I welcome back the Audit Scotland team. We have before us Audit Scotland’s proposal for a 2010-11 autumn budget revision. I invite Mr Black to make a short opening statement.
I will be brief. Over the past few years, we have managed to reduce significantly our requests for end-year flexibility, and our underspend has come down. As the commission will be well aware, it is not possible for Audit Scotland to carry balances and it would, strictly speaking, be illegal for Audit Scotland to run a deficit. It is a challenge to manage that, but we have reduced the underspend significantly. We are able to continue that trend within the framework of the current proposal.
Do colleagues have questions?
I want to follow up on the theme of the questions that I asked earlier. There is a significant increase in pension costs. This is perhaps going off at a bit of a tangent, but Mr Frith said earlier that some organisations will have to make higher contributions as a result of the adjustment. From the work that Audit Scotland does with local authorities and other public sector bodies in auditing their accounts, do you know whether the issue is causing substantial problems for organisations because they are having to make contributions that are even higher than the ones that Audit Scotland is having to make?
The short answer to that is that it is a significant pressure on the budgets of any public body that is required to make a contribution to pension costs. Audit Scotland will make a report to the Scottish Parliament in the early months of next year that will give a picture of the overall burden of unfunded liabilities in Scotland. That should be with the Parliament by March at the latest. It will give members an up-to-date assessment of the position as we see it in Scotland.
In relation to Audit Scotland’s budget, have you had staff taking early retirement in the past year?
No, not early retirement, although there have been normal retirement dates.
So none of the costs that are reflected is to do with people having to leave early and your having to make additional contributions. It is purely because the actuaries have brought in different calculations.
Yes. Just to be clear, given the conversation that we had earlier, the general upward pressure on employer contributions applies across all members of the various public sector schemes. The particular addition that we are talking about arises because of the sudden drop in interest rates during 2009-10, which has resulted in the annual charge that needs to be recognised in our accounts moving above the amount that we actually pay in contributions. That is in accordance with the accounting standard.
Can you explain that last part again? You are underpaying.
By the definitions of the accounting standard, the amount that we are paying over in cash for this year is less than the full accounting cost of the pension. In previous years, it has been more. Over the lifetime of the scheme, it balances out.
If you are accounting at a higher rate than you are paying, I presume that what you are paying is also reflected in your accounts. How is the difference reflected in your accounts?
The difference is reflected as a non-cash charge or a non-cash credit.
The figures at the bottom of page 2 of our autumn budget revision show the values of the non-cash credits that have been released by that phenomenon in recent years. The point that Russell Frith is trying to make—my apologies; I mean the point that he is making—is that in the past quite a number of non-cash credits have come back to the Parliament. It just so happens that, this year, it has tipped the other way because of the volatility of these numbers in relation to what can sometimes be quite small movements in the real discount rate. It is a fact of life.
Does the same phenomenon apply to all public sector bodies?
It will apply to central Government bodies that are members of the local government pension scheme. For local government bodies, statutory mitigation is in place that enables them, for the purposes of calculating council tax, to ignore the volatility and simply record the amount that they are paying over to the pension fund. That is a specific statutory mitigation that was brought in four or five years ago.
Would it be helpful if bodies such as yours did not have to do as you do but were able to do as local government does? Would that be helpful in the preparation of accounts?
It would certainly reduce one of the biggest volatilities between the budgets that you approve well before the start of the year and the likely outturn for us.
What financial benefit is there in your being required to follow that standard when local government is not required to do so?
The principle would be that public bodies should follow accounting standards wherever possible. The issue for local government is that the volatilities that have been introduced by its slowly adopting all the same standards as the private sector have also had the potential to impact in the short term on the amount required to be raised through council tax, although any payments involved would not have to go out for many years hence.
I understand that, but what is the benefit of this accounting standard?
From the point of view of the health of public finances in Scotland as a whole, by taking into account the present cost of future pension liabilities, we know what obligations the public sector is taking on for future pensions. However, the reality is that, under the current regime for calculating the discount, we rely on discount rates that actuaries set, which can vary. As we capture on page 3 of our report, the real discount rate was 1.6 per cent at March this year whereas, back in March 2009—just a year previously—it was 3.7 per cent. As the numbers are highly geared, such changes can produce a significant difference in the result.
