PPF update on transition to new model – Good news!

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The PPF has today released a note to stakeholders with an update on the transition to their new insolvency risk model.

The PPF has confirmed that it is proposing to use a bespoke model specifically designed for this purpose, rather than Experian’s Commercial Delphi model. The new model has been constructed based solely on 'the sub-population of sponsors of PPF-eligible pension schemes' and only reflects insolvency experience of sponsors within that population.

Other features will include:

  • different scorecards for different types of employers where the size and legal structure of the entity (i.e. whether it is part of a group, is a stand-alone business or a not-for-profit organisation) will be key determinants in assessing an entity’s risk of insolvency
  • a greater focus on the entity’s financial fundamentals rather than some of the more unusual indicators used in the D&B failure score system
  • more emphasis on the user experience e.g. free-to-use web portals - allowing users to check information held on sponsors and monitor their scores

This is good news as the PPF looks to be addressing the major concerns raised by its stakeholders; a number of these issues were highlighted in Barnett Waddingham's PPF Levy Survey 2014 (results of which were passed on to the PPF).

Whilst some of the factors considered by the old D&B model were statistically good early indicators of insolvency, they caused unwarranted volatility. There were also too many examples of D&B factors unfairly penalising companies which resulted in massive financial consequences.

The new approach should also reduce the potential for scores to be manipulated by levy payers which can only make the system more credible.

The use of different scorecards for different types of employers so as to include only information that is relevant will also be welcome news as this is expected to make the scores still more credible.

A six-week consultation will open at the end of May, setting out the PPF’s plans for the next three levy years.

The scores will not count until 31 October 2014 and addresses the concern around the timing of the consultation and the time companies would have to get their Experian score checked before it counted towards their 2015/16 levy. The resulting shorter averaging period that will result is probably a price worth paying.

Companies, particularly those with a complicated group structures, should act on the PPFs advice and make sure the information held the Regulator’s Exchange system is correct and up to date.

All in all – this should be welcome news for pension scheme sponsors!