NHS Pension Scheme and NHS Compensation for Premature Retirement Scheme Accounts

Transcription

1 NHS Pension Scheme and NHS Compensation for Premature Retirement Scheme Accounts HC 1007 Price: 10.25

2 NHS Pension Scheme and NHS Compensation for Premature Retirement Scheme Accounts (For the year ended 31 March 2011) Accounts presented to the House of Commons pursuant to Section 6(4) of the Government Resources and Accounts Act 2000 Annual Report presented to the House of Commons by Command of Her Majesty Annual Report and Accounts presented to the House of Lords by Command of Her Majesty Ordered by the House of Commons to be printed 14 July 2011 HC 1007 LONDON: The Stationery Office Price: 10.25

3 This is part of a series of Annual Reports and Accounts which, along with the Main Estimates and the document Public Expenditure: Statistical Analyses 2011, present the Government s outturn and planned expenditure for NHS Business Services Authority (2011) The text of this document (this excludes, where present, the Royal Arms and all departmental and agency logos) may be reproduced free of charge in any format or medium providing that it is reproduced accurately and not in a misleading context The material must be acknowledged as NHS Business Services Authority copyright and the document title specified. Where third party material has been identified, permission from the respective copyright holder must be sought. Any enquiries regarding this publication should be sent to: Scheme Administrator, NHS Business Services Authority, Pensions, Hesketh House, Broadway, Fleetwood, FY7 8LG This publication is available for download at ISBN: Printed in the UK by The Stationery Office Limited on behalf of the Controller of Her Majesty s Stationery Office ID /11 Printed on paper containing 75% recycled fibre content minimum

4 Contents Page Report of the Managers Report of the Actuary Statement of Accounting Officer s Responsibilities Statement on Internal Control Certificate and Report of the Comptroller and Auditor General The Accounting Schedules: Statement of Parliamentary Supply Combined Statement of Comprehensive Net Expenditure Combined Statement of Financial Position Combined Statement of Changes in Taxpayers Equity Combined Statement of Cash Flows Notes to the Accounts

5 REPORT OF THE MANAGERS The NHS Pension Scheme provides pensions in varying circumstances for employees of participating employers. This report provides a summary of the arrangements to ensure the Scheme affairs are managed in an efficient way and gives a broad outline of the major benefits offered by the Scheme. NHS BUSINESS SERVICES AUTHORITY From 1 April 2006, the NHS Business Services Authority (the Authority) has been the body responsible for the administration of the NHS Pension Scheme for England and Wales. HOW THE SCHEME WORKS The NHS Pension Scheme is an unfunded occupational scheme backed by the Exchequer, which is open to all NHS employees and employees of other approved organisations. The Scheme provides pensions, based on final salary, in varying circumstances for employees of participating employers. The Scheme receives contributions from employees and employers to defray the costs of pensions and other benefits. Scheme provisions are governed by the following sets of Regulations: The NHS Pensions Scheme Regulations 1995 and 2008, as amended The NHS (Compensation for premature retirement) Regulations 2002 Consolidated The Pensions (Increase) Act 1971 NHS AVC Regulations NHS Gratuitous Expectations Regulations Following the consultation on the NHS Pensions Review in 2006 the Authority worked alongside NHS Employers and Trade Unions leading to the final agreement on changes to the NHS Pension Scheme which were announced on 21 September On 1 April 2008 a new section of the NHS Pension Scheme was introduced for new members. Most members of the Pension Scheme prior to 1 April 2008 will be in the 1995 Section. New joiners on, or after, 1 April 2008 will be members of the 2008 section. The changes introduced new rules for NHS employees joining from 1 April 2008 and modified the rules for those already in the pension scheme prior to this date. (Further details of these changes can be found on the NHS Pensions website During the financial year , the Authority undertook the day-to-day administration of the Scheme, including calculation of benefits, maintenance of member records and payment of benefits. In support of the Authority, NHS employers are required to comply with Scheme Regulations and explain the Scheme to their employees. In addition they submit pension data to the NHS Business Services Authority (NHSBSA), and a significant number of employers calculate pensions benefit estimates for their employees. 2

