Pensions risk transfer: PPF+ deals

What exactly is a 'PPF +' deal?

The typical background to a PPF + deal is that a defined benefit (DB) scheme's sponsoring employer will have suffered an insolvency event triggering a PPF assessment period in relation to the scheme. It then becomes clear that the scheme's assets are more than sufficient to secure benefits at PPF compensation levels, perhaps as a result of a negotiated injection of extra funding from a party related to the scheme's sponsor. Where this is the case, the scheme can then exit from PPF assessment, and the trustees can wind up the scheme and secure 'PPF +' benefits with an insurer which are somewhere between PPF compensation levels and full buy-out benefits. In even more exceptional cases – and we have come across them – a purchaser may be prepared to buy the insolvent sponsor out of insolvency and guarantee funding up to the full buy-out level.

For the purposes of PPF compensation levels, the previous statutory compensation cap no longer applies – although there is some current complexity around the timing of this disapplication. This follows recent legal challenges in the High Court in London and Court of Justice of the EU that the cap was age discriminatory or did not comply with the EU Insolvency Directive.

Read more on pensions risk transfer

• Pensions risk transfer: achieving data protection compliance
• Pensions risk transfer: requested contractual terms
• Pensions risk transfer: trustees’ rights to use scheme assets
• Pensions risk transfer: getting governance right
• Pensions risk transfer: the value of a clear vision for full scheme buy-outs
• Pensions risk transfer: reinsurer requirements
• Pensions risk transfer: company wind-up indemnities
• Pensions risk transfer: the risks of residual risk insurance
• Pensions risk transfer: discretionary pension increases
• Pensions risk transfer: GMP equalisation and bulk annuities
• Pensions risk transfer: data warranties
• Pensions risk transfer: material change
• Pensions risk transfer: insurer buy-out requirements
• Pensions risk transfer: the endgame strategy
• Pensions risk transfer: tricky benefits to insure
• Pensions risk transfer: longevity transactions hedging risk trustee considerations

How do PPF + deals differ from a more 'normal' bulk annuity deal?

Fundamentally with a more 'normal' bulk annuity deal the trustees will specify members' full benefit entitlements under a scheme and ask insurers to provide competitive quotes on how much it would cost to secure those benefits in full.

With a PPF + deal the trustees will approach insurers, indicate what assets they have to secure benefits, and ask insurers to quote competitively on the extent – (in percentage terms – to which they would be able to secure benefits for members above their PPF compensation entitlements.

Case study

In one PPF + deal we advised on, the trustees sought competitive quotes from several insurers based on scheme assets of approximately £7 5million. The best quote for PPF level benefits was in the region of £50m, leaving an expected circa £25m to secure additional benefits between PPF and full buy-out levels.

It did not become clear until after the end of the data cleanse period exactly how much was available to secure the additional benefits. At that point, the trustees notified the insurer what amount was available for each beneficiary and the insurer applied this amount to uplift benefits.

Trustee discharges and the statutory priority order

Care needs to be taken in any PPF + case to ensure that the trustees are discharged from any further liability where they are not securing members' full entitlements. Statute allows trustees to be discharged from liability by buying annuities. Statute also dictates that in order for trustees to be discharged where scheme assets are not sufficient to satisfy scheme liabilities in full, the trustees must comply with the statutory priority order.

The priority order requires the trustees to satisfy liabilities in an earlier part of the priority order first – for example, liability for benefits equivalent to the level of compensation which would have otherwise been payable by the PPF if the scheme had qualified for the PPF. Any remaining assets can then be used to satisfy liabilities in a later part of the priority order – for example, liability for the difference between PPF benefits and full scheme benefits.

If the remaining assets are sufficient to satisfy, for example, only 50% of all liabilities within that later priority, then statute requires that the amount of those liabilities must be satisfied in the same proportions. Using this example, the available assets should be allocated to each member so that they get benefits which are equal in value to 50% of the shortfall between the value of their PPF benefits and their full scheme benefits. So, it is not as simple as just giving everyone the same percentage uplift on their PPF benefits. However, subject to this, the additional benefits granted to members could differ in shape and amount from their actual scheme entitlements.