The three types of contingent assets reduce schemes’ underfunding risk or insolvency risk.

The following types of contingent assets are recognised in the levy calculation, provided they satisfy the requirements of the determination and have been certified correctly and on time.

 

Type	Description
Type A	Parent or group company guarantees
Type B	Security over cash, UK real estate and securities
Type C	Letters of credit and bank guarantees

A type A contingent asset is the only way the probability of insolvency of a group company or another entity related to the scheme’s sponsoring employer can properly be taken into account in the levy calculation.

The formula for recognition of type A contingent assets has been amended from previous years to show more directly how insolvency risk is affected. The formula has been calibrated so that a percentage guarantee of at least 105 per cent funding on a s179 basis will result in a complete switch from employer insolvency probability to guarantor insolvency probability.

Type B and C contingent assets are added to scheme assets to determine the total assets for use in the underfunding risk calculation.

Certifying a contingent asset

Contingent assets should certified electronically on Exchange and the supporting documents sent to the PPF in hard copy by the data deadline in order to be taken into account in the levy calculation.

Contingent assets must also be recertified online each year. The PPF does not send reminders about this to schemes, so you should make sure that you recertify correctly and on time.

Guidance and standard form agreements

Certain acceptability criteria are in place for each form of contingent asset, in order to protect the Pension Protection Fund and levy payers against enforceability and valuation risks. In particular, a standard certificate must be completed for each contingent asset arrangement for it to be recognised for levy purposes. Each certificate also has accompanying notes which should be read before completion.

Contingent Asset Guidance  -  December 2009

Pension Protection Fund required form of Type A contingent asset - group company guarantee
Pension Protection Fund required form of Type B(i) contingent asset - security over cash
Pension Protection Fund required form of Type B(ii)EW  contingent asset - security over real estate (England & Wales)
Pension Protection Fund required form of Type B(ii)S contingent asset - security over real estate (Scotland)
Pension Protection Fund required form of Type B(ii)NI contingent asset - security over real estate (Northern Ireland)
Pension Protection Fund required form of Type B(iii) contingent asset - security over securities
Pension Protection Fund required form of Type C(i) contingent asset - letter of credit/bank guarantee (evergreen)
Pension Protection Fund required form of Type C(ii) contingent asset - letter of credit/bank guarantee (reducing balance)

IMPORTANT NOTE ON STANDARD DOCUMENTS:  It is the user’s responsibility to obtain legal advice before using the Pension Protection Fund’s standard documentation – you should not rely on the guidance note or on other documentation published by the Pension Protection Fund.  The Board accepts no responsibility to trustees/managers or any other person for the efficacy of the standard documentation or for any legal effects that such documentation may have if used in any circumstances.