6 The employers of NHS Pension Scheme members are classified as Employing Authorities or Direction Bodies. Employing Authorities are defined in the Regulations and their staff have automatic entry to the Scheme. Non-NHS employers can apply for Direction Body status in order that their staff may join the Scheme provided they meet specified criteria. As at 31 March 2011 there were 435 participating NHS Trusts, Primary Care Trusts, Local Health Boards and Health Authorities, 8,275 participating GP Practice employers and 415 Direction Bodies. NHS PENSION SCHEME BENEFITS Contributions Employers and employees pay contributions based on a percentage of pensionable pay. Every four years the Government Actuary conducts a full actuarial review that is used for Scheme funding purposes (a Funding Valuation), and recommends employer contribution rates in his Valuation report. The Valuation report undertaken as at 31 March 2004 was used to determine the contribution rates payable during Following this review, and after consideration of changes to the NHS Pension Scheme taking effect from 1 April 2008, his Valuation report recommended that employer contributions could continue at the existing rate of 14% of pensionable pay from 1 April For employee contributions a tiered scale from 5% up to 8.5% of their pensionable pay depending on total earnings was introduced from 1 April The Funding Valuation report undertaken as at 31 March 2008 has not yet been published. Benefits In the NHS Pension Scheme provided defined benefits, which are summarised below. This list is an illustrative guide only, and is not intended to detail all the benefits provided by the Scheme or the specific conditions that must be met before these benefits can be obtained: Annual Pensions The Scheme is a final salary scheme. Members in the 1995 Section receive a pension worth 1/80th of the best of the last three year's pensionable pay for each year of membership. Members who are practitioners as defined by the Scheme Regulations have their annual pensions based upon 1.4% of total pensionable earnings over the relevant pensionable service. Members in the 2008 Section receive a pension worth 1/60th of the average of the best three consecutive years pensionable pay in the last ten; for each year of membership. Members who are practitioners as defined by the Scheme Regulations have their annual pensions based upon 1.87% of total pensionable earnings over the relevant pensionable service. 3

7 Pensions Indexation Annual increases are applied to pension payments at rates defined by the Pensions (Increase) Act 1971, and are based on changes in retail prices in the twelve months ending 30 September in the previous calendar year. From the Consumer Price Index (CPI) will be used to replace the Retail Prices Index (RPI). Lump Sum Allowance A lump sum is payable on retirement. Members in the 1995 Section receive a lump sum which is normally three times the annual pension payment. Members in the 2008 Section receive a lump sum which may be a maximum of 25% of the value of their fund at retirement. Ill-Health Retirement Early payment of a pension, with enhancement in certain circumstances, is available to members of the Scheme who are permanently incapable of fulfilling their duties or regular employment effectively through illness or infirmity. Death Benefits For members who die in service, a lump sum is payable of twice annual pensionable pay, or average uprated earnings for practitioners. For members who die after retirement an amount is payable which is the lesser of 5 times annual pension less pension already paid, or twice reckonable pay less any retirement lump sum taken. Other death benefits are also payable for members who have a deferred pension. Additional Voluntary Contributions (AVCs) Members can contribute to money purchase AVC s run by the Scheme s approved providers or by other Free Standing Additional Voluntary Contributions (FSAVC) providers. These contributions are not contained within the cash flows of the Scheme, but paid directly to the approved provider. Added Years and Additional Pension purchase Members could purchase additional service (added years) in the NHS Scheme by paying an agreed percentage of salary over an agreed length of time, but this option ceased to be available on 31 March It was replaced on 1 April 2008 by the option to purchase extra annual pension amounts, by way of a lump sum value or instalments. Transfer between Funds Scheme members have the option to transfer their pension between the NHS Pension Scheme and another scheme when they move into or out of NHS employment. 4

8 Preserved Benefits Where a scheme member ceases NHS employment with more than two years service they can preserve their accrued NHS pension for payment when they reach retirement age. Compensation for Early Retirement Where a member of the Scheme is made redundant they may be entitled to early receipt of their pension plus enhancement, at the employer s cost. A REVIEW OF THE YEAR Part-time staff access to the NHS Pension Scheme The Scheme has made further progress in clearing cases affected as a consequence of the Preston and Others v Wolverhampton Healthcare NHS Trust employment tribunal case (the Preston case) and the subsequent test cases, appeals and cross-appeals. In total, 12,034 Employment Tribunal claims have been taken out against the Scheme, The vast majority of the claims have now been processed and judgments have been issued in all but 8 claims. During the year the Scheme has been named as a respondent in a further 15 claims, while 23 claims have been processed to completion. Whilst the numbers of claims received are relatively small there is no cut off date for employees to take out an employment tribunal claims and until all employees who worked part time during the period 08 April 1976 to 31 March 1991, have retired NHS Pensions will be named in all new NHS part time pensions employment tribunal claims. Where it is found that an NHS employee has been denied access to the Scheme, the employee will be permitted to recover the lost service on receipt of an appropriate contribution from the member. Interest on late payment of pension scheme benefits From April 2000, under the provisions of Regulation T8 to the NHS Pension Scheme regulations, the Scheme has been required to pay interest automatically to members who suffer delay in receiving their pension scheme benefits. However, this regulation was not initially implemented in full and interest was only paid on request by the member. All cases identified have now been processed and an interest payment made, apart from cases where the member retired between 1 April 2000 and 31 December Applications have been invited via inclusion in the 2011 Pensioners Newsletter despatched to every pensioner member, who think that their benefits were not paid on time between the above dates. As at 15 June 2011 we have received 27 valid applications from these pensioner members and made payments amounting to 5,972. 5

