Pension Protection Fund updates guidance on its power to modify onerous contract terms and publishes annual report and accounts

When a scheme employer fails and responsibility for paying scheme benefits transfers to the PPF, there is a legal power for the PPF to modify the terms of contracts entered into by the scheme trustees. On October 15, 2024, the published an update to its 2010 guidance on modifying onerous contract terms.

The PPF’s standard procedure is to review during the assessment period any contracts that are expected to remain in place and transfer with the relevant scheme. If the PPF finds an onerous term or contract it will notify the counterparty and trustee explaining why it considers the term or contract to be onerous.

Although the PPF has not used its powers of disclaiming onerous contract terms to date, the test it uses is whether a term is “substantially unfair or manifestly prejudicial”. The PPF says it would not ordinarily seek to disapply or substitute terms in contracts that have been negotiated at arms’ length by trustees in the ordinary course of their trustee business, even if it is felt that the trustees negotiated a poor deal.

Examples of terms that could be caught, and which are examined closely in the assessment process, include those specifying charges on employer insolvency; contracts with parties connected to or associated with trustees; and restrictions of liability to third parties. A catch-all category covers "contracts entered into in the run-up" to an assessment period.

The PPF has published its 2023/24 Annual Report and Accounts revealing a robust financial position. As at March 31, 2024, PPF assets were £32bn and total liabilities were £19bn, compared to £33bn and £21bn respectively in 2023.

With such a healthy balance sheet, there have been recent calls for the PPF to reduce the risk-based levy on schemes to zero. The DWP has been lobbied to make the necessary change in the law.