PPF shift to bespoke insolvency risk model 'could increase transparency'

UK – The UK Pension Protection Fund’s shift in providers of its insolvency risk scores could lead to greater transparency on how scores are calculated, Towers Watson has suggested.

The lifeboat fund announced earlier this week that it would part ways with Dun & Bradstreet (D&B) in favour of Experian, with which they will develop a bespoke insolvency risk-score system.

Speaking about the change in providers Joanne Shepard, senior consultant at Towers Watson, said she hoped it would lead to a better understanding of how the scores were calculated.

“Certainly, companies would want to see more understanding of he factors that affect the insolvency risk, how is that calculated – so they could have more knowledge of what the impact would be if they took certain actions,” she told IPE.

“You can understand why D&B as a commercial company offering a service, it probably doesn’t want to give too many details about the model it’s using both for the PPF and its own credit scoring purposes,” she said.

Shepard added that, as the new model developed by Experian would be catered to the PPF’s needs, “why not have more transparency over how that model works”.

Milan Makhecha, principal consultant at Aon Hewitt, added that the promised review would allow for amendments to deal with “perceptions of unfairness” in the previous approach to calculating insolvency risk.

“This is an opportunity for a comprehensive review of the way schemes and their sponsors can influence and challenge their ratings,” he said.

“At least, that would ensure any issues with the new system can be rectified quickly – but it is imperative this be all implemented with the least pain and expense for pension schemes.”

Barnett Waddingham partner Nick Griggs also warned that Experian’s assessment of a company could differ from how it was perceived by D&B.

“If their Experian rating is worse, they will have a relatively short window at the start of 2014 to consider what they can do about it, or potentially face a big increase in their PPF levy,” he said.

However, Shepard warned against expectations that there would be a radical shift in the way insolvency risk was calculated.

“My expectation is that they wouldn’t want to change the framework itself, but they’d be looking at things like the stressing factors and the levy multipliers, and, perhaps, the levy band and the insolvency risk associated in the levy band.”