Thank you, Ian.
I will step back from Ian Leitch’s general introduction to focus on the spring budget revision initially, after which we will pause.
As members know, each year we bring a proposal to the commission for the annually managed expenditure funding to cover the non-cash pension charges that we need to meet in respect of the local government superannuation scheme. The overall AME cover for Scotland is redetermined once a year through the spring budget revision, and we have a routine process for coming to the commission at this point in the year.
Unlike in previous years, this year there are two elements to our proposal, the first of which is due to a reduction in the discount rate since our budget proposal for 2019-20 was submitted to the commission in December 2018. Based on the actuary’s report that we received in April 2019, we estimate that the pension service cost for this year will be £4.1 million higher than the available budget.
The second results from the impact of the McCloud case on pension liabilities. In June last year, the United Kingdom Government was refused leave to appeal the decision in that case, and the affected employees will need to be compensated. The costs of that are unclear, although the UK Government estimates that they might be around £4 billion UK-wide. Initial estimates by the local government pension scheme actuary indicate that the potential past service cost for Audit Scotland might be in the region of £2 million, but the figure could be significantly higher or lower depending on the agreement that is finally reached. It is also expected that the in-year pension benefit cost will increase from the original forecast.
As we are unable to carry forward reserves, any significant shortfall would leave us with a final outturn deficit at the end of the financial year. Therefore, the Scottish Government finance directorate has advised us to request sufficient AME budget cover to meet potential movements in the non-cash pension charge.
In our proposal, we have, therefore, requested the £4.1 million that was forecast by the actuary in April, plus a further £5.9 million to cover any liabilities that are linked to the McCloud case. Obviously, any budget cover that is unused cannot be used for any other purpose and will be returned to the Scottish Government for recycling in the usual way.
We will pause there, chair, and Stuart Dennis and I will do our best to answer the commission’s questions, recognising that this is a particularly complicated aspect of our accounting.