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Cymraeg | |
D&B Methodology QuestionsAbout D&B see also the Insolvency Probability Table 2008/09-2009/10 |
| Useful numbers and addresses for further information about D&B: | ||
D&B’s Customer Service team for Pension Protection Fund related queries - 0870 850 6209 D&B’s main Customer Service team: - 0870 243 2344 / customerhelp@dnb.com. D&B Customer Services | D&B’s UK and Europe Headquarters: D&B New business/related products and services: 0800 001234 | |
What is D&B?
D&B (or Dun & Bradstreet) is a provider of business information which supplies the Pension Protection Fund with insolvency risk data on the sponsoring employers of pension schemes that are eligible to pay the pension protection levy. See the D&B website for more information
Why was D&B appointed by the Pension Protection Fund to assess insolvency risk?
D&B was appointed to provide the PPF with insolvency risk information following a competitive tendering exercise - measured against specific criteria, including
What is the D&B Failure Score? (updated 8/8/08)
The D&B UK Failure Score is a percentile score designed to predict the likelihood that a company will cease operations without paying all creditors over the next 12 months. This includes the onset of failure such as meeting of creditors, administrator appointments, bankruptcy, receiver appointments, petitions for winding-up and other legal events.
The score indicates a relative measure of risk ranging from 1 to 100, where 1 represents businesses that have the highest probability of failure and 100 the lowest.
A score is calculated for all UK businesses (for exceptions see below) so that approximately one per cent of businesses have the same score. This means that the score shows where a business ranks among scored UK businesses in the D&B database. D&B use an equivalent approach in other countries.
For example – if a business has a score of 85:
The following example shows the failure score of a strong company with low risk of failure (eighty five per cent of businesses in the database have the same or a higher risk of failure).
Each score will have an associated probability of failure. Any two businesses with the same score will also have the same probability of failure.
More information can be found on the Failure Score page on D&B’s website.
How does the Pension Protection Fund use the D&B Failure Score for the insolvency risk calculation?(updated 8/8/08)
For single employer schemes, the Pension Protection Fund will take the D&B Failure Score and map it to a PPF assumed probability of insolvency and use that assumed probability of insolvency in the risk-based levy calculation.
For multi-employer schemes, we will take the Failure Scores of all the participating employers, map those to the PPF assumed probability of insolvencies and calculate a weighted average probability of insolvency. This average probability will then be used in the risk-based levy calculation.
The probability of insolvency corresponding to a given Failure Score is used in the 2008/09 risk-based levy formula as follows:
Underfunding risk x insolvency risk x 0.8* x 3.77**
*The risk-based levy is 80 per cent of the total pension protection levy
**The levy scaling factor is 3.77
The D&B scorecard used for the 2008/09 risk-based levy includes some refinements to previous years. Changes include:
Does D&B have a Failure Score for every business in the UK?
The D&B Failure Score is available for virtually all businesses in the UK with the exception of:
How is the Failure Score calculated?
The Failure Score is created using a statistical modelling technique that looks at the D&B databases to determine which data characteristics have historically been common to failing and successful companies, and then using this knowledge to build a scoring algorithm via logistical regression.
Although there are consistent scores for all businesses regardless of their size or line of business, different factors are obviously taken into consideration. For example, the assessment of a large limited company with a board of ten directors will be based on different factors to a sole trader. However, it is possible that both could have the same score, and hence the same probability of failure.
What data elements and factors are taken into account when producing the D&B Failure Score and what quality controls and verification processes are there in place to ensure its accuracy?
In order to calculate the Failure Score in the UK, D&B collects data from a wide variety of public and unique data sources, including:
This data is put through a rigorous verification and validation process before it is inserted into the main D&B database.
