December 14
Season’s greetings in the 2017 Purple Book?

The publishing of the Pension Protection Fund’s Purple book is one of the highlights of my year and 2017 is no exception with some gems tucked away on insolvency.  In particular, the average insolvency rate of PPF eligible schemes’ sponsoring companies has fallen from 0.8% in 2006 to 0.3% in 2017.  This is based on the four quarter moving average of total historic insolvency events i.e. is based on past data.  In addition the average insolvency probabilities for schemes with over 10,000 members (based on future expectations) has fallen dramatically as shown in the following two charts from the 2016 and 2017 Purple book.

 insolvency chart 2016.pngInsolvency chart 2017.jpg
So, why isn’t the PPF cheering about these figures?  The answer relates to whether we can be comfortable that the improvement shown by the statistics represents a “real” change in the underlying situation and a realistic expectation of future sponsor insolvencies.  The first statistic is based on past data and since Q2 2013 the four quarter moving average of insolvencies has fallen from 0.8% to below 0.4% in Q3 2014.  The rate of insolvencies has remained relatively stable since then, falling slightly in 2016.  However, it is difficult to tell whether this is a fluctuation around a longer term falling trend or a step change in insolvency rates.  We know that economic conditions have been relatively benign since the start of this drop in Q2 2013 and therefore it is hard to believe that this represents a step change.
The second set of data is based on future insolvency expectations but is based on different methodologies.  In 2016 Experian failure scores were converted into credit ratings which were then used to derive a probability of insolvency over the next year whereas in 2017 the schemes’ levy rates were used as a proxy for insolvency probabilities.  This change in methodology may explain some of the difference although it is difficult to know how much.  In addition, is it reasonable to believe that the one year insolvency risk for the 197 sponsors of schemes with over 10,000 members has improved so significantly over just one year (from 0.6% to c 0.25%)?
This uncertainty about what the statistics are actually showing and why perhaps explains the lack of commentary by the PPF on these apparently dramatic changes since  2013 and for now we can only be cautiously optimistic about the rate of future insolvencies within the PPF universe.

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