9 Guaranteed Minimum Pension (GMP) During 2010/11 the retrospective exercise on Guaranteed Minimum Pension (GMP) was concluded. However, the improved system functionality within HMRC that was envisaged following the NAO s Report on the issues (previously reported in the Scheme accounts in ) did not materialise and, as a result, the risk of overpayments due to the duplication of Pensions Increase (PI) remains an issue, but is not perceived to be a material weakness within the systems used to process pension payments. Change in the NHS Pension Scheme discount rate The discount rate used by the Actuary to calculate the Scheme liability is based on the AA corporate bond rate. The discount rate has been changed with effect from 31 March 2011 from a real rate of 1.80% to a real rate of 2.90% (the gross discount rate, which combines the real discount rate with the inflation assumption, changed from 4.60% to 5.60% per annum). As a result the Scheme liability as at 31 March 2011 decreased by 18.7 billion (Note 20.5 to the Scheme accounts that follow this report refers). The rates used to assess the movement of the Scheme liability in are the rates determined to come into effect overnight on 31 March Details of the rates used since 2007 can be found in note of the Scheme accounts. National Fraud Initiative On a biennial basis, the NHS Pension Scheme takes part in the National Fraud Initiative, which commenced in 1998 and is co-ordinated by the Audit Commission. This initiative allows the Scheme to submit approved data to the Audit Commission who match it against other data sources to ensure the payments are still being made to the individual originally entitled to the pension. This exercise was in addition to the Scheme s normal procedure of regularly confirming entitlement with individual pensioners. The table below provides an update of the position for the exercises conducted since 1998 (For the purposes of this report NFI1998, NFI2000, NFI2002 and NFI2004 have been consolidated), and lists the outstanding amounts, which are still being actively pursued. Total Identified 000 Total Cases Prior Years Amount Outstanding Written Recovered Written Recovered Written at off 000 off 000 off Recovered 000 NFI ,795 1,218 2,440 1, NFI , NFI , NFI Total 7,518 2,339 3,423 1, ,236 6

10 Pension Increase The Pensions increase rate was 0.0% ( %) with effect from 12 April 2010 (6 April 2009). In-house money purchase AVC provision The Pensions Scheme has continued to offer a broad range of in-house top up money purchase AVCs, including AVC and Stakeholder Pension facilities from Standard Life and Prudential and an AVC only facility from Equitable Life. Scheme Funding and Liabilities As at 31 March 2011 the liabilities of the Scheme were valued at billion (31 March billion). As the NHS Pension Scheme is an unfunded scheme, these liabilities are underwritten by the Exchequer, which also funds the year on year difference between the Scheme s contribution income and the actuarially assessed growth in scheme liability, interest charges and other in-year increases in liability. In the net surplus was 14.2 billion ( net deficiency 12.5 billion) and is detailed in the Combined Statement of Comprehensive Net Expenditure of the following scheme accounts. The main reason for this is the impact of the change from using RPI to CPI on the value of past service. Adoption of the Consumer Price Index (CPI) for the indexation of Public Service pensions In the UK Budget Statement of 22 June 2010, the Chancellor of the Exchequer announced that, with effect from 1 April 2011, the Government would use the Consumer Prices Index (CPI) rather than the Retail Prices Index (RPI) for the price indexation of benefits and tax credits; and that this would also apply to the public service pensions through the statutory link to the indexation of the Second State Pension. The change from RPI to CPI for the purposes of uprating index-linked features of post employment benefits has been recognised as a negative past service cost in accordance with IAS 19. This accounting treatment has been adopted by all central Government reporting entities where RPI has been used for inflation indexing for many years. The question of whether, as regards the main public service pension schemes, there is a legitimate expectation that RPI will be used for inflation indexing is currently before the courts in judicial review proceedings. The Government case is that no legitimate expectation exists and that, in any event, even if there was a legitimate expectation this was overridden by the clear public interest in making very substantial savings at a time when the Government had adjudged that deficit reduction was a fundamental objective for the country. If the Government s case is proven, there would be no change to the accounting treatment adopted in these accounts. 7

11 Accounting Officer s disclosure to the Auditors As far as the Accounting Officer is aware, there is no relevant audit information of which the NHS Pension Scheme auditors are unaware and the Accounting Officer has taken all steps he ought to have taken to make himself aware of any relevant audit information and to establish that the entity s auditors are aware of that information. Completeness of Membership data We have previously reported in the Statement on Internal Control (SIC) an issue with the completeness of member data provided to the Government Actuary s Department to enable them to assess the scheme liability for inclusion in the accounts. As a result of work undertaken during the year, including a re-assessment of the level of completeness and an analysis of the impact on the scheme liability, we no longer consider this to be a SIC issue. FUTURE DEVELOPMENTS NHS Pension Scheme Review NHS Pensions Choice On 1 April 2008 a new section of the NHS Pension Scheme was introduced for new members. Most members of the Pension Scheme prior to 1 April 2008 will be in the 1995 Section, new joiners on, or after, 1 April 2008 will be members of the 2008 section. Review Partners (NHS Employers, NHS Trade Unions and the Department of Health) agreed that all contributing members of the 1995 Section on or after 1 October 2009 should be offered a choice to move to the 2008 Section or remain in the 1995 Section. During we continued the rollout of Choice Statement Packs to all eligible scheme members as per an agreed rollout schedule. We delivered 663,000 packs during the year leaving 515,000 to be delivered during ADMINISTRATION EXPENSES In the costs of administering the NHS Pension Scheme were met by NHS Business Services Authority (NHSBSA), which was in turn funded by the Department of Health. The annual accounts of the NHSBSA can be found at For further information on the Scheme please contact the Scheme Administrator. 8

