Meeting of the Commission

Meeting date: Wednesday, December 22, 2021

Official Report 537KB pdf

---

Audit Scotland Spring Budget Revision 2021-22 Budget Adjustment

Agenda item 2 is consideration of Audit Scotland’s spring budget revision 2021-22 budget adjustment. Members have a copy of the spring budget revision budget adjustment in their meeting papers. I welcome Alan Alexander, chair of the board of Audit Scotland; Stephen Boyle, the Auditor General for Scotland; Martin Walker, acting director of corporate services at Audit Scotland; and Stuart Dennis, corporate finance manager at Audit Scotland.

I put on record the commission’s thanks to Diane McGiffen, who has recently left her role as chief operating officer of Audit Scotland. She is taking up a new position as chief executive of the Law Society of Scotland. I am sure that everyone will join me in thanking Diane for all her work over the past 20 years and wishing her well in her new role. With Diane’s departure, I welcome Martin Walker to his first appearance before the commission in his role as acting director of corporate services.

I invite Alan Alexander and then the Auditor General to make any short introductory remarks.

On the matter of the spring budget revision, I would appreciate it if the commission heard from Stephen Boyle first and came back to me for the rest of the agenda. In other words, Stephen will make the opening statement on the spring budget adjustment and I will do the one on the budget proposal.

Okay. That is grand.

Good morning. I am happy to make a couple of introductory remarks on the spring budget revision. If you are content, chair, I will make fuller remarks following Mr Alexander’s comments on the budget proposals.

As ever, the spring budget revision request relates to Audit Scotland’s pension arrangements, and the membership, for the vast majority of Audit Scotland staff, of the local government pension scheme, which is a defined benefit scheme, supported by assets and subject to valuation by the scheme’s actuaries.

Each year, employers such as Audit Scotland have to make accounting disclosures and, if necessary, accounting adjustments to reflect the result of the valuations, based on actuarial assumptions. From the information that we have been provided by the scheme’s actuaries, that has resulted in a spring budget revision request to the commission of £6 million for the financial year 2021–22.

The background to that relates to changes in assumptions and, in particular, to a reduction in the discount rate that the actuaries are using. That has an effect of increasing the liabilities of the scheme and the associated share that the respective employer members, such as Audit Scotland, recognise.

Lastly, I advise the commission that Audit Scotland is in discussions with the Scottish Government finance directorate to highlight the financial implications and requirements across all of Scotland’s public bodies that will make these accounting adjustments, where their funding comes from central Government or parliamentary sources. It is covered by what is known as AME—annually managed expenditure—funding, reflecting the non-cash adjustment from that funding. Subject to confirmation of negotiations, that is due to be received from Her Majesty’s Treasury.

I am happy to pause there. Stuart Dennis and I would be delighted to answer any of the commission’s questions.

Thank you, Auditor General. I remind witnesses and members that they should pause briefly before they start to speak to ensure that the broadcasting team has time to switch on their microphone. Any member who has a supplementary to a question should type R in the chat box, and I will bring them in as soon as I can. As always, I would be grateful if questions and answers could be kept as tight as possible.

Auditor General, this non-cash accounting adjustment seems to come up every year, regular as clockwork. In fact, I cannot remember when it last went the other way. With regard to the Lothian Pension Fund, you have stated that you have had some discussions with the Scottish Government, but are we satisfied that the previously agreed arrangements with HM Treasury remain in place to meet the pension adjustment?

I am happy to answer both questions, although Stuart Dennis might want to update the commission on where we are with the discussions with the fund and the Treasury. Over the years, this situation has fluctuated between an increase or a reduction in budget requirements, but our expectation is that we will be seeking support from the commission for additional AME funding budget approval both this year and probably in years to come if the assumption that discount rates will fall holds good. Of course, none of us can talk about this with a strong degree of confidence. In fact, just in the past week, the Bank of England changed interest rates for the first time in many years, and there is undoubted variability in the discount rates that are used to measure the scheme’s assets and liabilities.

