UK - The Pension Protection Fund (PPF) is consulting on a solution to address concerns regarding its powers to “disclaim” an investment contract when a scheme enters the PPF.

Under section 161 and schedule 6 of the Pensions Act 2004, which address the PPF’s duties when it assumes responsibilities for a scheme, all the property, rights and liabilities of a scheme are transferred to the PPF and the trustees or managers of the scheme are discharged from their obligations.

The organisation also has the ability to disclaim, once it has taken responsibility for a scheme, and in the assessment period the PPF examines all scheme contracts and determines if any are “onerous or contain onerous terms”.

The PPF has now revealed it has received a number of enquiries into whether it plans to use its powers to disclaim contracts, particularly in relation to investment contracts agreed between trustees and fund managers.

The PPF admitted it has not yet “identified a term that it wishes to disclaim”, but as each case is considered individually it warned it cannot say in advance whether it will disclaim any particular contract, as it warned it might wish to reject a term that:

Restricts the liability of a third party contracting with the trustees Imposes unreasonable fees on the trustees of the PPF Imposes financial penalties on transfer into the PPF

Because of this uncertainty over the PPF’s use of its powers, the PPF revealed in the consultation document that some fund managers have started to include an additional “trigger event” into the termination clauses of the contracts, so that on the transfer of the scheme to the PPF the investment contract would be ended automatically.

However, the PPF claimed, “such premature termination is not generally in the trustees’ or the managers’ interests”, and has supported an industry solution to include a standard wording into contracts between trustees and counterparties to address the issue.

Its suggested format, published in the s161 consultation, confirms the PPF “will not exercise its powers under section 161 [following a transfer] to disclaim a contract, provided it has already confirmed its position in writing in respect of investment management contracts” before the approval of the section 143 scheme valuation - which determines the level of underfunding.

The closing date for comments on the issue and on the proposed wording is 8 May 2009, and further details can be found on the PPF website.

If you have any comments you would like to add to this or any other story, contact Nyree Stewart on + 44 (0)20 7261 4618 or email nyree.stewart@ipe.com

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