PPF consultation on insolvency risk

7th February 2020

Introduction

The 2020/21 year is the last year of the current triennium, during which the PPF aims to keep the calculation of the levy it charges defined benefit schemes stable.  Ahead of the next triennium it has appointed Dun & Bradstreet as its insolvency risk provider and consulted on some elements of the calculation of insolvency risk.  Consultations on other elements of the levy calculation will follow later in the year.

The portal

There will be a new web-based portal providing information on insolvency risk scores, including a “what-if” tool to help stakeholders understand the impact of changes in data.  The new portal has already been launched, in beta form, so that schemes can check their levy data ahead of the scores being used for the 2021/22 levy, expected to be in April 2020.

The insolvency risk model

Since the 2015/16 levy year Experian have been providing insolvency risk services to the PPF, using a model they developed for that purpose.  Under this model, companies are allocated to one of 8 scorecards, depending on their size and structure, and their insolvency risk is then assessed by their scores in relation to the variables specified for that scorecard.

D&B have built a replica of the Experian insolvency risk model, so that scoring is consistent between the two models.  Some elements have then been adjusted to address elements where a particular scorecard was under-predicting insolvencies compared with historical data.  Two variables which stakeholders had raised concerns about – creditor days and mortgage age – have been replaced or modified to address those concerns.

In recent years the PPF has used credit ratings and the S&P Credit Model (a proprietary credit scoring model used for unrated financial services entities) to score some entities.  However, the S&P Credit Model has proved to be of limited value, so it will not be used after March 2020.

Potential impact on levies

Assuming that all other elements of the levy calculation remain unchanged suggests that, in 2021/22, just under 40% of employers will remain in the same levy band. For seven of the eight scorecards, more employers should experience an improvement than see a worsening in levy band.  However, large employers who are on Scorecard 1, are more likely to see a worsening in their score.  The PPF expects the proportion seeing an improvement in score to rise as data gaps are filled.

The corresponding levy impact is expected to be nearly half of schemes seeing a lower levy but 20% seeing an increase, in particular schemes with employers on Scorecard 1.