UK – New guidance by the UK Pension Protection Fund (PPF) on when it will permit the use of guarantees to offset levy payments risks deterring trustees from using guarantees in future, Aon Hewitt has warned.
Confirming previous estimates that the PPF levy would remain £630m (€775m) in 2013-14, the lifeboat scheme also announced changes to the levy multiplier and scaling factor that meant a smaller number of schemes would see their levy payments capped.
In the accompanying policy statement, chief executive Alan Rubenstein also touched on the use of various contingent assets – including parental guarantees – schemes could employ to offset any levy payments.
Rubenstein said the guidance had been relaxed “where appropriate”, such as allowing guarantees from banks with an A rating from ratings agencies.
However, he added that he made “no apology […] for the firm line” the PPF had taken with regards to parental guarantees.
“If we are to represent the interests of all levy payers, then the potentially very substantial reductions in levy that are offered in respect of parental guarantees need to be matched by the reduction in risk those schemes pose,” he said.
“Just as we expect trustees to have a valuation for any physical asset pledged to a scheme, they need to understand, and be able to justify, the value offered by a parental guarantee that they certify for levy purposes.”
Consultancy Aon Hewitt was pleased to see the detailed guidance on guarantor strength published by the PPF, but said it resulted in additional responsibility on trustees.
Partner Aidan O’Mahony said: “The PPF suggests trustees should consider the impact of an insolvency on items such as inter-company debts, intangible assets and investments in subsidiary companies – covenant advice could be required in many cases.”
O’Mahony’s colleague Milan Makhecha, principal consultant at Aon Hewitt, echoed the view that the additional information provided was helpful, but qualified his support.
“It could deter some trustees from putting guarantees in place, especially if they have any doubt they will be accepted by the PPF, which is not in the best interests of de-risking pension schemes in general,” he said.