Extra governance by pension scheme trustees on their choice of company guarantee is required to avoid being caught out by the Pensions Protection Fund’s (PPF) stringent ‘stressed and smoothed’ test, says Mercer. The consultancy is warning that failure to anticipate and plan for the PPF’s test could result in a submission being declined costing some companies millions more in levy.
The issue is rooted in the selection of so called “Type A” guarantees, whereby a company guarantees payments into a pension scheme, by the trustees. Following new guidance issued by the PPF in December 2011, and recently clarified, trustees are now required to confirm that the value of the guarantor company is higher than the value of the guarantee it provides to the pension scheme. On top of that, the PPF will also conduct its own test on the guarantor. This ‘stressed and smoothed’ test looks at the value of the guarantee in extreme economic circumstances and the guarantor’s ability to pay it.
“While the PPF’s guidance directs trustees to certify a guarantee based on recent information to assess the value of the guarantee,” said Mike Fenton, Mercer’s UK PPF Leader, “we know that the PPF will use the ‘stressed and smoothed’ approach to carry out its test. Given the economic volatility over recent years, it could well be that seemingly viable companies don’t meet the ‘stressed and smoothed’ test. The final decision rests on the results of the PPF’s test, and this will over ride the trustees’ certification, so the PPF might decline the guarantor, costing some companies millions in levy payments.”
“The deadline for this year’s submission will have passed by the time a scheme hears that their submission has been rejected by the PPF so the matter is very important,” said Mike Fenton. “We are advising that those schemes guaranteed by a company which can not cover the “stressed and smoothed” test consider putting a cap in place, covering the deficit up to a certain amount. The alternative might be that the whole submission is thrown out.”
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