UK: PPF levy: Move from Experian to D&B
From April 2020, the Pension Protection Fund (PPF) will use Dun & Bradstreet (D&B) to calculate the insolvency risk of UK defined benefit pension plan sponsors. Most companies will see changes in their insolvency risk scores and PPF levy payments, with a minority seeing a significant change.
The UK’s Pension Protection Fund (PPF) has released its first consultation outlining the changes that it is proposing to make as part of its three-yearly review of the PPF levy rules. This initial consultation focuses on the PPF’s decision to appoint D&B as its insolvency risk provider for the calculation of future PPF levies.
The move from Experian to D&B
The insolvency risk of a defined benefit (DB) pension plan’s sponsoring employer(s) is one of the key components in the calculation of the PPF levy. Experian have been the PPF’s insolvency risk provider and calculated employer’s insolvency risk scores since 2014. From April 2020 Experian will be replaced by D&B as the PPF’s insolvency risk provider.
Despite the move from Experian to D&B, the PPF is retaining the use of its bespoke “PPF-specific model” to calculate insolvency scores, so the underlying model to calculate insolvency risk scores will be substantially similar. However, this does not mean that insolvency risk scores will be unchanged.
In addition to some minor structural changes and a recalibration of the model to reflect recent insolvency experience, D&B take a different approach to Experian in relation to certain processes that will directly influence insolvency risk scores and the amount of the PPF levy (for example, data collection and the identification of the parent company).
Taken together, these differences will result in changes to the insolvency risk scores of most companies, with some companies seeing a material change in score. The PPF estimates that around two-thirds of DB plans will experience a change in the PPF levy payable as a result of the move from Experian to D&B.
Which companies will be most affected?
As part of the PPF’s recalibration of the insolvency risk model to reflect recent insolvency experience, they identified that the scorecard for the largest companies appears to be under-predicting insolvencies, so an adjustment has been made to correct this. Overall, this means that larger companies may expect to pay a higher levy in the future, as insolvency scores will generally worsen, while smaller companies and not-for-profit organisations may expect to pay a lower levy.
Another significant change is the proposed discontinuation of the Standard & Poor’s Credit Model. This commercial model is currently used to determine the PPF levy for regulated financial entities that do not have a credit rating. The PPF is proposing that insolvency scores for these companies will now be calculated using the D&B model in line with the majority of other organisations.
The PPF is proposing to continue using commercial credit rating scores (i.e. those provided by Standard & Poor’s, Fitch and Moody’s) to determine insolvency risk scores for those companies with a credit rating. Under the PPF’s current proposals, the use of these credit ratings in the levy calculation will remain unchanged from previous years.
What should you do now?
Companies can now access the new “beta version” of the D&B portal to view their insolvency risk scores under the revised insolvency risk model. Given that this change could have a significant financial impact for some companies, we strongly recommend checking the information being used by D&B to determine insolvency risk scores, to ensure that future PPF levy invoices are being calculated correctly. We also recommend that any differences in the new D&B scores and the old Experian scores are fully understood and investigated.
Companies who have historically submitted accounts to Experian manually should note that this information will not be passed over to D&B automatically, so action will be needed to submit this information. The PPF’s proposed deadline for self-submission to D&B is the end of April 2020.
The PPF is proposing to capture D&B insolvency risk scores from the end of April 2020 to be taken into account in the 2021/22 PPF levy. We therefore recommend checking the new insolvency risk scores as soon as possible. The D&B portal shows two insolvency scores: (i) the “Latest Score”, and (ii) the “Consultation Score”. It is the “Consultation Score” that the PPF is proposing to start recording from the end of April 2020 for use in the levy calculation.
The PPF’s consultation on the move from Experian to D&B and the associated changes to the calculation of the insolvency risk scores closed on 11 February 2020, so a response is expected shortly. In the meantime, the PPF is intending to issue further consultations this summer regarding other elements of the levy calculation which will determine the amounts payable by DB plans over the coming three years.