There are a number of factors which influence the D&B Failure Score, and these fall into five main categories. Below is a list of some of the most significant elements in each category:
Demographic information
| Line of Business | Line of business or Standard Industry Code (SIC) is very relevant because different industries have different levels of risk. | |
| Region | Different regions have different levels of risk. This may happen due to cultural, historical, business structure or even government support in the different regions. | |
| Years in Business | While young and recent established companies seem more likely to fail, older companies have much lower risk. | |
| Parent Company | Having a parent company may have a positive effect on a subsidiary, while having a parent company at significant risk may indirectly increase the risk of the subsidiary. |
Public Negative Data
| Negative Public Information | Bad debt, county court, credit placed for collection, mortgages and charges are all associated with an increase in risk, although the volume, value and timeliness of these indicators is also considered. |
Principals
| Average Age |
The more experienced the principals can mean the less risky the business. |
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| Associated Businesses | The associated businesses (both currently and previously) are an important factor.In particular, a high proportion of associated businesses which have previously failed indicates a higher level of risk. |
Trade payments
| PAYDEX®,Paydex Variance and Paydex Trend | PAYDEX stands for “payment index,” which is based on an analysis of past payment behaviour as reported to D&B. The model looks at a company’s trade performance over the past 12-18 months, its volatility, its trend and its present value to predict future failures. | |
| Percent of Satisfactory Payment Experiences | The higher the percentage of satisfactory payment experiences the lower the risk. | |
| Percent of Payment Experiences 90 or more days Past Due | The lower the percentage of payment experiences of the firm that fall within the 90 or plus days past due category, the lower the risk. |
Financial Information
| Age of Balance Sheets | A more recent Balance Sheet indicates lower risk. Very old financials or financials delayed for companies obliged to file their accounts is seen differently. | |
| Liabilities to Net Worth (Solvency) | Generally, the lower the company’s ratio of liabilities to net worth, the lower its overall likelihood of risk. | |
| Profit Margin | Generally, the higher the company’s profits, the lower its overall likelihood of risk. | |
| Retained Earnings and Shareholders Return | Profits may be retained or distributed. These two elements are correlated with the probability of a company becoming bad in the next twelve months. While retained earnings seem to be positively associated with good companies, negative or extremely high shareholder’s returns are more associated with bad companies. | |
| Cash | More cash means more liquidity and that can indicate lower risk. | |
| Current Assets | Generally, the higher the company’s current assets, the lower its overall likelihood of risk. |
Every night the scores are recalculated by D&B’s Dynamic Rating Systems to ensure that the ratings which are delivered the following day are as accurate, complete, timely and consistent as possible. In addition to the quality standards which the data must satisfy, the underlying models are subject to certain statistical tests, both during development and on an ongoing basis.
The models are also reviewed regularly for changes in the underlying population or specific data elements. If these shifts are statistically significant, the models are refined or completely redeveloped. This ensures that they are as accurately predictive as possible for the representative universe of businesses.
The ratings produced are therefore an independent, unsolicited assessment of the relative risk of a business and its associated probability of failure.
Are D&B assessment techniques more relevant for smaller companies?
The D&B Methodology is based on retrospective analysis of business failure across all businesses both large and small. For example, the assessment of a large company with a board of ten directors will be based on different factors to a sole trader. However, it is possible that both could have the same score and hence the same probability of failure. Large businesses can fail just as small ones do.
My D&B Failure Score does not correspond to the credit rating from Moody’s/S&P/Fitch etc, why won’t the PPF take my credit rating instead?
It is inappropriate to compare the D&B Failure Score with any other agency’s credit measure. The PPF appointed D&B as their sole insolvency risk provider as we believe that D&B’s credit scoring method provides a comprehensive and sound quantitative assessment of risk.
Credit rating agencies usually measure default rather than insolvency risk. It is an insolvency event that will trigger the PPF assessment period and therefore risk of insolvency that the Board is required by legislation to consider. Although default is often a pre-cursor to insolvency, an insolvency event does not always follow a company defaulting. By using the probability of default the PPF could be over estimating the amount of levy needed to be collected. Similarly available credit ratings might not necessarily assess the sponsoring employer, which is this specific entity that the PPF is required to consider.
I am not legally obliged to file accounts at Companies House, would it help if I gave them to D&B?
D&B are happy to receive signed, audited accounts. They can be posted or scanned/emailed and need to be supported by a 'letter of authentication' (delivered by post) signed by a director or authorised principal of the business. The letter should confirm the accounts are an accurate representation of the business & give D&B full permission to abstract & reproduce the data.
