The Pension Protection Fund (PPF) has launched a consultation on a new way to determine the levy payment from 2015/16 based on a PPF-specific insolvency risk model.
It said the model, developed with global information solutions company Experian, had drawn on input and expertise from the pensions industry and employers’ representatives.
The bespoke insolvency model differs from the PPF’s previous Dun & Bradstreet (D&B) model, which it has used for the past nine years in a number of ways. Most notably, whilst the standard D&B model reflected a variety of “non-financial” factors, the new, bespoke model will place significantly less emphasis on these metrics.
The lifeboat fund added the model aims to provide much greater precision and discriminatory power in assessing employers’ insolvency risk, and reflects more accurately that the PPF employer universe is very different to the broader UK corporate landscape that generic models look at.
The bespoke model has been independently assessed against nine success criteria identified by the PPF’s Industry Steering Group, and found to be as effective as more generic models in four of them, and superior in five, including the ability to predict insolvency.
It is expected that the new scores will not be used until October 2014 to calculate the levy from 2015/16 onwards, reflecting the PPF’s commitment to allow schemes ample opportunity to understand and, where necessary, challenge scores, before they are used.
PPF executive director of financial risk Martin Clarke (pictured) said: “We believe the new insolvency model will ultimately provide more discriminative and robust insolvency risk scores, plus offering greater transparency and access to levy payers. But we are determined that levy payers should be an integral part of this change, which is why we are consulting and allowing levy payers time to understand the new model, to check the information held on them and familiarise themselves with their predicted levy.
“The PPF looks forward to engaging with levy payers and other stakeholders over the coming months to ensure the new model is fully integrated and delivering greater accuracy and transparency in assessing insolvency risks.”
Experian Credit Services managing director Paul Vescovi added: “The model we have created offers a more accurate assessment of insolvency risk score as for the first time it has been calculated using historical insolvency data from the universe of PPF employers. It uses variables demonstrated to be most predictive and appropriate for businesses that have eligible defined-benefit pension schemes. We will be working closely with the PPF in the upcoming weeks to provide support for levy payers by helping them understand the new score and what it means for them.”
The PPF said the new methodology is not designed to change the aggregate amount of levy raised, but it anticipated a significant reconfiguration of around £230m within the total levy raised, with more levy payers seeing a fall in their levy than an increase.
In addition to the adoption of the PPF-specific model the consultation also proposes new approaches for the treatment of asset-backed contributions, parental guarantees and associated last man standing schemes for levy purposes.
Hymans Robertson head of trustee defined benefit consulting Calum Cooper said: “Today’s change is hugely positive for pension fund trustees and sponsors. For the first time ever, pension schemes will be able to clearly see the full list of ingredients that drives their PPF levy – this includes the specific recipe for their sponsor’s insolvency score. This means, critically, that they be easily able to focus their efforts more effectively to reduce their levy.”
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