Pension Protection Fund, London, is seeking comment on its new insolvency risk model, which will produce customized scores to better assess employers’ insolvency risk and to calculate contributions.
The U.K.’s lifeboat £15.6 billion ($26.1 billion) fund for insolvent firms’ defined benefit pension funds has released a consultation paper setting out details of the proposed new model, which was developed with information services company Experian.
The model is PPF-specific and will lead to changes to contribution ranges and rates. The PPF said in a news release that the new model gives the PPF “much greater precision and discriminatory power in assessing employers’ insolvency risk, and reflects more accurately that the PPF employer universe is very different to the broader U.K. corporate landscape that generic models look at.”
The PPF expects to apply the new scores in October to calculate 2015-16 contributions to allow pension funds to understand and, where necessary, challenge the scores, before they are applied.
“We believe the new insolvency model will ultimately provide more discriminative and robust insolvency risk scores, plus offering greater transparency and access to levy payers,” said Martin Clarke, executive director of financial risk at the PPF, in the news release. “But we are determined that levy payers should be an integral part of this change, which is why we are consulting and allowing levy payers time to understand the new model, to check the information held on them and familiarize themselves with their predicted levy.”
The PPF said the total contributions from employers are not expected to increase, but that some employers may see their payments change. The PPF said it expects around £230 million to be reconfigured, “with more levy payers seeing a fall in their levy than an increase.”
Analyzing a sample of 6,100 plans, the PPF said 34% will see a reduction in payments, with an average 40% fall in contributions. However, 24% will see an increase, averaging 150%. Around 600 plans’ contributions will more than double, and about half of those will more than triple. The five plans with the biggest increases in percentage terms, which have high levels of underfunding, will see their levy contribution increase between 13 and 20 times, according to the PPF.