12 MEMBERSHIP STATISTICS Details of the current membership of the Scheme at 31 March 2011 are set out below: Active Members Active members at 1 April ,368,215 New entrants in the year (including deferred members who rejoined, and transfers in) 65,409 Retirements in year (34,330) Members leaving the Scheme with deferred pension rights (38,222) Transfers out (3,109) Members leaving the Scheme and taking a refund of contributions (32,573) Deaths (4,911) Active members at 31 March ,320,479 Deferred members Deferred members at 1 April ,726 Members leaving who have deferred pension rights, and members rejoining the Scheme 43,286 Members taking up deferred pension rights (7,680) Deferred members at 31 March ,332 Pensioners in payment (including Compensation payments) Members Dependants Total Pensioners in payment at 1 April ,610 Members retiring 42,010 42,010 New Dependants 5,100 5,100 Cessations in year (12,926) (3,704) (16,630) Pensioners in payment at 31 March ,090 Nick Scholte Chief Executive, NHS Business Services Authority 7 July

13 MANAGEMENT STRUCTURE AND ADVISERS Accounting Officer: Nick Scholte NHS Business Services Authority Bridge House Newcastle upon Tyne NE1 6SN Scheme Administrator: NHS Business Services Authority Pensions Hesketh House Broadway Fleetwood FY7 8LG In-house AVC Providers: Equitable Life Assurance Society Walton Street Aylesbury Buckinghamshire HP21 7QW Standard Life Assurance Company Standard Life House 30 Lothian House Edinburgh EH1 2DH Prudential Plc 250 Euston Road London NW1 2PQ Bankers: Paymaster (1836) Ltd Sutherland House Russell Way Crawley West Sussex RH10 1UH Bankers: NatWest (England & Wales) Government Banking Service PO Box National Westminster Bank PLC London Corporate Service Centre 3 rd Floor 2 ½ Devonshire Square London EC2P 2GR Government Banking Service c/o Citi CitiGroup Centre Canada Square Canary Wharf London E14 5LB Legal advisers: DH Legal Services 5 th Floor The Adelphi Area th Floor 1-11 John Adam Street London WC2N 6HT Actuary: Government Actuary s Department Finlaison House Furnival Street London EC4A 1AB Auditors: Comptroller and Auditor General National Audit Office Buckingham Palace Road Victoria London SW1W 9SP 10

14 NHS PENSION SCHEME REPORT OF THE ACTUARY FOR THE ACCOUNTING YEAR ENDED 31 MARCH 2011 FOR THE PURPOSES OF IAS19 (RESOURCE ACCOUNTING) The report of the Actuary sets out the liabilities and accruing costs of the NHS Pension Scheme for the purposes of Resource Accounting. Introduction 1. This statement has been prepared by the Government Actuary s Department at the request of the NHS Business Services Authority ( NHSBSA ). It summarises the pensions disclosures required for the Resource Accounts of the NHSPS ( the scheme ). 2. The NHSPS is (for most members) a final salary defined benefit scheme, the rules of which are set out in the National Health Service Pension Scheme Regulations 1995 (SI 1995/300), the National Health Service Pension Scheme Regulations 2008 (SI 2008/653) and subsequent amendments to both. The scheme is wholly unfunded. I am not aware of any informal practices operated within the scheme which lead to a constructive obligation (under IAS 19 constructive obligations should be included in the measurement of the actuarial liability). 3. The statement is based on an assessment of the liabilities as at 31 March 2008, with an approximate updating to 31 March 2011 to reflect known changes. Membership data 4. Tables A to C summarise the principal membership data as at 31 March 2008 and 31 March 2011 used to prepare this statement. Table A Active members 31 March Number Total Total Total salaries Total salaries (thousands) salaries in accrued implied by implied by membership pensions contribution contribution data (pa) ( billion) receipts receipts ( billion) ( billion) ( billion) 1,

