Insolvency Risk 


Insolvency risk represents the likelihood of a scheme’s employer(s) becoming insolvent.

In the levy formula, this is represented by IR - the insolvency risk of the scheme. Pension Protection Score information is provided to the PPF by Experian. IR may be modified where there is a Type A contingent asset.

Measuring Insolvency Risk – the PPF-specific model
From Levy Year 2015/16 Experian have provided the PPF with scores for the purpose of the PPF Levy, using the PPF-specific model. This is a statistical model, developed using observed insolvencies amongst employers and guarantors of defined benefit pension schemes.

Schemes and employers are encouraged to register and access information using the Pension Protection Score Portal. In addition to score information the portal has guidance material (including score card worked examples) and FAQs. Once registered with the portal you can also use the ‘What if’ to see the impact new data will have on an employer’s Pension Protection Score.


Categorisation of Employers and Guarantors
Experian match PPF employers and guarantors (referred to simply as employers from here onward) to one of eight scorecards based upon key factors such as whether they are part of a group and the type of accounts they file (full or abbreviated).

Included within subsidiary (group) scorecards is a parental strength measure and so ultimate parent companies are scored for the purpose of calculating this element of the subsidiary score if they are not already separately scored in their own right.

The eight scorecards are as follows

 Scorecard Number   Description  Features
 1

 Large and Complex 

 Includes ultimate parent cos and largest subsidiary cos.

 2

 Group £50m +

 Subsidiaries with appropriate turnover

 3

 Group £10m to £50m 

 Subsidiaries with appropriate turnover

 4

 Group >£10m 

 Subsidiaries with appropriate turnover

 5

 Group Small 

 Subsidiaries filing SME accounts

 6

 Independent Full

 Independent co filing full accounts

 7

 Independent Small

 Independent co filing SME accounts

 8

 Not-For-Profit

 Overrides classification under other scorecards


Data used to allocate employers to scorecards and to calculate scores

Accounts

The primary data used for both allocating employers to scorecards and calculating the coefficient (the measure of predictability) for each of the variables is contained in the latest filed accounts with Companies House, the Charity Commission or other permitted sources. If accounts are not filed with any of these bodies they can be voluntarily submitted to Experian. The accounts information will be used no later than the month following the date of filing or receipt by Experian.


Accounting Standards Change Certificate

For 2017/18, schemes can provide an accounting change certificate to Experian by 31 March 2017, if a change of accounting standard (for example to FRS 101 or FRS 102) impacts the calculation of trend variables (which compare accounts data in the most recently filed accounts to that filed three years previously). The
Pension Protection Score Portal includes the certificate and guidance on how to complete the form.

The What If tool, available on the portal, also includes a part that will allow you to see whether providing a certificate will impact your monthly scores. We encourage schemes to test whether the impact is sufficient to impact on their Mean Score (the twelve month average) sufficiently to affect the levy band this results in before submitting a certificate. In the accounts of employers filing for the first time on new standards Experian found that the impact did not result in a change of levy band in over 80% of cases.

Scorecard Variables
Each scorecard consists of 5-7 variables and in most cases the most recently filed accounts information is used to calculate a factor for each element of the scorecard which are combined to calculate Monthly Scores on the last working day of the month.

The Pension Protection Score Portal provides worked example scorecard calculations. 



Revised accounts


If accounts are revised where the originally filed accounts were incorrect and new accounts are filed to replace them Experian will use those revised accounts to calculate scores for 2017/18 (ie: April 2016 onwards) from the original date of filing (provided the revised filing is not later than the end of February 2017). Where revised accounts are filed after February 2017, Experian and the PPF retain flexibility to consider on a case by case basis whether to recalculate scores, in line with our Levy Data Correction Principles.


Non-sterling accounts

If accounts are filed or provided and are not in sterling Experian convert the accounts data to sterling, using the balance sheet date of most recent accounts to convert both those accounts and the accounts used for trend variable calculations.


Accounts not published in English


Experian can accept accounts not published in English provided that the translation is accompanied by an auditor's certificate confirming that it is an accurate translation of the Accounts.


Employee Numbers

Four of the scorecards include variables that use employee numbers. Businesses who report a Full Time Equivalent (FTE) number in their accounts can request in writing that Experian use that number for the calculation of employee related variables for monthly scores used in 2017/18, providing it is sent to them by 31 March 2017.

Where no employee numbers were shown in the accounts, for example due to the size of the business or as a result of filing accounts in a jurisdiction where there is no requirement to provide employee numbers, a written statement can be sent to Experian confirming the employee numbers (either on a total employee or FTE basis) - and that the accounts have not (and were not required by law to state) the number of employees, signed by the employer’s auditor providing it was sent to them by 31 March 2017.