Not at present.
I am struggling to think why, if the standard is important enough to apply to organisations such as Audit Scotland, it is not applied to local government, notwithstanding some of the problems in relation to council tax. If the local government arrangement can apply without significant concern, why not allow the same flexibility for all other organisations? Should we make representations for the accounting standard to be dispensed with for other public sector bodies?
The number of central Government bodies that are affected is relatively small, because the measure applies only to members of the local government scheme. Members of the principal civil service scheme, the national health service scheme or the teachers scheme deal with another different form of accounting, which dispenses with the need for the volatility. The answer is probably that nobody has regarded the issue as a sufficient priority.
That raises the question whether we should submit that the accounting standard should be dispensed with for bodies that are affected, such as Audit Scotland. Is the issue not significant?
I suggest that the Public Audit Committee might want to reflect on that matter when it considers the report that we will publish early next year on the state of play with public sector pensions.
Should the SCPA not comment on the standard, as it has an impact on Audit Scotland’s accounts?
That is clearly a judgment for the commission to make.
I am not sure whether I am getting more than a frisson of understanding of the matter.
That is more than I am getting.
I presume that the objective is to avoid a black hole in the accounts—to avoid having to pay £1 million at some point to catch up because you have not paid in the past. I presume that the notional figures are intended to keep you up to date and are right in principle. However, we have a cash difference. Forgive me if I am wrong, but it sounds as if the way in which you are required to account—you ask us for the increase to do that—is the proper, prudent and right way to operate across the years. Am I correct?
That is absolutely correct.
Following Hugh Henry’s point, I think that that might raise the question whether local authorities will be landed with a gigantic and larger bill, because they have an exception and a dispensation. They already have quite a serious pension challenge, have they not?
In theory, the response to your first point is no because, over the scheme’s life, the amounts that are charged to accounts each year will equate to the contributions that are paid over.
We are being asked to find more money and to skew Audit Scotland’s accounts, but the provision applies differently to local authorities.
The commission is being asked to approve resources, not cash. There is no change in the cash that is being paid over.
In a way, you are saying, “You’ve had the benefit of that £2 million in the past, but this year we’re asking for an amount to come the other way.” Is it reasonable to regard the amount that we are being asked to carry forward under EYF this year as being, in effect, a loan that will be recouped in future years when the rates change?
To use your analogy, I would say that we have £2 million on deposit from previous years and are seeking a withdrawal.
It depends on your starting point, does it not?
Indeed.
In the previous year, you sought to carry forward £500,000 of EYF to fund a number of initiatives, one of which involved the question of on-going best-value development, in relation to which £182,000 was not used. Is anything suffering because of that? Are there any pieces of work that you have not been able to do or will not be able to do, and will that have adverse consequences on your general work?
No. We have been able to deliver the programme of best-value work without using those resources because the timing of changing from the first model of best value to the new streamlined model of best value has enabled us to restructure the resources that we required for development. Through the pilot process of the new best-value model, we were able to try out the way in which we were going to run the best-value programme as we were developing it. We now have a tried and tested approach that we can deploy earlier than we would have been able to if we had developed it and then tested it.
Not peers such as Lord Foulkes, I assume. I take it that you mean another sort of peer.
I mean local government peers. I do not think that Lord Foulkes was involved.
Of the work that was completed, we are told that £112,000 was incurred in relation to “Own staff”, who were two whole-time equivalents. Were they staff who were already employed, or does that refer to staff who came in from somewhere else?
Those were a mix of secondments, temporary promotions and so on.
With regard to the £555,000 that has to be found because of changes to the pension scheme, I was interested to note that £309,000 will be found through efficiency savings, and that you are looking to fund the rest from EYF. Where was the starting point? Did you first calculate how much money you could get through efficiency savings and then work out how much EYF you required? Are you confident that you will reach those efficiency savings of £309,000, or is there scope for those savings to be lower or higher, as time progresses?
We are confident that we can make those efficiency savings, partly because of the actions that we took earlier in the year, which we mentioned earlier, such as freezing pay. The fact that that has been accompanied by a recruitment freeze allows us to be sure that we are on track to meet the other pressures in the budget and contribute to funding that cost.
Okay. Thank you.