15 Table B Deferred members 31 March March 2011 Number Total deferred Number (thousands) pension (pa) (thousands) ( million) 478 1, Table C Pensions in payment 31 March March 2011 Number Total pension Total pension (thousands) (pa) (pa) ( billion) ( billion) Methodology 5. The present value of the liabilities has been determined using the Projected Unit Credit Method, with allowance for expected future pay increases in respect of active members, and the principal financial assumptions applying to the Resource Accounts. The contribution rate for accruing costs in the year ended 31 March 2011 was determined using the Projected Unit Credit Method and the principal financial assumptions applying to the Resource Accounts. 6. This statement takes into account the benefits normally provided under the scheme, including age retirement benefits, ill-health retirement benefits and benefits applicable following the death of the member. It does not include the cost of injury benefits (in excess of ill-health benefits). It does not include premature retirement and redundancy benefits in respect of current active members, although the assessment of liabilities includes pensions already in payment in respect of such cases. Principal financial assumptions 7. The principal financial assumptions adopted to prepare this statement are shown in Table D. With effect from 31 March 2011, the assumed rate of return in excess of pension increases was increased from 1.8% a year to 2.9% a year, and the assumed rate of return in excess of earnings was increased from 0.3% a year to 0.7% a year. In addition, with effect from 31 March 2011, the assumed rate of future pension increases is 2.65% a year and the assumed nominal rate of salary growth is 4.9% a year (changed from 2.75% and 4.29% respectively as at 31 March 2010). 12

16 Table D Principal financial assumptions Assumption 31 March March 2010 Rate of return (discount rate) 5.6% 4.6% Rate of return in excess of: Earnings increases 0.7% 0.3% Pension increases 2.9% 1.8% Expected return on assets: n/a n/a 8. The pension increase assumption as at 31 March 2011 is based on the Consumer Price Index (CPI) expectation of inflation rather than the Retail Prices Index (RPI). This is a consequence of the Government s announcement that CPI is to be used for the indexation of public service pensions from April Demographic assumptions 9. The demographic assumptions adopted to prepare this statement were derived from the specific experience of the scheme membership and are the assumptions expected to be adopted for the 2008 funding valuation of the NHSPS. 10. The standard mortality tables known as S1NXA are used but with the mortality rates applicable for one year of age younger than members actual age (for members retiring in normal health). Mortality improvements are in accordance with those incorporated in the 2008-based principal population projections for the United Kingdom. 11. The contribution rate used to determine the accruing cost in was based on the demographic and financial assumptions applicable at the start of the year: that is, those adopted for the Resource Accounts. Liabilities 12. Table E summarises the assessed value as at 31 March 2011 of benefits accrued under the scheme prior to 31 March 2011 based on the data, methodology and assumptions described in paragraphs 3 to 11. The corresponding figures for the previous four year ends are also included in the table. 13

17 Table E Statement of Financial Position Billion Value of liabilities 31 March March March March March Accruing costs 13. The cost of benefits accruing in the year ended 31 March 2011 (the Current Service Cost) is based on a standard contribution rate of 32.0% up to 22 June 2010 and 28.3% thereafter. Members contributed between 5.0% and 8.5% of pensionable pay, depending on the level of their pay. Table F shows the employers share of the contribution rate used to determine the Current Service Cost taking into account an estimated average rate of contributions paid by members of 6.6%. The corresponding figures for are also included in the table. Table F Contribution rate Percentage of pensionable pay Standard contribution rate 29.1% 21.9% Members estimated average contribution rate 6.6% 6.5% Employers estimated share of standard contribution rate 22.5% 15.4% 14. For the avoidance of doubt the employers share of the standard contribution rate determined for the purposes of the Resource Accounts is not the same as the actual rate of contributions payable by employers, currently 14.0%, which was determined based on the methodology and the financial and demographic assumptions adopted for the funding of the scheme. The most significant difference between the actuarial assessments for Resource Accounts and for scheme funding purposes is the discount rate net of pension increases, which was 1.8% p.a. for the Current Service Cost up to 22 June 2010 and 2.5% thereafter (3.2% p.a. for ) compared with 3.5% p.a. for the existing scheme funding rate. (Note that the discount rate for scheme funding purposes has recently been reviewed and reduced to 3% but this does not affect the current rate of contributions.) A higher discount rate for scheme funding purposes results in a lower assessed cost of benefit accrual. The discount rate for scheme funding is set by HM Treasury and is expected to stay the same for an extended period so as to provide a stable budgeting mechanism for pension accrual within government. The discount rate for Resource Accounts is set each year by HM Treasury to reflect the requirements of IAS19. 14

18 15. The pensionable payroll for the financial year was 39.7 billion (derived from contributions payable by employers over the year). Based on this information, the accruing cost of pensions in (at 32.0% of pay up to 22 June 2010 and 28.3% of pay thereafter) is assessed to be 11.6 billion. Government Actuary s Department June

