UK - Pension schemes using parental guarantees as a contingent asset could face an increased Pension Protection Fund (PPF) levy if they fail to re-certify the guarantee before the end of March, Lane Clark & Peacock (LCP) has warned.

The firm of actuaries and consultants highlighted changes to the PPF guidance on contingent assets, which was published alongside the organisation's 2008/09 determination notice.

LCP is recommending any schemes with a Type A contingent asset, such as parental/group company guarantee, to check the updated guidance as a "nuance of policy" could have a dramatic affect, if the level of funding needed to meet the requirements of a Type A guarantee were to change.

David Everett, head of pensions research at LCP, said: "The PPF is now in effect saying that for some types of contingent asset you need to demonstrate 121% funding in order to take full advantage of the guarantor's better Dun & Bradstreet (D&B) failure score, while with others only 105% is needed."

The changes relate to the PPF's decision to increase the funding level at which schemes are exempt from the risk-based levy from 125% to 140%, while the level of funding needed to pay a reduced levy will rise from 104% to 120%. (See earlier story: PPF dismisses opposition to funding level increases)

In this updated guidance, the PPF stated following comments on the draft levy determination, it has decided to replace the existing formulae - which ensures in the levy calculation a 'Type A' guarantee offering at least 105% funding on a section 179 basis would cause a complete "risk switch" from employer insolvency risk to guarantor insolvency risk.
Instead, the PPF said it is introducing a "considerably more straightforward" formula, although it claimed this would continue to ensure a "percentage guarantee" of at least 105% would continue to cause a complete "risk switch".

It also warned any schemes which already have a Type A contingent asset in place "are encouraged to consider the effect that contingent asset will have under the revised rules".

That said, the PPF confirmed it would continue to recognise arrangements put in place in previous years, using the relevant versions of the standard documentation, providing trustees re-certify the arrangement to the PPF before midnight on 31 March 2008.

It added: "The Board's intention is that once a scheme has put a contingent asset in place, in accordance with the Board's policies in any given year, a scheme will continue to receive credit for that arrangement in the levy calculation in perpetuity, assuming the arrangement continues to meet the Board's requirements, and is re-certified each year."

However, Everett argued while LCP "can see the logic of the new approach, the timing could not have been more disastrous" as schemes will have already taken forward their contingent asset discussions on the basis that the PPF would have kept the treatment of the assets in line with its previous guidance.

"Those schemes affected must now race to adjust their capping criteria and re-certify their contingent assets before the 31st March 2008 deadline.  If they do not, they could be in for a nasty surprise when next year's levy bill arrives," he concluded.

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