Alternatively providing Experian receives a  written request to use an FTE number included in the latest filed accounts it will use this.

In both cases providing the requests are made by 31 March 2017 it will be used to recalculate scores from the date at the latest accounts were filed.

 

Mortgage age
Six of the scorecards include a measure based upon the age of the most recent mortgage or charge (registered at UK Companies House or public registries in Australia, Gibraltar, Hong Kong, India, Ireland, Isle of Man, Malaysia, New Zealand and Singapore).

Our Mortgage Guidance explains the circumstances in which certain mortgages can be excluded from this calculation. Where company officers wished to certify charges for exclusion from the calculation, this can be sent electronically up to midnight on 31 March 2017.


Guidance on Exclusion of Mortgages


Where a charge was successfully certified for 2016/17 as any of:

  • a charge relating to employer/group with an investment grade credit rating
  • a charge in favour of the pension scheme
  • a rent deposit, or
  • a refinancing of a previous arrangement

then this certificate will generally have been carried forward to the 2017/18 scores. Credit rating exclusions will not apply for 2017/18 if the entities' rating does not remain at least investment grade at 31 March 2017.

Where the benefit of a certificate has not been carried forward, or where a charge of these types was certified in the past year as immaterial, it will be necessary to certify the mortgage again for 2017/18 if it is to be excluded from the calculation.

Certificates for 2017/18 are available

Companies registered in countries not specified above as having public searchable registries or not registered with Companies House receive an ‘unknown’/neutral score for mortgage age. The same score is applied to entities that are not required to register charges with Companies House.

An exception to the unknown score will be if the entity has no power to grant security over its assets (and can therefore have no charges). Such entities will generally receive a zero score if they provide satisfactory evidence that they do not have the legal ability to grant security over any of their assets.

Employers who fall within this exception should contact Experian by email at experianppf@mailgb.custhelp.com before midnight at the end of 31 March 2017, with the following evidence: 
         
(a) A copy of the legislation applying to the entity that prevents the entity from granting security, and
(b) A copy of the constitutional documents of the entity demonstrating the prohibition on granting security      

in each case, accompanied by a letter from a legal advisor (which may be an in-house lawyer), confirming that the entity has no power to grant security. 
 

Mean Scores
The starting point in establishing the insolvency risk element of the risk-based levy is normally the averaging of schemes' Experian Monthly Scores (for 2017/18 the average is calculated over the 12 months from the end of April 2016 to the end of March 2017).  This average is called the Mean Score. Where there are gaps in this information, it is calculated on the basis of the months for which it is held and if only a single monthly figure is held, that Monthly Score is used.

The averaged (or only) Monthly Score is then matched to the minimum and maximum mean score range of one of ten Levy Bands and the corresponding Levy Rate is used.

 Levy Band  Minimum Mean Score  Maximum Mean Score  Levy Rate

 1

 0.000%

 < 0.030%

 0.0017

 2

 0.030%

 < 0.049%

 0.0023

 3

 0.049%

 < 0.086%

 0.0030

 4

 0.086%

 < 0.143%

 0.0040

 5

 0.143%

 < 0.243%

 0.0053

 6

 0.243%

 < 0.488%

 0.0081

 7

 0.488%

 < 1.049%

 0.0126

 8

 1.049%

 < 1.595%

 0.0176

 9

 1.595%

 < 2.986%

 0.0239

 10

 2.986%

 100.00%

 0.0383


When calculating a Mean Score the Monthly Score is rounded to six decimal places (or four decimal places when expressed as a percentage (as above).

Within the Pension Protection Score Portal you will be able to see a summary of the Mean Score, Levy Band and Levy Rate that has been calculated for each employer, once Experian have calculated them.

 

Guarantor Levy Band Adjustment
The Levy Band of guarantors (unless they are ultimate parent companies that file consolidated accounts) of Type A contingent assets is adjusted according to the increase in gearing that would result if the guarantee was called upon.

Guarantors’ Adjusted Levy Bands and Adjusted Levy Rates will be available through the Portal once the contingent asset has been reviewed and the PPF have notified Experian of the basis for the adjustment.

 

Mean Scores for employers based outside the UK
The same broad basis of calculation is used for non-UK employers as those in the UK. Accounts information is collected by Experian where they are able to and if they are not accounts can be voluntarily submitted to Experian. The Mean Score is matched to a Levy Band and Levy Rate in the same way as would apply to a UK employer.

Single employer schemes
For schemes with a single employer the Insolvency Risk (IR) is simply the Levy Rate (LR) of the employer.