The PPF is consulting on the calculation of levies for the three years commencing with the 2018/19 year, which focusses mainly on improvements to the measurement of insolvency risk. There will be a further consultation in the autumn, with firm proposals, alongside draft rules for 2018/19. The second consultation will set out also the PPF’s view on how much they need to raise from the levy overall, including the proposed levy scaling factor.
The consultation contains proposals relating to:
- insolvency risk,
- parental guarantees and
- deficit-reduction contributions.
It also invites views on whether – and how – the levy could be adjusted to reflect good governance and whether there are particular measures that could assist small schemes.
Insolvency risk
The Experian model, which has been used for the last 3 years for measuring insolvency risk, includes a set of eight “scorecards” developed for different types of employer, with separate scorecards for:
- ultimate parent companies (and very large subsidiaries), referred to as the “Large and Complex scorecard”,
- three scorecards focussed on different sizes of subsidiary company,
- a scorecard for stand-alone businesses,
- two scorecards for entities filing small companies accounts, depending on whether they were part of a group or stand-alone businesses and
- a scorecard for not-for-profit entities (NFPs).
Each scorecard contains variables which are statistically correlated with experience of insolvency amongst the companies on that scorecard. The scorecards were then calibrated so that overall they predicted a number of insolvencies in line with the PPF’s actual experience. Overall the predictive ability of the model has been good, although it has deteriorated slightly more recently, particularly in relation to the small-business and NFP scorecards.
The PPF has also reviewed the case for using credit ratings in its scoring methodology. At the last review, the PPF recognized the difficulty of translating credit ratings into insolvency probabilities. It considers that it now has a suitable model that looks at all defaults of UK-rated entities to see how many resulted in insolvency.
In relation to scorecards, therefore, the PPF proposes:
- that the populations currently scored on the “Large and Complex” and “Independent Full” scorecards be combined, then divided according to size (above or below £30 million turnover) and scored by two new scorecards,
- to rebuild the two “small accounts” scorecards, using different variables and delivering a higher level of predictive ability,
- to re-build the NFP scorecard to ensure it is calibrated to actual experience of insolvencies, as well as making use of data specific to NFP employers with DB schemes,
- to use credit ratings, where available, to generate insolvency risk scores and, for some un-rated entities that are regulated financial services businesses, to use industry-specific scorecards – supplied by a credit rating agency.
The PPF has noted that insolvency scores tend to change only once a year – when accounts are filed – and then the change is rarely to a different levy band. It is consulting, therefore, on whether it is still necessary to use monthly Experian scores or whether it can return to using scores as at 31 March each year.
The PPF expects these changes to result in two thirds of schemes seeing a reduction in their levy. In particular, schemes run by smaller employers and NFP entities are likely to see a reduction, while nearly 40% of those whose employers are non-subsidiaries turning over more than £30 million and large subsidiaries are likely to see an increase.
Parental guarantees
The PPF continues to have issues relating to Type A contingent assets (parental guarantees), since it finds it rejects a significant number of these on the basis of insufficient evidence of the guarantor’s ability to meet the certified amount. It proposes that, in order to certify Type A contingent assets worth more than £100 million, a guarantor strength report be required in advance of certification. The report will have to demonstrate that the guarantor would be able to meet the terms of the guarantee in the event of the employer’s insolvency. The PPF is also reviewing the wording of the standard contingent asset documents.
Deficit-reduction contributions
A further possible change relates to the calculation of deficit-reduction contributions. Allowing for investment costs can be complex, so may deter smaller schemes from obtaining the required certificate. The PPF is considering simplifying this process, either by allowing for implicit investment costs to be ignored or by allowing all recovery plan contributions paid to be certified.