FSA Annual Report 2006/07 - Better Regulation Ltd

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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.
48 Section four – Financial review FSA Annual Report 2006/07 Movement in the FSA’s reserves We believe that our new revolving credit facility provides sufficient financial capacity to allow us to meet any likely expenditure to address unforeseen events. Consequently, we have reduced our targeted reserves (that is the cumulative excess of our fees over our costs) from 5% (+/-2%) of the cost of our ORA to £nil (+/-2%) of the cost of our ORA, so reducing the future fee burden on our feepayers. Our ORA reserves at 31 March 2007 were £nil (2005/06: £7.2m) and at the centre of the range we have set for them. In our Business Plan 2007/08 we introduced two new components in the calculation of our Annual Funding Requirement, and so in future will hold reserves or deficits against them. They contribute towards funding: • A three-year transition programme as part of our move towards principles-based regulation. The surplus income (£8.0m) for this year, together with the ORA reserves we held at the beginning of the year (£7.2m), have been applied to fund this transition. In 2006/07 £1.5m was incurred against that budget, so by the end of the year we had set aside reserves of £13.7m to cover those costs. We intend to increase our funding of this budget annually as needed, up to a maximum of £50m. • A £20m prepayment generated by the additional pension deficit reduction contributions made in 2006/07. £4.8m of that prepayment was amortised during the year (funded by the shortfall in our expenditure relative to the budget we set for the year) leaving a balance of £15.2m at the end of the year. Movements in our reserves / (deficits) are summarised in Table 4.5: Table 4.5 Reserves/ (Deficits) movements PBR Additional ORA transition pension reserve reserve payment Total £m £m £m £m At 1 April 2006 7.2 7.2 Unbudgeted Pension contribution (20.0) (20.0) Excess Revenue collected 8.0 8.0 Budget not spent 4.8 4.8 Amortise pension contribution (4.8) 4.8 – Create PBR transition reserve (15.2) 15.2 – PBR costs (1.5) (1.5) Total management reserves at 31 March 2007 Nil 13.7 (15.2) (1.5) Net Pension liability (79.9) Total Statutory reserves at 31 March 2007 (81.4)
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