FSA Annual Report 2006/07 - Better Regulation Ltd

Section four – Financial review
FSA Annual Report 2006/07
47
Table 4.4
Funding the FSA’s net expenditure
Balance Sheet
Financial strength
The statutory accounts show that we
had net liabilities of £81.4m at 31
March 2007, primarily as a result of
pension liabilities of £79.9m,
calculated under International
Accounting Standard 19: Employee
Benefits (IAS 19). The pensions
liabilities will not crystallise for
many years and our approach to
managing them, and to funding our
pension deficit, is explained below.
Notwithstanding the large deficit
currently reported, we believe that
we remain able to meet our
liabilities as they fall due because of
our statutory power to raise fees.
Accordingly, our financial statements
have been prepared on a going
concern basis. Excluding the
pensions deficit measured on an IAS
19 basis, we had a net deficit of
£1.5m.
Our cash balance during 2006/07
averaged £102.7m, totalling £47.8m
at the year end. Detailed
information on how we manage the
financial risks associated with our
pension scheme is outlined below.
During 2006/07, we investigated
options to improve the management
of the risks to our balance sheet and
to our fee-payers. That review
included options to significantly
2006/07 2005/06
£m £m
Total net expenditure for the year per the
Financial Review 269.3 272.2
IFRS adjustment in 2005/06 – (1.6)
Under/(over) spend against budget
(see reserves movement table 4.5) 4.8 (3.2)
Excess fees over budget
(see reserves movement table 4.5) 8.0 3.2
Fees raised in the year 282.1 270.6
reduce the deficit on our pension
scheme by applying any surplus
working capital or by borrowing
against our future cash flow, and
investing those funds in the pension
scheme. As a result of that work we
paid an additional £20m into the
Pension Plan. We also arranged a
£100m revolving credit facility with
Lloyds TSB Bank plc to fund the
costs we expect to incur in
delivering principles-based
regulation and overhauling our IT
delivery and technical infrastructure.
This allows us to spread the costs to
fee-payers over several years. The
price of that facility appropriately
reflects the strength of our financial
covenant.
Financial management of the
FSA’s pension costs
Our pension scheme has two
sections, Final Salary and Money
Purchase. The Final Salary scheme
has been closed to new members,
other than staff transferring from
previous regulators whose activities
we have taken on, since 1 June
1998. At 31 March 2007, 650 staff
(31 March 2006: 745) were in the
Final Salary scheme and 1,840 (31
March 2006: 1,883) in the Money
Purchase scheme. The Final Salary
scheme is relatively immature
compared to many such schemes, in
that just over 12% of members of
the scheme are pensioners.
In our Business Plan for 2006/07,
we committed to making an
additional pension deficit reduction
contribution of £6m during
2006/07. During the year, the
financial security of the new
revolving credit facility enabled us to
make an additional £20m
contribution to our Final Salary
pension scheme while spreading the
cost to our fee-payers over up to
eight years. In total therefore we
made pension deficit reduction
contributions of £26m towards the
funding of the scheme during the
year. Also, the increase in the
corporate bond discount rate (from
4.9% to 5.2%) reduced the deficit
by a further £23.5m. However, a
number of factors offset those
decreases in the size of the deficit,
primarily an increase in the
longevity assumptions employed
(increasing the deficit by £21m),
under-performance of scheme assets
(by around £9m compared to overperformance
of £39m in 2005/6)
and an increase in the r.p.i
assumption (by around £8m). The
under-performance is a result of
currency movements during the year,
rather than as a result of the
performance of the under-lying
assets, which was in line with
expectations. After taking all those
factors into account, the deficit as
measured by IAS 19 had reduced by
£11.4m to £79.9m.
We continue to work with the Final
Salary pension scheme trustee to
secure the pension benefits of our
employees and mitigate the risks
arising from our Final Salary
pension scheme. We believe that our
approach to the management of our
pension costs strikes an appropriate
balance between our obligations to
our staff and fee-payers. We will
keep our approach under review, in
particular to reflect the results of the
next Scheme Specific Valuation,
which will be performed as at 1
April 2007 and we expect will be
completed during 2007/08.