19 STATEMENT OF ACCOUNTING OFFICER S RESPONSIBILITIES Under the Government Resources and Accounts Act 2000, HM Treasury has directed the NHS Pension Scheme and NHS Compensation for Premature Retirement Scheme to prepare for each financial year a statement of accounts in the form and on the basis set out in the Accounts Direction. With the exception of certain transactions (which are accounted for on a cash basis) the accounts are prepared on an accruals basis and must give a true and fair view of the state of affairs of the NHS Pension Scheme and NHS Compensation for Premature Retirement Scheme, and of its combined financial statements and transactions during the year and the disposition, at the end of the financial year, of the combined net liabilities. Note 2, Accounting Policies, to the financial statements describes those transactions, which are accounted for, on a cash basis, the use of which has no material effect on the net outgoings for the year nor on the combined net liabilities at the year end. In preparing the financial statements, the Accounting Officer is required to comply with the requirements of the Government Financial Reporting Manual and in particular to: observe the Accounts Direction issued by HM Treasury including the relevant accounting and disclosure requirements, and apply suitable accounting policies on a consistent basis; make judgements and estimates on a reasonable basis; state whether applicable accounting standards, as set out in the Government Financial Reporting Manual have been followed, and disclose and explain any material departures in the financial statements; and prepare the financial statements on a going concern basis. The Department of Health has appointed Nick Scholte, Chief Executive of the NHS Business Services Authority as Accounting Officer for the NHS Pension Scheme and NHS Compensation for Premature Retirement Scheme. The responsibilities of an Accounting Officer, including responsibility for the propriety and regularity of the public finances for which the Accounting Officer is answerable, for keeping proper records and for safeguarding the assets of the pension scheme are set out in Managing Public Money published by HM Treasury. 16

20 STATEMENT ON INTERNAL CONTROL Scope of responsibility The NHSBSA Board is accountable for internal control. As Accounting Officer, and Chief Executive of this Board, I have responsibility for maintaining a sound system of internal control that supports the achievement of the organisation s policies, aims and objectives. I also have responsibility for safeguarding the public funds and the organisation s assets for which I am personally responsible, in accordance with the responsibilities set out in HM Treasury s Managing Public Money and as assigned to me in the Accounting Officer Memorandum. The NHSBSA manages a range of business activities on behalf of the Department of Health. Accountability arrangements with the Department comprise an overall Senior Departmental Sponsor, with individual sponsors providing policy direction for each core service streams. A clear ongoing accountability framework is in place, which includes formal quarterly reviews with all sponsors, where amongst strategic, policy and operational issues, the NHSBSA s corporate risk register and latest financial position are reviewed. Additionally, regular scheduled meetings are held with individual service sponsors. Whilst the NHSBSA is responsible for administering the overall Scheme, the Scheme regulations set out the obligations of each employer. This includes ensuring that deductions from salary, employers contributions and payments into the Scheme are in accordance with Scheme rules, and that member pension scheme records are accurately updated in accordance with the timescales set out. The Accounting Officer of each Employing Authority is required to include a positive statement to this effect in their Statement on Internal Control. The purpose of the system of internal control The system of internal control is designed to manage risk to a reasonable level rather than to eliminate all risk of failure to achieve policies, aims and objectives; it can therefore only provide reasonable and not absolute assurance of effectiveness. The system of internal control is based on an ongoing process designed to: identify and prioritise the risks to the achievement of the organisation s policies, aims and objectives; and evaluate the likelihood of those risks being realised and the impact should they be realised, and to manage them efficiently, effectively and economically. The system of internal control has been in place in the NHS Business Services Authority for the year ended 31 March 2011 and up to the date of approval of the annual report and accounts. Capacity to handle risk The NHSBSA is committed to ensuring that risk management is an integral part of the leadership and management of the organisation. The Board has overall responsibility for approving the Authority s Risk Management Strategy and 17

21 assurance relating to the implementation and monitoring of this strategy is provided by the Audit and Risk Management Committee. As Accounting Officer, I have overall responsibility for establishing the organisation s internal controls and I have delegated certain risk management responsibilities to other Directors and their senior managers. We have established a team with responsibility for coordinating the risk management activities within each business stream and supporting all staff with the effective identification and management of risks. The Authority aims to empower all staff to assume responsibility for contributing to effective risk management. This is achieved by robust governance systems and processes which enable the identification, assessment, analysis and management of risk at appropriate levels for all operational and project related risks. During 2010/11 we have further developed our capability and capacity to manage risk. We have refreshed our Risk Management Policy, setting out our risk appetite and risk tolerance and providing greater clarity around assessing and responding to risks. A new Risk Management Process Guide and supporting training, tools and techniques are in the process of development. Additionally, we have improved the way we report and review our corporate risk register, ensuring that its format is aligned with our Business Plan. The risk and control framework In working towards its five year Strategy, the NHSBSA Board approves an annual Business Plan which sets out the key service delivery priorities, objectives and developments which it aims to deliver against during the year. The Plan also identifies the key risks to delivery. Responsibility for approving the Authority s policy and procedures for the management of risk is a Board responsibility and as Accounting Officer, responsibility for ensuring the NHSBSA has a programme of risk management in place has been delegated to me. The Audit and Risk Management Committee provide the Authority s Board with an independent and objective review of the adequacy and effectiveness of the Authority s overall assurance framework and in particular the organisation s risk management approach. The Committee has responsibility for reviewing: all risk and control related disclosure statements including the annual Head of Internal Audit statement and external audit opinion; the underlying assurance process that governs the management of principal risks and the achievement of corporate objectives; the appropriateness of policies and procedures for ensuring compliance with law, guidance and codes of conduct, and their effectiveness; and policies and procedures related to the detection and prevention of fraud and corruption. 18