Stuart Dennis can say a wee bit more about our confidence in HM Treasury support, but what I would say is that having AME funding support to cover the totality of what is ultimately a non-cash adjustment is a well-trodden path, and it is rooted in accounting disclosures that need to be correct and proper. There is no direct flow of funds from the central UK Government to Scotland—there is merely the need to have sufficient budget cover.

I will pause there and see whether Stuart wishes to add any more detail.

I can absolutely confirm what Stephen Boyle has just said. This is a non-cash adjustment. Each year, the Scottish Government finance directorate and HM Treasury discuss the requirements for Scotland in respect of such adjustments; we have always been included in those discussions, and we regularly communicate with them to highlight what our requirement will be for the year. I do not expect any rejection in that respect. The proposal is always supported, because it is a non-cash adjustment and because it is part of an accounting standard and treatment that we need to adopt in our annual accounts.

I just want to clarify something in my own mind. I have this vision of a big pot of liabilities taken from all four nations sitting down at the Treasury in Westminster. How is that accounted for?

It is a combination of things. There is accounting in the individual bodies and accounting on a UK basis. HM Treasury’s accounts, which of course are audited by the National Audit Office, will disclose what the annually managed expenditure budget has been and the call on it in totality, and that will be recorded. There are also the UK whole of Government accounts, which capture the scale of assets and liabilities.

However, many of the schemes will be accounting on their own basis. In other words, the local government pension scheme will produce its own accounts, which are audited by Audit Scotland; they are disclosed as the scheme’s formal assets and liabilities, and then the respective members of the scheme will make extensive disclosures in their accounts. For example, Audit Scotland’s annual report and accounts contain many pages of pension disclosures and set out our respective share of the liabilities, and as the commission will know, they, too, are subject to annual audit. There is therefore in the round a number of components of assurance with regard to the disclosure of budgets and the pots of assets and liabilities.

Thank you. I call Mark Ruskell.

I am content with those answers to your question, chair, but I have a wider question about pension governance in the Lothian Pension Fund. What role does Audit Scotland play in it as an employer? What role do the members of the scheme play in the fund’s governance, given that many of those people are your existing or former employees? Stephen Boyle or Stuart Dennis might want to answer that.

I will start, and Stuart might want to follow.

We are the external auditors. The Accounts Commission appoints the external auditors of the Lothian Pension Fund to carry out that function. Actually, I should say that we appoint the auditors. Strictly speaking, the Lothian Pension Fund auditors are one of the firms that we appoint as external auditors.

In relation to our engagement with the pension governance arrangements, we are always mindful that, although we are an employer member, we also appoint the external auditors. Therefore, an appropriate distance needs to exist so that we do not compromise the independence of external audit in any way. Stuart can say a bit more about how we manage that and about the engagements that we have directly with the Lothian Pension Fund.

The commission might be familiar with the fact that, in recent years, significant changes have taken place in public pension governance arrangements, with the creation of pension boards—if I recall correctly, that has been in the past five or six years. The aim is to increase representation from employers and employee members in order to inform and shape some of the workings of public pension funds.

The success of those arrangements is a matter for review by the individual pension funds. They publish annual reports and conduct governance reviews, all of which seek to further the agenda that people who are members of the fund—employers or employees—are better informed, understand that significant sums of public money are used, and recognise that those liabilities and assets will exist for many generations.

I invite Stuart to talk about Audit Scotland’s—[Inaudible.]

I would add that the Lothian Pension Fund prepares a pension strategy document each year that we, as an employer, see.

As the Auditor General said, we are an audit body, so we do not feel that it is appropriate for any of our members of staff to be a member of the Lothian Pension Fund, even though we appoint an external firm to carry out that audit work. However, we are involved in pension strategy, and people from the Lothian Pension Fund contact us regularly to ensure that we are content with the way in which the fund operates.

As no other member has indicated that they wish to ask questions on the spring budget revision, I thank the witnesses for their evidence.