The PPF Levy: learn the rules of the game and then play better than everyone else

Fraser Sparks has kindly agreed to contribute the following blog for Dalriada Trustees website. He is a partner at Stephenson Harwood with over ten years’ experience of advising employers and trustees on all aspects of pensions law.

The Board of the Pension Protection Fund has published for consultation its draft determination for the 2014/15 levy year.  For the most part, the processes and mechanisms for the levy calculation should be consistent with the current year.  However, one area where the PPF is continuing to tinker is the certificate trustees must provide in relation to group company guarantees.

Many schemes and employers have experienced the arbitrariness of the PPF failure score regime and have played the game of finding a group company (often one that hasn’t been used very much) with a stronger score than the scheme employers.  In some cases, this really was treated as a game and the group guarantee put in place was accepted by the trustees simply on the basis that it reduced the PPF levy, thereby helping the financial strength of the employer and, in turn, helping the scheme.

The PPF thought this was cheating.  PPF levies were being reduced even though the risk posed by a scheme to the PPF was not being similarly reduced.  That’s not an unreasonable point of view but some would argue that, if there was scope within the rules for reducing the levy, employers and schemes should be able to take full advantage.  And once it became clear a number of employers and schemes were doing this, there was a certain pressure on others to do the same in order to keep up.

After all, as Einstein said:  “You have to learn the rules of the game. And then you have to play better than anyone else.”

So, aware of the game that was being playing, the PPF added an extra requirement before a PPF levy reduction would be applied where a group guarantee had been put in place.  This requirement was for the scheme trustees to provide the following certificate:

“The Certifier [i.e. the trustees] has no reason to believe that each Certified Guarantor, as at the date of the certificate, could not meet its full commitment under the Contingent Asset as certified.”

The accompanying guidance from the PPF was, perhaps, a little confusing.  On the one hand, it appeared that this was not intended to be an onerous requirement necessitating detailed and expensive covenant advice.  On the other hand, however, the PPF wanted trustees to take this seriously and to make sure there was a reduction in risk commensurate to the reduction in the levy.  Of course, some trustees took the certificate at face value and felt under no obligation to go looking for problems that they were not already aware of.

Now, in its draft determination for the 2014/15 levy year, the PPF is suggesting that trustees provide the following confirmation:

“The Certifier, having made reasonable enquiry into the financial position of each certified guarantor, is reasonably satisfied that each certified guarantor, as at the date of the certificate, could meet its full commitment under the contingent asset as certified, having taken account of the likely impact of the immediate insolvency of all of the relevant employers.”

The PPF has said that this change is being made to meet concerns about the previous language, in particular, the phrase, “The trustees have no reason to believe…”. Apparently, it was felt that this wording could act as a block to certification where an isolated negative factor was known by the trustees but was outweighed by a number of positive factors.

In the PPF’s opinion, the revised wording should not affect the way in which trustees consider the value of the guaranteed amount or the assessment of the guarantor (outside of the issue highlighted above).  According to the PPF, “trustees need to be comfortable (rather than certain) that the guarantor could meet its full commitment under the guarantee if called upon to do so.”

Changing the certification from a negative statement to a positive statement is a significant change in language but, if trustees have been taking the approach previously suggested by the PPF, it seems unlikely they will need to do anything different going forwards.  For those trustees who had been taking a more literal approach to the wording of the certificate, there would not seem to be any escape now from investigating the financial strength of the guarantor and, in particular, how the guarantor would be affected by the insolvency of the scheme’s employers.

Maybe the PPF has blown the whistle and called a halt to the game … time will tell if it works out like that!

Fraser Sparks
Stephenson Harwood LLP