Failure scores are no measure to go by - Aon
UK - Trustees should not let improving insolvency measures lead them into a false sense of security, as worsening economic conditions are still increasing the likelihood of insolvency, Aon Consulting warned today.
Companies must ensure they have robust contingency plans in place to protect their businesses and assets as this lack of attention could leave pension schemes exposed, suggested the consultant in a communiqué.
Aon criticised the use of Dun & Bradstreet's failure scores, the primary sponsor insolvency measure for the UK's Pension Protection Fund (PPF), arguing the improving nature of the results gives the false impression that all is well.
Instead, the D&B score is actually designed to focus on short-term cash flow rather than the overall financial stability, said Aon.
"The PPF states in its annual ‘Purple Book' that 0.7% of active companies go into insolvency liquidation each year, but the risk of insolvency is dramatically higher for the 5% of companies with the lowest D&B failure score," said the company.
It added with D&B failure scores showing consistent improvement, "a false sense of security has built up for many trustees and sponsor companies", while in reality the credit crunch means even robust companies can become vulnerable, sometimes without much warning.
According to the consultant, it is a mistake to think only the schemes which are in deficit and with weaker employer covenants - which include an employer's willingness, ability and legal obligation to stand behind its pension scheme - are at risk.
Paul McGlone, principal and actuary at Aon Consulting, commented the number of corporate insolvencies is likely to rise over the-short-to-medium-term, increasing the number of schemes dependent on the PPF.
"We have to hope that type of economic downturn has been factored into the PPF's modelling, so that any increase in cases entering the PPF does not result in premiums being increased further," he concluded.
Aon thinks a substantial increase in company failure could prove problematic for the PPF in the long-term, which could lead to greater levies, depending on the extent to which the PPF has built margins for such factors into its calculations.
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