22 The Committee meets these responsibilities by receiving regular reports on a range of audit and assurance topics and in particular through the receipt and review of: quarterly risk management reports setting out and assessing the major risk facing the organisation, stratified into the key areas of focus set out in our Business Plan. Such reports set out the key movements in risks between reporting periods and identify emerging risks and the mitigating actions which have been taken or are planned to mitigate them; a half yearly corporate assurance schedule which sets out the key elements of the Authority s overarching assurance framework and identifies the extent to which robust arrangements are in place and operating effectively in each area; an annual risk management report outlining how the Authority s risk management arrangements have continued to operate effectively during the year and how they have been reviewed and strengthened; and an annual local counter fraud specialist report, supported by regular reports identifying the Authority s fraud risks by way of fraud risk matrices. Supporting the role of the Board and the Audit and Risk Management Committee, the NHSBSA s risk and control framework also includes the following elements: regular quarterly reviews of the Corporate Risk Register by the Leadership Team, as a precursor to the Audit and Risk Management Committee Review; the maintenance and quarterly review of Risk Registers for each service area covering their operational and project risks; a Risk Management Group led by the Director of Finance with representation from all of the NHSBSA s services, which reviews risk issues and provides a platform for shared learning and a harmonised approach; annual letters of management representation from each Managing Director providing confirmation that an appropriate control environment has been in place throughout the financial year for their area, thus informing this Statement on Internal Control; regular reviews of all information risks by an Information Governance and Security Group (IGSG) which monitors the Authority s compliance with information governance and security best practice and self assesses against a nationally developed toolkit; a performance management framework which highlights performance against key performance indicators for each service stream; control measures are in place to ensure that all the organisation's obligations under equality, diversity and human rights legislation are complied with; as an employer with staff entitled to membership of the NHS Pension scheme, control measures are in place to ensure all employer obligations contained within the Scheme regulations are complied with. This includes ensuring that deductions from salary, employer s contributions and payments in to the Scheme are in accordance with the Scheme rules, and that member Pension Scheme records are accurately updated in accordance with the timescales detailed in the Regulations; and 19

23 regular reviews of the Sustainable Development Action Plan and Carbon Reduction Strategy to ensure that the Authority s sustainability targets are being met. Towards the end of 2010/11 the NHSBSA undertook an assurance mapping process utilising the widely recognised three lines of defence model to identify the assurance in place over each of its core business processes and also its governance responsibilities and legislative requirements. This model highlights where assurance can be taken from management control and reporting, functional oversight and governance systems, and independent review and regulatory oversight. It provides a basis on which the leadership of the NHSBSA can determine the focus of its assurance effort; assesses the outcome of assurance activity and determine its assurance appetite. This integrated approach to assurance will be further developed during 2011/12. As set out above, the Authority has strong governance arrangements to manage and minimise the risks it faces. However, like any organisation the NHSBSA faces some major risks. In particular, the Authority faces key risks regarding external factors which impact upon the organisation. As an organisation we have identified a risk that, due to the complexity of our activities, we may be unable to respond to changes in policy where these are required at short notice. This is particularly pertinent at a time of major change both in the wider NHS and the potential implications of the draft Health and Social Care Bill and also other changes in the environment. We are looking to mitigate, manage and control this risk through our client relationship management process, regular engagement with stakeholders and organisational and service redesign. Review of effectiveness As Accounting Officer, I have responsibility for reviewing the effectiveness of the system of internal control. My review is informed in a number of ways. The Head of Internal Audit provides me with an opinion on the overall arrangements for gaining assurance through the Assurance Framework and on the controls reviewed as part of the risk based internal audit work. For 2010/11 the Head of Internal Audit Opinion concluded that based on the work completed to date significant assurance can be given that there is a generally sound system of internal control, designed to meet the Authority s objectives, and that controls are generally being applied consistently. Some control issues were brought to the attention of management. The significant areas are outlined later in this Statement. Executive Directors and Managing Directors within the organisation who have responsibility for the development and maintenance of the system of internal control within their service area provide me with assurance via annual letters of management representation which confirm that internal controls have remained in place during the year; financial information for their service is to the best of their knowledge correct and there is no material information of which they are aware that I have not also been made aware of. The Assurance Framework itself provides me with evidence that the effectiveness of 20

