The PPF have recently announced their intention to adopt a bespoke model for assessing insolvency risk in the 2015/16 levy calculation and beyond. This will replace the commercial D&B model which has previously been used, with the insolvency score as at 31 October 2014 being the first to contribute to the 2015/16 levy calculation. This will affect all Higher Education Institutions (HEIs) who participate in eligible pension schemes.
While the PPF and Experian initially segmented the UK population of defined benefit (DB) pension scheme sponsors into seven homogeneous groups for the purpose of creating their model, subsequent analyses suggested a lack of predictability for sectors including Health, Education, Local & Regional Government and Charities, which represent around 18% of the PPF-employer population. As a result, a decision was made to construct a separate scorecard that would apply to any entity meeting the PPF’s 'Not-for-Profit' (NFP) definition.
Data collection & immediate actions
While Experian will primarily source information from Companies House, there is an acknowledgement that collecting information for NFPs will provide more of a challenge. Experian have therefore widened the sources from which information will be collected to include other bodies, such as the Charities Commission. Furthermore, Experian are also expected to have the ability to research entities manually and capture publically available, filed accounts not appearing on a central register. Entities not required to file accounts information will also be able to submit this directly to Experian.
We understand that the PPF and Experian have also been looking into whether or not it would be possible for Experian to access and collect accounts publicly available through umbrella governing organisations. As a result of this, Experian have confirmed that they are intending to obtain data from several other sources, including the HEFCE. The process of downloading information from these new sources is likely to take some time (possibly a couple of weeks), but the affected universities should ultimately see scores that better reflect their financial position.
Although this widening of data sources is expected to resolve a number of issues, it is still recommended that HEIs ensure that they are being scored correctly. In particular, they should look to:
- confirm that they are being scored on the NFP scorecard;
- confirm that the information being held by Experian, including details of the sponsoring employer(s) and financial information available, is up-to-date and correct; and
- where Experian do not hold complete information, entities can look to supply this voluntarily to Experian.
Importantly, where there is a lack of information or the inability to clarify a match to a recognised business or entity, the PPF have confirmed that the entity will be scored by an “alternative means”. In particular, a scheme-average score will be adopted where there are at least ten participating employers within a multi-employer scheme - this is likely to be particularly relevant to participating employers of the USS. Otherwise, either an industry or blended average score will be used which the PPF acknowledges “will not, in many cases, accurately reflect that employer’s insolvency risk”.
While this eighth scorecard is expected to provide a better fit for the Not-for-Profit sector than the seven other commercial scorecards, the proposed change to Experian is expected to result in a material redistribution of the levies payable by PPF-eligible pension schemes, with all bills expected to see some change. Indeed, the PPF have estimated this redistribution to be of the order of £100 million, with the NFP sector being one of the two sectors identified to be most detrimentally affected, in aggregate, by the proposed change.
More specifically, the introduction of a bespoke model and NFP scorecard will see a significant change in emphasis. While the D&B model historically considered up to 30 financial and non-financial measures to produce an insolvency risk rating, the new NFP scorecard considers only six variables, two of which (Capital Employed and Total Assets) drive nearly 70% of the overall score.
This change in emphasis will, the PPF estimates, see around 25% of NFPs experience a deterioration in insolvency risk score and around 35% of NFPs will see an increase in their PPF levy going forwards. Most affected by the changes are expected to be those entities previously scoring 100 under the old D&B model, and those with Capital Employed of less than £100,000.
As part of their consultation package, the PPF also proposed several other changes to the way in which future levies will be calculated:
- Transitional Protection: the PPF have proposed that, for the 2015/16 levy year, an element of Transitional Protection could be introduced. This would mean that for one year only, levy increases arising directly from the change to Experian will be capped at 200%. However, to cover the cost of this subsidy, the Scheme-Based levy will increase as a result. For a scheme with liabilities of £500 million, the proposed increase (of 0.01% of liabilities) will see their Scheme-Based levy increase by £50,000.
- Last Man Standing schemes: the PPF have also proposed to reduce the 10% discount currently available to qualifying Last Man Standing schemes. The impact of this could be particularly material for entities participating in the USS or other multi-employer schemes, particularly where there is a disproportionate allocation of scheme members to a minority of employers within the scheme.
- Credit rating override: where an entity has a credit rating calculated by one of three preferred rating agencies, the PPF have proposed that this would override the calculation completed by Experian. Although some entities will benefit via a reduction to their levy as a result of this, the PPF have estimate that the majority of affected entities will pay a larger levy if the change goes ahead as proposed.
Aside from the need to ensure that the data being held and modelled by Experian are correct, there are various other actions that HEIs and other NFPs can consider to help mitigate levy increases. These include:
- better understanding of the financial measures that Experian will use to calculate an entity’s insolvency risk. Could a change to the way in which financial information is recorded drive an improvement in your PPF score?
- understanding the impact that introducing a new mortgage or renegotiating an existing charge will have on your credit rating.
- understanding the impact that submitting new financial information will have on the insolvency calculation. Again, the impact of these changes can be modelled before the information is submitted.
- understanding the structure of your scheme and how the Last Man Standing and Credit Rating override proposals will affect you.