Companies need to clear outstanding bills before the end of March or they could see their Pension Protection Fund (PPF) levy quadruple, claim two leading consulting firms.
Aon Consulting and Hymans Robertson are both warning any outstanding payments or county court judgments (CCJs) could see pension levies rise up to four times higher.
The PPF will set the 2006/07 levies for companies on 31 March 2006, with 80% of the levy based on the risk of insolvency using a company’s credit rating or financial security determined by Dun & Bradstreet (D&B).
But Aon says failure to pay bills for as little as a few hundred pounds could mean levies which are up to four times greater than if they had paid their bills earlier, as credit ratings are heavily impacted by a company’s trade experience with wholesalers and suppliers and any outstanding payments suggest the company is more likely to become insolvent in the following year.
To try and limit the possibility of this happening, Aon Consulting advises companies to be extra vigilant with their financial accounts and settle all outstanding CCJs as a matter of priority or run the risk of facing levies far bigger than necessary.
David Stewart, senior consultant and actuary at Aon Consulting, says there are many factors which influence company credit ratings and prompt bill payments are one of them.
He says Aon’s main concern is companies are failing to realise the huge implication unpaid bills, even those of nominal amounts, will have on their PPF levies.
Hymans Robertson also reveal D&B believe companies with just one small CCJ are four times more likely to fail than a company without any, and they calculate a company with two CCJs is seven times more likely to become insolvent.
The consulting firm warns D&B take into account the number of CCJs in calculating the levy, even if they are small and appear to be trivial.
Robert Inglis, a partner at Hymans Robertson, says: “We have seen some alarming cases where the rating has fallen from around 50 out of 100 to less than 10 as a result of a company collecting some CCJs for tiny amounts. But the impact on the levy can run into millions.”
He adds that as the PPF levy will be calculated by looking at information as of 31 March 2006, companies need to move fast to clear all outstanding CCJs and most importantly ensure they don’t pick up any more.
Stewart says: “I am aware of a number of companies that tare expected to have reduced their levy by more than 75% as a result of paying a few small outstanding bills. For a scheme with liabilities of £400m this could result in a levy reduction of more than £1.5m.”
He admits although this is at the top end of the spectrum, there are still a huge number of companies who will find themselves crippled by an unmanageable increase in their PPF levy if they fail to pay their invoices on time.
But Clive Fortes, a partner and head of actuarial practice at Hymans Robertson, warns companies need to act now, as the D&B scores are rankings not ratings and as companies clear CCJs and take other actions to improve their D&B score they will overtake other companies in the D&B ranking list.
He says: “D&B scores look at how likely companies are to fail compared with others. So some companies could see their rating fall and their levy go up even though their financial position is unchanged.”
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