PPF Risk Based Levy changes – move to Experian

Introduction

On 20 March 2014, the PPF issued an announcement giving information about its move to replace D&B with Experian as its insolvency risk provider and explaining what schemes can do to prepare.

In this Alert:

• Key points 
• PPF specific score
  
• Consultation
  
• Action points
  

Key points

• Experian will generate a PPF specific insolvency score, which will be based on the PPF’s experience of the DB scheme sponsors that have gone insolvent since 2006.
• Experian and the PPF will provide a free to use web portal which will make it easier for employers to check the information held and monitor their insolvency scores.
• To give schemes time to understand the new scores and take action, data used to calculate the 2015/16 levy will only be collected or based on insolvency scoring from 31 October 2014 onwards.
• D&B data will not be used after 31 March 2014.
• The new system is designed to be more transparent so that issues can be identified and corrected at an early stage, before levy calculations are made.

PPF specific score

The PPF specific score uses an industry standard approach but is informed by the PPF’s experience.  This means it will not be possible for companies to use Experian’s commercial standard to estimate the impact of the move to Experian.  Scores will reflect the nature of employers that sponsor DB schemes and, for example, scoring methodology will reflect the fact that new and small employers (which are at relatively high risk of insolvency) are unlikely to sponsor DB schemes.

An employer’s insolvency score will be generated using financial information from a range of sources, such as Companies House (or an overseas equivalent) and the Charity Commission and information provided through TPR’s exchange.  So far as possible, overseas entities will have their scores based on the same model, rather than having a non-UK insolvency score “translated”.

In certain limited circumstances, such as when accounts cannot be gathered by Experian, it will be possible for employers to supply information direct.  However, the PPF considers that schemes and employers should focus on ensuring that accurate, up-to-date information is supplied to the sources Experian will use, including information filed through TPR’s Exchange.

Assessment of insolvency risk

An employer’s insolvency risk will be assessed using one of eight scorecards, depending on:

• whether the entity is part of a group, or a stand-alone business
• the financial data available
• for group companies, the size of the entity
• whether the employer is part of the not-for-profit sector.

Different variables are used within the different scorecards, but each aims to capture financial fundamentals such as scale of operations, profitability, gearing, liquidity and cash flow.  As the design combines spot and trend data and uses continuous variables, it is intended that cliff edges will be avoided and that slight changes in variables will not generate significant variations in scores.

The aim of using a range of scorecards is that it allows the model to use information only where it is relevant or available for a certain type of entity.  This should make the model more predictive.

Consultation

The PPF intends to publish a consultation at the end of May 2014 setting out its plans for the next three levy years (from 2015/16 to 2017/18), including:

• details of the PPF specific model, including how a score is calculated
• how the PPF plans to approach setting the levy bands the scores feed into and the levy rate for each band
• an impact analysis to allow schemes to assess how their new score (which will then be available) would have affected their 2014/15 levy
• a summary from Experian of the work done in constructing the model and its design and an evaluation from PricewaterhouseCoopers.

Action points

Employers and trustees should:

• make use of advance warning and the six month window between 31 March 2014 and 31 October 2014 to ensure that all information held on Exchange is accurate.  Email addresses for contacts should be kept up-to-date, as should the list of statutory employers
• check their scores as soon as they are available and verify the information they contain
• look out for further information about the PPF specific model and changes to the key framework.  Assess the implications for the scheme’s PPF levy and decide whether action needs to be taken.

Monitoring developments, updating and correcting information and other steps such as putting PPF contingent assets in place will assist schemes in managing their PPF levies.  Please speak to your usual contact at Sackers if you would like more information.