation to particular types of contingent asset. For the purposes of this article, I will provide an overview of the first two elements.
New Contingent Asset Arrangements
The key requirements are:
- the contingent asset agreement must follow the standard form;
- the contingent assets must be conferred upon the trustees in the circumstances specified (eg insolvency);
- the trustees must certify to the PPF that the contingent asset agreement meets the requirements specified in the certificate;
- the trustees must obtain and provide a copy of a legal opinion basically stating that the agreement meets the PPF's requirements;
- the agreement must cover the liabilities of all the employers participating in the relevant scheme who are associated (within the meaning of s435 of the Insolvency Act 1986) with the person who is providing the asset; and
- in certain circumstances, the provider of the asset must, for reasons of enforceability, be domiciled in an OECD state or be regulated by the FSA or equivalent EU regulator.
Existing contingent assets
The basic requirement is that the trustees will need to re-certify previously PPF-compliant contingent asset agreements. Therefore, it is not sufficient to satisfy the PPF's requirements once, but they must be re-certified by the trustees each year. The guidance for certificates that need to be completed for validation in 2007/08 is due to be published later this month. The indications are that it will not be necessary to obtain a new legal opinion to the effect that the arrangements meet the PPF's requirements and that existing certificates will remain good unless they have been amended. In relation to type B contingent assets (eg security over land) there are additional requirements relating to valuations and certificates of title.
Mark Catchpole is head of pensions at Stephenson Harwood. E-mail mark.catchpole@shlegal.com.