The addition of audited accounts may or may not affect the D&B Failure Score it is one of a number of factors that are taken in consideration when assessing and calculating the probability of failure of a business. The Failure Score can change for a number of reasons and is often as a result of a combination of factors.
Due to the integration of data across a wide range of products and monitoring services to our customers D&B will not remove the accounts, other than for historic reasons, from the database.
If you wish to provide accounts as indicated, please send them to customerhelp@dnb.com and mail the 'letter of authentication' to
D&B Customer Services
Suite 5.3
Building 8
Exchange Quay
Salford
Greater Manchester
M5 3EJ
Does D&B take account of parental guarantees in its Failure Score? Does the Pension Protection Fund take them into account in the risk-based levy calculation?
D&B do not take parental guarantees into account in the Failure Score, whether those guarantees are provided to the subsidiary employer or to the pension scheme. However, information on parent companies is included in the demographic information collected by D&B within the Failure Score calculation. Having a parent company may have a positive effect on a subsidiary. Conversely, having a parent company at significant risk may indirectly increase the subsidiary’s risk.
The Pension Protection Fund published its rules for calculating the 2008/09 pension protection levy within the Board’s Determination under section 175(5) of the Pensions Act 2004 (“the Determination”) on 19 February 2008. This document included the rules for recognising contingent assets including group company guarantees in the risk-based levy calculation. For further information please consult the Determination
Contingent assets, including group company guarantees, are recognised by the Pension Protection Fund in the risk-based levy calculation. For more details see our pages on voluntary certificates
I have put in place a parental guarantee for my scheme, the parent company is a based in a foreign country, how can I find out their insolvency risk?
1. Contact the D&B dedicated helpline for Pension Protection Fund related queries on 0870 850 6209. They will obtain a Failure Score for the overseas company.
2. Contact the PPF Stakeholder Support Team on 0845 600 2541 providing details of the country of domicile of the overseas guarantor and the corresponding Failure Score provided by D&B. The Pension Protection Fund will provide the company with a probability of insolvency for that Failure Score.
Why are the assumed probabilities of insolvency attached to particular D&B Failure Scores different for every OECD country?
The assumed probabilities of insolvency attaching to particular Failure Scores or local equivalents differ between OECD countries, because of variations in the overall national insolvency rates which are reflected in local scoring models.
Can you calculate a D&B Failure Score if the published accounts are in a non-sterling currency?
We do calculate Failure Scores for UK businesses whose accounts are published in non-Sterling currencies. The only obvious exception to this is Foreign Companies (registered in the UK), for which we do not provide a Failure Score.
Do County Courts Judgments (CCJs) have an affect on my D&B Failure Score?
For the purpose of the 2007/08 levy calculation the PPF implemented a rule in respect of CCJs, whereby the weighting applied to CCJs in the Failure Score methodology was reduced in some circumstances to ensure that the insolvency risk calculation best suited the universe of sponsoring employers of pension schemes under consideration and avoid disproportionate and volatile score changes caused in some cases by CCJs. Further detail is available in the 2007/08 levy Determination.
D&B refined their Failure Score methodology in summer 2007 and scores based on this methodology will be used for the 2008/09 risk-based levy. The new UK scorecards treat CCJs according to the size of the business, along with the number, value and timing of any judgements. This will ensure CCJs do not have a disproportionate effect on the Failure Score.
How can I find out my Failure Score? (updated 8/8/08)
If you wish to obtain your 30 March 2007 (for 2007/08) or 31 March 2008 (available from 31 March 2008 for 2008/09) Failure Score, which will be used in the PPF’s risk based levy calculation, you should contact D&B’s PPF helpline on 0870 850 6209. You can also contact the D&B PPF helpline to monitor your score on an ongoing basis, however there is a cost for this subscription based service.
Does it cost me anything to see my own D&B Failure Score? (updated 8/8/08)
If you wish to see your 30 March 2007 (for 2007/08) or 31 March 2008 (for 2008/09 and 2009/10) Failure Score, there is no charge.