24 controls that manage the risks to the organisation achieving its principal objectives have been reviewed. My review is also informed by: the work of the Audit and Risk Management Committee which informs the Board about the outcome of its activities through submission of its minutes and its annual report to the Board; the findings of both the National Audit Office and our internal audit reviews. The Audit and Risk Management Committee oversees progress towards the implementation of all such recommendations; and the work of our Local Counter Fraud Specialist to prevent, deter, investigate and report on fraud activity. A plan to address weaknesses and ensure continuous improvement of the assurance system is in place and the Audit and Risk Management Committee will continue to monitor improvements in the overall corporate assurance framework. Significant Internal Control Issues During the year the Authority has continued to address those internal control issues identified in the previous year. Progress has been as follows: Completeness of Membership data I have previously reported an issue with the completeness of member data provided to the Government Actuary s Department to enable them to assess the scheme liability for inclusion in the accounts. Ideally the Actuary s valuation would be based on 100% of the member data. However this is not possible for various reasons linked to the completeness of records, and therefore an extract is used and the results extrapolated to reflect the total population. The level of completeness reported in 2009/10 was 87%. As a result of work undertaken during the year, including a re-assessment of the level of completeness and an analysis of the impact on the scheme liability, I no longer consider this to be a significant control issue. The key reasons for this assertion are: further analysis of the data which made up the whole population upon which the valuation was based showed a completeness of membership data of 90%; an analysis of movements in the valuation liability between years has not identified any material impact as a result of changes in the level of excluded data, suggesting that the data included for valuation purposes is representative of the whole population; that the impact of membership data completeness on the scheme liability is not a material factor compared to other factors/assumptions making up the valuation such as; longevity; discount rate; CPI/RPI; and as a result of the major data governance work which the NHSBSA has undertaken, current levels of updatedness of membership data as at 31 March 2008 now exceed 96%. 21

25 In order to continually improve the quality of member data provided by employers and the records held by the Authority, the Data Governance Project continues apace. The impact of this is evidenced by the increase in how up to date active member records are. In addition to this a new Valuation Process has been developed in close liaison with GAD to enable the NHSBSA to: provide all member data to GAD for active, pensioner and deferred members to allow the maximum number of records to be used; inclusion of both the 1995 and 2008 sections; a quality assurance, management reporting and review process to validate all data and tables provided to GAD; and A financial reconciliation of member records to cash receipts to further support the validity of the member data. Erroneous implementation of Regulation T8 within the Pensions regulations We have previously reported an issue with the erroneous implementation of Regulation T8. We no longer consider this to be a significant control issue as we have taken measures to ensure the Regulation is followed for new cases. All cases identified have now been processed and an interest payment made, apart from cases where the member retired between 1 April 2000 and 31 December Applications have been invited via inclusion in the 2011 Pensioners Newsletter despatched to every pensioner member, who think that their benefits were not paid on time between the above dates, and we have paid all historic amounts due. Conclusion My review confirms that the NHSBSA and the NHS Pension Scheme have a generally sound system of internal control that supports the achievement of its policies, aims and objectives and that those control issues have been and are being addressed. Nick Scholte Chief Executive NHS Business Services Authority 7 July

26 CERTIFICATE AND REPORT OF THE COMPTROLLER AND AUDITOR GENERAL TO THE HOUSE OF COMMONS I certify that I have audited the financial statements of NHS Pension Scheme and NHS Compensation for Premature Retirement Scheme for the year ended 31 March 2011 under the Government Resources and Accounts Act These comprise the Statement of Parliamentary Supply, the Statement of Comprehensive Net Expenditure, the Statement of Financial Position, the Combined Statement of changes in Taxpayers Equity, the Cash Flow Statement and the related notes. These financial statements have been prepared under the accounting policies set out within them. Respective responsibilities of the Accounting Officer and auditor As explained more fully in the Statement of Accounting Officer s Responsibilities, the Accounting Officer is responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view. My responsibility is to audit, certify and report on the financial statements in accordance with the Government Resources and Accounts Act I conducted my audit in accordance with International Standards on Auditing (UK and Ireland). Those standards require me and my staff to comply with the Auditing Practices Board s Ethical Standards for Auditors. Scope of the audit of the financial statements An audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of: whether the accounting policies are appropriate to the NHS Pension Scheme and NHS Compensation for Premature Retirement Scheme s circumstances and have been consistently applied and adequately disclosed; the reasonableness of significant accounting estimates made by the NHS Pension Scheme and NHS Compensation for Premature Retirement Scheme, and the overall presentation of the financial statements. In addition I read all the financial and non-financial information in the Report of the Managers to identify material inconsistencies with the audited financial statements. If I become aware of any apparent material misstatements or inconsistencies I consider the implications for my certificate. In addition, I am required to obtain evidence sufficient to give reasonable assurance that the expenditure and income reported in the financial statements have been applied to the purposes intended by Parliament and the financial transactions conform to the authorities which govern them. Opinion on Regularity In my opinion, in all material respects, the expenditure and income have been applied to the purposes intended by Parliament and the financial transactions conform to the authorities which govern them. 23