UK: PPF Contingent Assets: Play By The Rules, Or Pay The Price

Last Updated: 22 June 2015
Article by Kris Weber

A recent determination of the PPF Ombudsman has reiterated the importance, when registering a PPF-compliant contingent asset, to follow any procedural requirements of the PPF to the letter. Those who fail to do so, risk coming unstuck with potentially significant consequences...

Background

The Action for Children Pension Fund is a perfectly normal, final salary pension scheme. Its trustees, in accordance with what is now everyday good practice, sought contingent security over an asset of the sponsoring employer in order to further enhance the security of the employer's covenant in favour of the Scheme. A standard-form charge over real estate owned by the sponsor was granted in favour of the Scheme, and subsequently varied with the parties' consent. Certification of that charge was given in the normal way by the Scheme's legal advisers. And everybody lived happily ever after.

Or did they?

There, however, the fairytale ends. For here, for the sponsoring employer at least, there was no fairytale ending. For it turns out that there were two minor procedural errors in the documents submitted to the PPF in support of the contingent asset agreement:

  • The legal opinion was required to confirm that the real estate, over which the charge in the PPF's favour was being created, was subject to no prior or pari passu charges in favour of another security-holder.
  • The legal opinion given shortly before the PPF's 31 March deadline for submission was provided, and dated, before the revised charge was registered at Companies House.

A game of consequences

As is the PPF's normal practice, levy invoices are not issued to schemes until some time after the deadline for contingent asset submissions, i.e. well into the year to which they relate. In other words, by the time that anyone unfortunate enough not to have ticked every single one of the PPF's boxes finds out that a box remains unticked, it is too late to do anything about it. And that, of course, was precisely what happened here. The Scheme's levy invoice failed to recognise the contingent security that had been granted in favour of the Scheme, and the levy was accordingly higher – perhaps by a considerable margin – than it would have been, had the contingent asset been recognised as everyone intended.

The trustees of the Scheme appealed (in light of what one might assume to be the considerable sums at stake) to the PPF's Reconsideration Committee. It found in favour of the PPF. The trustees appealed again, this time to the PPF Ombudsman. He too found in favour of the PPF. His determination was to uphold the outcome that, by reason of the Scheme's non-compliance with the various formalities required for registration and recognition of a contingent asset, its existence could not properly be taken into account when setting the Scheme's levy for the levy year in question.

Wedlake Bell comment

In one sense a lot of sympathy must go out to the Scheme in question and its employer, which failed on two technicalities to obtain a levy reduction that it could clearly have properly obtained had the paperwork been in order. Equally, it is harder to feel sympathy given that the pensions industry knows – and is regularly reminded – that the PPF expects its requirements to be followed, to the letter, in order for contingent assets to be recognised and levy reductions obtained.

Clearly the omission of the words in question from the legal opinion that supported the contingent asset, had no bearing whatsoever on the actual effect and extent of that contingent security. Nor did the fact that the legal opinion pre-dated the registration of that security at Companies House, affect the additional security that it actually gave the Scheme in terms of sponsoring employer covenant. The extra security was in place at all material times, the additional benefit (in the sense of lower employer default risk) flowed through to the PPF at all material times, so why should the full levy still have to be paid?

But that's really to miss the point. The PPF has to set out a level playing field for all participants. Particularly given the significant sums of money at stake, it is imperative that everybody knows what the rules are and sticks to them. If the PPF allows one technical oversight to be ignored, that is potentially to the detriment of all those who have strived to make 110% sure that every single box which should be ticked, is indeed ticked. It would also open questions as to where one should draw the line in assessing the subjective materiality of any breach of the PPF's procedural requirements.

The message really needs to be, make absolutely sure that you do everything the PPF need you to do. There are strong policy reasons in support of strict compliance with its requirements, and those who choose not to comply with them – whether or not intentionally, or with any motive in mind – do so at their peril.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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