However, if you wish to view one of D&B’s more comprehensive reports on your organisation, a fee is payable. Contact D&B directly for more details on these.
What can I do to change my D&B Failure Score?
A number of actions can be taken directly by you to influence your Failure Score, for example ensuring that the most recent accounts and director information has been filed at Companies House. We encourage all sponsoring employers of schemes eligible for PPF protection to speak to D&B directly in order to understand their score and learn what they can do to improve it.
The only instance when the Failure Score used in the risk-based levy calculation for 2008/09 would now change would be if a company identified that incorrect or out of date information had been used in that Failure Score calculation. If you wish to request a review of your 31 March Failure Score you should contact the dedicated D&B helpline for Pension Protection Fund related queries on 0870 850 6209. You may request a review up to 28 days after issue of a levy invoice.
Can D&B tell me the reasons why my D&B Failure Score has changed since the last time I checked it?
The D&B Failure Score can change for a number of reasons, and often it is as a result of a combination of factors. Therefore, highlighting exactly why it has changed from one day to another is sometimes difficult, but importantly, the score will only change if there has been a significant change in the risk of the business. This means that historically, other businesses which have experienced the same change have then had a significant increase (or decrease) in the proportion of insolvencies in the subsequent 12 months.
What do I do if I believe that D&B has used incorrect or old data in my Failure Score calculation?
Please contact the D&B customer service team (customerhelp@dnb.com / 0870 850 6209). They will be happy to look into the data elements from which your score is calculated.
How can I be informed of any changes to my D&B Failure Score?
To find out your Failure Score, please contact D&B Customer Service as above. If you wish to receive regular reports on your company and be notified changes to your score you will need to become a D&B customer. Please contact the D&B products and services team on 0800 001234 for more details.
Please refer to the information on "Querying Your Invoice" in our invoicing section
Can I appeal the D&B Failure score for the purposes of the Pension Protection Fund risk-based levy calculation because I believe adopting FRS17 has influenced my score?
No. The Board’s levy determination requires the Board to use the standard D&B failure score as at, subject only to a limited number of adjustments - not relating to FRS17 – set out in the determination. The Board has no discretion to depart from the determination when calculating the levies. Of course, you may appeal the score if you believe that other information, not relating to FRS17, which should normally have been taken into account by D&B’s scoring process as at the insolvency risk measurement date (30 March 2007 for 2007/08; 31 March 2008 for 2008/09 and 2009/10), was not in fact taken into account in calculating your failure score.
I have adopted FRS17 within my company balance sheet, how will this affect the D&B Failure Score and associated probability of insolvency used by the PPF for the purpose of the levy calculation? (added 8/8/08)
FRS17 implementation starts from the assumption that the assets and liabilities of a pension plan are essentially assets and liabilities of the sponsoring employer, and as such should be recognised at fair value on the company balance sheet. Any changes to the assets and liabilities on the filed and audited financial statement will be considered in the D&B Failure Score. However, it is important to remember that the inclusion of the pension deficit on the balance sheet will not necessarily have a negative impact on the Failure Score, and there are a range of other factors that may explain any deterioration.
If you are concerned with the effect that including this pension deficit could have on the Failure Score of a particular company and the levy payable by the pension scheme sponsored by that employer, please contact D&B Customer Services at customerhelp@dnb.com or on 0870 850 6209.
Does adopting FRS17 mean the deficit in the pension scheme is counted twice, once on the company balance sheet in D&B’s insolvency risk calculation and once as the section 179 deficit in the underfunding risk calculation? (added 8/8/08)
No. The D&B failure score assesses how likely your company is to go insolvent without paying its creditors, taking all of its assets and liabilities into account. FRS17 assumes that the assets and liabilities of a pension plan are essentially assets and liabilities of the sponsoring employer and so these are included in D&B’s calculation of insolvency risk.
The underfunding risk calculation is a measure of the size of the claim a pension scheme would make on the PPF should the scheme’s sponsoring employer become insolvent. We are required by law to assess both of these risks separately.
