Trustees have until midnight on 31 March 2016 to re-certify existing contingent assets and certify new contingent assets, but given the changes to this year’s guidance, can trustees be certain they are they sufficiently knowledgeable and skilled to meet the PPF’s requirements? Alison Hills,senior associate in the pensions & employee benefits team at Wedlake Bell explores.

The 2015/16 Guidance to the PPF Levy Determination contained significant changes in respect of Type A guarantees. These included the new concept of “realisable recovery”, whereby trustees were suddenly required to certify the precise amount they believe would be recovered from the guarantor upon insolvency.


Whilst this saw an additional duty imposed on trustees it was a logical development as the full value of a guarantee is not always realisable.

The 2016/17 guidance has seen further changes in relation to “realisably recovery”, this time with a focus on the due diligence to be carried out by trustees before providing this figure to the PPF. We discuss in this article how the new provisions will be of interest, and perhaps concern, to trustees.

So, what’s changed?

The guidance has been developed to include some helpful tips for trustees, such as the fact that trustees should not rely on group accounts where the guarantor is in a group of companies. However, the changes that may give rise to most concern, relate to the manner in which trustees are expected to act when gathering and analysing financial information relating to the employer(s):

  • trustees should consider whether they have ”sufficient experience on their board to know what information is required from the guarantor and to assess the information received”;
  • trustees are now expected to ”demonstrate that they have challenged assertions made by the guarantor, and where appropriate, obtained third party professional advice to support their view”; and
  • trustees ”need to have adequate financial information in order to make a meaningful assessment of the guarantor’s position

The challenge for trustee boards

Whilst the guidance states that ”the extent to which professional advice is necessary will depend on the circumstances”, in our view, this year’s guidance seems to be pushing trustees to act in the same manner as a professional covenant assessor (albeit in this context the covenant assessment only relates to the current position, in contrast with covenant assessments conducted during the valuation process which take a long-term view).

This year’s guidance seems to be pushing trustees to act in the same manner as a professional covenant assessor”

Whilst some trustee boards will be capable of exercising the functions as directed by the PPF, others may well lack either the relevant experience or the confidence in their ability to meet the standards set down by the PPF. Trustees should, of course, be robust, but many may struggle with the concept of challenging assertions provided to them by their sponsoring employer(s).

Those trustee boards which include finance directors (or their equivalent) may well have the expertise to help analyse the data, but the issue of conflict of interest is likely to plague such individual trustees, who may well conclude they are not able to take part, or only play a limited role, in the exercise due to the conflict.

It never rains…

Another addition to this year’s Guidance is the statement that the PPF ”strongly recommend[s] that trustees keep comprehensive records and evidence of the basis for their certification so that they can provide this at a later stage if required by the Board.” Whilst this reminder is a useful and important one, it has the potential to sound like a threat to trustee boards adding to the pressure on them to satisfy their duties to collect and analyse data using appropriate experience.

This has the potential to sound like a threat to trustee boards”

The Guidance, without expressly saying so, certainly seems to be pushing trustees towards obtaining independent covenant advice due to the increasingly onerous manner in which trustees are being expected to behave. Whilst the use of professional covenant advisers has become fairly mainstream in the world of final salary schemes, we suspect that the revisions to the 2016/17 Guidance will result in even more trustee boards succumbing to the pressure to instruct independent covenant reports to allay their fears that they may fall short of the stringent requirements of the PPF in relation to certification and recertification of contingent assets.

In the run up to 31 March 2016:

Four weeks and counting! There is now even greater pressure on trustee boards dealing with Type A contingent assets, particularly those who do not already instruct the services of an independent covenant assessor. Trustee boards must now consider whether they have the necessary expertise to collate and assess the information fed to them by the sponsoring employer(s) of their scheme and whether they can deal with the inherent conflicts likely to arise. And whatever they decide to do they need to start doing it quickly…

Alison Hills is senior associate in the pensions & employee benefits team at Wedlake Bell