The Treasurer March 2006

Why the Failure Score is still hit and miss

Any new system takes time to bed down and maybe, with the benefit of hindsight, the current concerns over the Failure Score element of the Pension Protection Levy will be seen to have been overplayed. Nevertheless, as the implications dawn on a treasurer community which is having to cope with a host of regulatory changes in pensions and other areas, there is a growing sense of frustration and bewilderment.

D&B, the ratings agency charged by the Pension Protection Fund (PPF) to come up with the Failure Score, is working hard to cooperate with treasurers and to be seen to be working hard in explaining as much as it can. But there’s the rub. There is only a certain amount that can be revealed to treasurers about how the score is calculated. D&B says there is much less cloak and dagger than there was 12 months ago. While that is good news, treasurers still feel that the black box element – where data goes in and a score churns out – is simply inequitable.

Companies want to do everything they can to improve their score – that is a legitimate aim. Although D&B can supply a detailed report on the positive and negative elements in a company’s score, such a report requires the work of an expert and therefore takes some time for it to complete. But D&B can only provide a company with the facts: it cannot reveal the methodology used or tell it how to improve its score.

Treasurers are confused by the D&B methodology and how it arrives at a particular score. Although the ratings agency makes much of being as transparent as possible, treasurers are not satisfied that the PPF is doing enough. The consensus among treasurers is that any information that D&B holds about a company should be made readily available without extra cost.

For treasurers, there are two clear risks with the Failure Score: first, that their organisations may be handing over a greater level of levy than necessary; second, that they are not going to win any prizes internally when boards of directors ask – as they will – how the Failure Score can be enhanced and the answer comes back: “I’m not sure.”

For the PPF to work in the long term it needs the co-operation and goodwill of the schemes and participating employers. It would be foolish to expect the PPF to address all concerns at such an early stage when so much remains to be done, but it does need to prove it can listen to legitimate grievances and respond to them. Adding greater clarity and transparency to calculating the Failure Score should be top of the list.

PETER WILLIAMS
Editor

See Finding Failure, p30

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