The credit crunch is biting ... your scheme's sponsoring employer is facing insolvency ... what can the trustees and advisors do before the insolvency to lay the foundations for a smooth Pension Protection Fund (PPF) assessment period?

What is a PPF assessment period?

If the sponsoring employer becomes insolvent, the Scheme will probably enter a PPF assessment period. During the assessment period, the scheme will be evaluated to determine whether or not the PPF will assume responsibility for the Scheme. The assessment period process will take at least 12 months.

There has been increasing pressure from the PPF and the Pensions Regulator for efficient assessment periods. This article sets out the steps trustees and advisors of Defined Benefit (DB) schemes can take in advance to make sure that an assessment period runs smoothly and efficiently.

Your Actions

Not all DB schemes will enter an assessment period.

The type of employer insolvency could affect the scheme's eligibility. For example, alarm bells should start ringing if a Members' Voluntary Liquidation is suggested. An MVL could prevent the scheme from entering an assessment period.

Trustees should be wary if a legally binding compromise of a debt owed to a scheme is ever suggested. Unless the PPF is on board at the time of the compromise, it will make the scheme ineligible for PPF entry.

Your Documents

The PPF will require copies of most scheme documents. There is a list of required documents on the PPF website. You should make sure that these documents are accurate and up to date so that they can be copied and sent to the PPF when requested.

Issues such as sex equalisation will need to be looked at when determining members' compensation entitlements. Check your scheme documents to find out how your scheme was equalised: was the rule change valid? If not, this will affect members' normal pension age and, therefore, their compensation entitlement. Have promises of more generous benefits been given outside the scheme rules? Those promises could also affect members' compensation entitlement.

These issues should be raised with your PPF caseworker as soon as possible after an assessment period starts.

Your Rule Changes

The PPF has the power to set aside rule changes and discretionary increases which took place in the three years before the employer's insolvency. It will set aside these changes or exercises of discretion if their combined effect is to increase the compensation that the PPF would have to pay. Keep this in mind when making scheme changes or exercising discretions if there is a real risk of employer insolvency.

Keeping an accurate record of changes or discretionary increases will also help the PPF and your advisers to agree what changes / increases will be set aside.

Your Investments

The trustees will need to review their investment policy if the scheme enters an assessment period, which can take time: speak to your investment manager to make sure that your current investments are still appropriate given the employer's situation and ask him or her to consider how they might need to change on employer insolvency.

Your Member Records

The assessment period will involve data cleansing of member records. This is a time consuming process, which is unavoidable whether the PPF assumes responsibility for the scheme or it exits the assessment period and winds-up: a head start is invaluable.

Conclusion

The trustees should lay the foundations for a smooth assessment period as soon as there is talk of employer insolvency. This preparation will save the trustees time and money, ultimately benefitting the members regardless of whether the PPF assumes responsibility for the scheme or if there is a buy-out.

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For further information about this published aticle, contact Kathryn Hobbs on +44 (0)121 213 2397, Alexa Highfield on +44 (0)121 213 2396 or Michelle Dolphin on +44 (0)121 213 2369

This published article may contain information of general interest about current legal issues, but does not give legal advice.