House of Commons - Public Accounts

Select Committee on Public Accounts Seventh Report

Excess Votes in 2006-07

1. Resource-based Supply requires departments to forecast and manage the resources they will consume on an accruals basis and their cash spending in delivering services. Parliament authorises both cash spending and the use of resources. In 2006-07, Parliament granted total net resources of £412.1 billion and total cash of £388.7 billion in Supply Estimates to 57 departments, pension schemes and other vote-funded bodies.[1] The difference in the provision of cash and resources is primarily the result of the inclusion of non-cash charges in resources covering items such as depreciation of assets, the charge equivalent to the cost of borrowing money if it was not funded by Supply or notional items relating to changes in value of assets or liabilities. In 2006-07, two of these bodies overspent net resources by £38.6 million (cash excesses £nil). Also, as in 2005-06, there were no instances of administration budgets being exceeded. The details are in Figure 1.

Figure 1: Summary of 2006-07 Excess Votes required

Department	Resources		Cash
	Excess £	Amount to be voted £	Excess £	Amount to be voted £
Teachers' Pension Scheme (England & Wales). RfR1: Teachers' Pensions Excess: Gross Resources Less: Additional income payable to the Consolidated Fund.[2]	81,859,000 (59,095,000)	22,764,000
Ministry of Defence. RfR2: Conflict Prevention Excess Gross Resources Less: Additional income payable to the Consolidated Fund.²[3]	20,894,000 (5,047,000)	15,847,000
Total		38,611,000		Nil

Teachers' Pension Scheme (England and Wales): Excess on Request for Resources 1

2. The Teachers' Pension Scheme (England and Wales) had a resource excess of £81.9 million (0.95% of the allocation of £8.6 billion) on Request for Resource 1 (Teachers' Pensions). The excess was caused by the in-year scheme service cost exceeding forecasts by £69 million because of unexpectedly higher employer and employee contributions and other in-year scheme expenses being £13 million higher than estimated. The excess in resource expenditure can be offset in part by £59.1 million of excess Appropriations in Aid.

3. Following the completion of a consultation exercise, changes to the Scheme rules for both new and existing members (Scheme modernisation) were implemented from January 2007. As a result of changes in the rules, the level of income from employer and employee contributions into the Scheme increased in 2006-07 and at the year-end it was £53.7 million (1.49%) higher than forecast by Scheme managers. The Actuary then took into consideration this higher income figure when calculating the liability to meet future pension costs. Consequently, the actuarial assessment of in-year service costs[4] was £69 million higher than expected by Scheme Managers. Scheme Managers made requests for additional resources in the Spring Supplementary Estimate to take account of the impact of Scheme modernisation, but these were insufficient to cover the additional costs.

4. In addition, other in-year expenses exceeded expectation, in particular the lump sum payments due upon retirement. The increase in these costs was due to more teachers than expected by Scheme Managers opting to commute their pension into lump sum payments on retirement. These were £13 million higher than estimated.

5. As a result of the need for this Excess Vote the Department for Children, Schools and Families commissioned its internal auditors to establish the causes for the inaccuracy in forecasting. They concluded that sound budgetary controls were in place; that the Department's arrangements were consistent with HM Treasury requirements; and that the Excess Vote was a result of the impact of scheme modernisation rather than a breakdown in risk management or internal control. On the basis of these findings, the Department is refining its predictive estimate model for calculating Supply Estimates.

Ministry of Defence: Excess on Request for Resources 2

6. The resource excess on the Ministry of Defence's Request for Resources 2 (Conflict Prevention) of £20.9 million (1.5% of the £1.4 billion allocation for Request for Resources 2) was primarily the result of significantly higher than originally forecast operational activity in Afghanistan and Iraq. The main contributing items were the firing and consequent accelerated depreciation of a greater number of Hellfire missiles in Afghanistan than originally forecast and the incomplete capture of depreciation costs associated with the operational use of capital spares. The excess in resource expenditure can be offset in part by an excess in Appropriations in Aid relevant for this Request for Resources of £5.0 million.

7. The nature of the operations whose resources are attributed to Request for Resources 2 makes it difficult to estimate the final costs as the level of activities are subject to unpredictable fluctuations. As a result, the bulk of the Ministry's forecast expenditure for 2006-07, including that for Iraq and Afghanistan, was provided via the Winter Supplementary Estimates made in November 2006.

8. The Ministry provided a final request for additional resources of £340 million in the Spring Supplementary Estimates approved by Parliament in February 2007. In spite of this, the resources provided were not sufficient to prevent the Ministry exceeding the limit on Request for Resources 2. This limit for resource in Request for Resources 2, after both Supplementary Estimates, was £1.4 billion.

9. In order to understand better the reasons for the excess, the Ministry has undertaken a detailed review of the treatment of asset depreciation and stock consumption in operations with a particular focus upon Urgent Operational Requirements. The results will be considered in the preparation of the 2007-08 Supply Estimates.

10. In addition, the Ministry has already identified the following important improvements for both forecasting and accounting for Request for Resources 2:

i. The relevant guidance to the major departmental groupings and budget holders will be re-issued with an emphasis on the importance of accounting properly for urgent requirements.

ii. There will be an increased focus on accurate forecasting at the mid-year point so that additional resource can be requested, if required, in the Spring Supplementary Votes.

iii. At the mid-year point, the Ministry will carry out a robust review of the consumption of stock and spares that are charged to Request for Resources 2, the depreciation of equipment damaged or destroyed in conflict, and of weapons fired, to ensure that the accounting is accurate and provides a firm basis for forecasting.

1 Central Government Supply Estimates 2006-07, HC (2006-07) 293, February 2007 Back

2 These amounts are the income earned on these Request for Resources above the wholly earned and applied Appropriations in Aid limit. The limit for the Teachers' Pension Scheme was £153,000 and for the Ministry of Defence was £15,557,000. It is proposed in both cases to seek approval from Parliament for the increase of the limit on Appropriations in Aid by these amounts. Back

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