With the change in insolvency risk assessor from Dun and Bradstreet to Experian, together with a change in methodology, as formally confirmed by the PPF yesterday in their 2015/16 determination, there will inevitably be winners and losers, despite the reduction in overall levy. PPF has acknowledged this, with 10% of risk-based levies expected to increase by £50,000. There are not too many win-win opportunities for Trustees and Employers, however scheme employers with profitable subsidiaries have a current opportunity to both improve the security of their scheme and reduce their PPF levy, which is ultimately financed by the employer, without the need for cash contributions.The new Experian scorecard approach for the risk-based levy places an increased significance on the financial results of an employer, but picks this information up from the latest balance sheet and profit and loss account filed at Companies House, rather than the detailed notes to the accounts.For group members with turnover of £10m to £50m or above £50m, pre-tax profit and pre-tax margin account for 23% and 27% respectively of the score, with any loss-making employer automatically being scored in the lowest banding for these elements. Payment of a dividend, taking a loss to a profit, will automatically improve the scoring and may result in an improvement in the insolvency risk banding. This need not necessarily be by means of a cash distribution and could legitimately be by means of creation of an inter-company debtorThis is particularly relevant to employers with December year ends, which have a short window of opportunity for a subsidiary entity to pay up a dividend before 31 December 2014, with the audited accounts, showing this revenue, filed in time for the Experian data to be uploaded before 31st March 2015.To have an impact on the March score Experian must have had the data in time for its upload on 30th March. This means that the accounts must be actively available on the Companies House website, which will take at least a further two days. Whilst Experian suggest a three week safety lead time, it may be possible to file accounts on 23 March and inform Experian that they are being processed by Companies House. The key message here is that filing on 31 March will be too late. For accounts filed in time, in March 2015, the impact on the Experian scoring will have only a one-sixth impact on the average monthly insolvency score for 2015/16, which is based on the scores from October 2014, with a double benefit if the accounts can be filed in February. There is clearly a full year’s potential benefit in terms of the 2016/17 levy.There are three beneficial impacts of a dividend being paid up to a scheme employer, namely:
- Scheme security is enhanced as an inter-company debtor ranks before a shareholder in terms of an insolvency distribution.
- A stronger employer balance sheet is evidence of a stronger covenant, with potential positive implications for the calculation of the technical provisions at the next triennial valuation.
For the 2016/17 levy it is possible that the above action could lead to an improvement of a further band and reduced levy. One of the features of the 2015/16 levy is the ability for trustees to undertake a ‘what-if’ scenario assessment, showing the impact on the failure score and levy, of changes to the financials. Trustees should use this facility to assess the impact of paying a dividend before the end of the employer financial reporting period.
- The PPF risk-based levy could be reduced. This will be both most likely and most financially beneficial at the higher risk end of the bandings where an improvement of one band could be worth a reduction of approximately 0.4% of the liabilities, i.e. £80,000 on a typical £20m deficit.
For further information please contact Paul Clark on 0207 651 1103 or email@example.com.