By Emily Sturgess, Senior Consultant, XPS Pensions Group
In early 2019 the PPF announced that Dun & Bradstreet (D&B) would take over as insolvency risk provider from April 2020. What changes are being proposed and what is the likely impact?
Scorecard recalibration
The main change proposed in the consultation is to recalibrate the existing PPF model scorecards, so that they provide a better fit with actual insolvency experience. In assessing the performance of the existing model the PPF has found, when compared to actual insolvency experience, that each scorecard either under- or over-predicts the level of insolvencies.
It is suggested that the proposed recalibration helps eliminate the smaller and not-for-profit entities subsidising the largest employers. The recalibration will impact all organisations measured by the PPF model scorecards, with two-thirds of larger employers seeing an increased levy band and higher levies.
At the same time as launching its consultation, the PPF has given trustees and sponsors access to a test version of its new score portal that will show ‘live’ D&B scores based on the recalibrated and ‘consultation’ scores
D&B’s collection and interpretation of data
Another change impacting scores will come from D&B’s approach to collecting and interpreting data and how this may differ to Experian’s approach. Experian’s general approach is to collect accounting data exactly as presented in the accounts. D&B’s approach can involve adjusting certain items, based on supplementary information such as that included in the notes to the accounts. D&B believe this approach leads to a more consistent treatment of the accounting data across companies.
D&B will also use a different approach to determine an organisation’s ultimate parent company and to determine consolidated accounting figures when financial information on an ultimate parent company is not available. The PPF encourages stakeholders to check they are satisfied with D&B’s interpretation of the ultimate parent and to provide feedback as part of the consultation.
All organisations on the PPF model could potentially be impacted, either negatively or positively depending on the circumstances.
Other PPF model changes proposed
The recalibrated scores allowing for D&B’s data interpretation represent the PPF’s ‘baseline’ scores going forwards. The PPF is also proposing the following additional changes based on stakeholder feedback:
• For group entities, the mortgage age variable is to be removed and replaced with a cash by current liabilities variable.
• The creditor days variable is to be capped at 60 days to remove extreme model values.
• For regulated financial institutions the creditor days variable will be given a neutral value reflecting the fact that these entities don’t have trade creditors.
Non-PPF model changes
Some organisations’ insolvency risk is measured by public credit ratings, or alternative industry specific scorecards instead of the PPF model. The PPF has confirmed:
• Public credit ratings have been shown to be highly predictive and will be retained.
• The S&P credit model that is used for around 70 large financial institutions listed on the Bank of England’s Bank or Insurer list will no longer be used post March 2020. Going forwards these organisations are to be scored using the PPF model instead.
Impact analysis
The PPF has carried out an impact analysis, firstly by looking at how the changes could lead to levy band changes and secondly by looking at how the changes could have impacted on the levies payable for the 2019/20 levy.
The analysis is caveated to the extent that some score changes could be due to ‘gaps’ in the data used to calculate the new D&B scores rather than anything else.
This is because D&B does not currently have access to all the supplementary information Experian had, such as self-submitted accounts.
The PPF’s analysis allowing for all changes shows that:
• Two-fifths of employers are expected to remain in the same levy band.
• One-third of schemes would have seen a similar levy amount if the new D&B scores had been used for the 2019/20 levy. Almost half would have seen a lower levy and one in five would have seen an increase.
• 7% could have seen an increase in levy of over 50%.
Actions for Trustees and advisors
The consultation closes on 11 February 2020. Trustees should check they can access the new scores, understand the reasons for any changes in scoring and consider whether supplementary information such as self-submitted accounts should be provided to D&B to fill any ‘data gaps’.
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