Published by Chris Ramsey on
Insolvency risk changes
As expected- following a consultation earlier in the year, the main changes made by the PPF relate to its calculation of insolvency risk. The Experian model has been used to estimate insolvency risk over the last three years and, while the PPF appears in general to be pleased with the results of this model, it is making some changes to improve the prediction of insolvency events.
The most significant change is the decision to use public credit ratings (specifically, those issued by Moody’s, Fitch and Standard & Poor’s) in place of the Experian model, where these are available. The PPF has set out how it intends to map credit ratings to Levy Band scores:
In addition to this, the PPF is tweaking the Experian model and introducing an industry-specific scorecard for banks, building societies and insurance companies.
Overall, it is hoped that these changes will make the levy system more equitable, with those schemes posing the greatest risk to the PPF- paying a higher levy.
Insolvency risk scores are again to be used in the calculation of schemes’ 2018/19 levy and will be recorded from 31 October- with only six months’ scores being averaged, instead of the usual 12.
The PPF is estimating that around 60% of schemes will see a reduction in PPF levy, while around 20% will see an increase.
Changes are also afoot for schemes with contingent assets in place. Many schemes will no doubt be relieved that the PPF has backed away from requiring the re-execution of all contingent assets for the 2018/19 levy year, but it looks like this will only be deferred until next year.
For schemes where a Type A contingent asset (group company guarantee) reduces the PPF levy by £100,000 or more, the PPF will require a ’guarantor strength report’ to be prepared in advance of the certification. This is largely in response to the significant number of guarantees that are still being rejected by the PPF.
In a welcome move, the PPF has confirmed that it will simplify the basis for certifying deficit reduction contributions (DRCs). This should make certification more economically viable in particular, smaller schemes.
What do we need to do?
The PPF is estimating that around 60% of schemes will see a reduction in PPF levy, while around 20% will see an increase. Large companies, particularly, should steel themselves for a potentially significant rise in the amount they are invoiced.
We would encourage all trustees and employers to ensure that they understand the likely impact on their company scores and levy invoice as soon as possible. With insolvency scores being recorded from 31 October, time is of the essence.
For all schemes (but particularly those seeing an increase in levy), we would recommend exploring mitigation options with your advisers to ensure that you are not paying more than your fair share.