Understanding the new model for assessing insolvency risk

How will the revised Pension Protection Fund (PPF) levy estimate affect employers' insolvency ranking? Naomi Brown, senior associate at Sackers, explores the immediate impact of the new levy estimate.

Original news: PPF announces 2015/16 levy estimate,

Following a consultation between May and July 2014, the PPF announced the levy estimate for 2015/16 will be set at £635m, nearly 10% lower than the 2014/15 estimate. The PPF also announced the launch of a consultation on detailed rules for the 2015/16 levy, which will close on 13 November 2014.

Why is the PPF introducing a new model for assessing insolvency risk?

The primary reason for moving to a new model is to improve the levy by:

• ensuring it can more accurately reflect the risk posed by individual schemes (ie ensuring that schemes pay their fair share), and
• making the assessment process more predictive and transparent for schemes and employers

What are the main aspects of the new model?

The main aspects of the new model are:

•  it is specifically tailored to the 'PPF universe' in that it focuses on the insolvency experience of employers actually sponsoring defined benefit schemes
• it has a much stronger focus on financial rather than non-financial information as this has proved most predictive and reliable, and
• it is more transparent in that the basis on which scores are calculated will be set out in the levy rules and schemes, and employers can see the data on which their score is based through the online web portal

How will schemes be affected by the new model?

Many employers will see their insolvency ranking change--as a result their 2015/16 levy may differ significantly from what they have paid in previous years. Although the PPF did consider providing some transitional protection for those most affected, it has decided not to do so following consultation.

What actions should employers and schemes be taking?

The PPF will use insolvency scores from 31 October 2014 in the 2015/16 levy calculations. Therefore, before that date, employers and schemes should:

• log into the PPF/Experian web portal to check that they have complete, up-to-date and accurate data about the employer(s)--they should do this even if they have logged on previously as the portal has recently been re-launched to reflect changes made to the new model following consultation
•  ensure that all relevant Companies House filings are up-to-date
•   engage directly with Experian, as necessary, to fully understand their score and raise any concerns, and
• explore with their advisers whether any action could be taken to reduce the scheme's levy
• They may also need to look at how to budget for the levy payment, particularly if they are likely to see a substantial increase from previous years.

They should also be aware that it is not just the insolvency risk model which is changing. They could also be affected by significant changes to other aspects of the levy process. In particular, schemes which have identified themselves as 'last man standing' schemes and/or which have either parent company guarantees or asset-backed contribution structures in place should seek advice to understand what the changes will mean for them.

Further reading

If you are a LexisPSL subscriber, click the links below for further information on pensions and insolvency:

The Pensions Regulator and its power to issue a contribution notice and financial support direction (Subscriber access only)

Not a subscriber? Find out more about how LexisPSL can help you and click here for a free trial of LexisPSL Restructuring and Insolvency.

First published on LexisPSL Restructuring and Insolvency

Interviewed by Diana Bentley.

The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor