The UK’s Pension Protection Fund (PPF) has confirmed it will launch a consultation on its new, bespoke insolvency score by the end of May and allow schemes to see all data relating to sponsors prior to the system’s launch this autumn.
Updating the industry on its efforts to move from the Dun & Bradstreet (D&B)-backed model to one developed by Experian, director of financial risk Martin Clarke said the new system would provide a more accurate reflection of insolvency risk.
He added that the new system would also offer greater transparency for those wishing to assess how scores had been calculated – likely a concern following a High Court challenge by a defined benefit fund that alleged out-of-date company accounts were employed by D&B.
“The model is also based on more objective financial data than other models, which will mean greater stability in scores over time,” Clarke said.
The lifeboat fund said it would soon launch a consultation on the PPF-specific score, which would assess a company based on one of eight drafted scorecards – including one tailored to the needs of the charity sector.
In a leaflet explaining the PPF’s approach, the fund added: “Different variables are used within different scorecards, but, broadly speaking, each uses measures that capture financial fundamentals such as scale of operations, profitability, gearing, liquidity and cash-flow.
“The design combines spot and trend data and uses continuous variables, which serve to avoid cliff edges – where a slight change in a variable could deliver a large change in score.”
Consultancy Barnett Waddingham said the details published looked to address major concerns previously raised by the industry.
Associate Simon Taylor said the proposed model would place greater emphasis on financial data “rather than some of the more unusual indicators present in the D&B failure score system”.
“Whilst some of the factors considered by D&B were statistically good early indicators of insolvency, they caused unwarranted volatility, and there were too many examples of them unfairly penalising companies, with massive financial consequences,” Taylor said.
He also noted that the new approach would make it more difficult for levy players to manipulate the system, enhancing its credibility.
The PPF further confirmed the new insolvency system would not be used until October, despite the suspension of the D&B score system at the end of the current tax year.
As a result, scores for the 2015-16 levy period will be based on six-month averages.
Taylor said: “Confirmation that scores will not count until 31 October 2014 is welcomed, and the shorter averaging period that will result is a price worth paying.”