16. Recent events that may impact on public sector finances

This section acknowledges recent government announcements that may have future implications on public sector finances.

East Coast Mainline

On 16 May 2018, the government announced that from 24 June 2018, London North Eastern Railway (LNER) will take over the running of East Coast Mainline services. We are currently investigating the implications of this decision and our conclusions will be announced in due course.

Housing associations

In recent weeks, the Regulation of Registered Social Landlords (Wales) Act 2018 has received Royal Assent, while the Housing (Amendment) (Scotland) Bill has passed Stage 3 of the Scottish Parliament. As such, ONS is likely to review the classification status of registered social landlords in Wales and Scotland in the near future.

Future potential methodological and classification changes to PSF

On 17 July 2018, we will be publishing a forward-looking article to provide users with an overview of those areas where existing methodologies are, or will be, under review. The aim is to give users early sight of those areas where the fiscal statistics might be significantly impacted by methodological or classification changes during the coming 24 months. The article is designed to help government in its fiscal planning and support the Office for Budget Responsibility (OBR) in its role in producing fiscal forecasts. For this reason the publication date has been set to coincide with the OBR’s publication of their latest Fiscal Sustainability Report. The article will be the first ONS paper of this type but we plan to update the article regularly.

The July article will include topics such as:

student loans

funded and unfunded public sector pension schemes

leases, in light of new business accounting guidance (IFRS16)

depreciation, in light of review of Perpetual Inventory Model (PIM)

asset stocks, in light of review of public sector balance sheet

EU withdrawal agreement

On 8 December 2017, the government published a joint report on progress during phase 1 of negotiations between the European Union and the UK (PDF, 383KB), under Article 50 of the Treaty on European Union (TEU) on the UK’s orderly withdrawal from the EU.

Although the Office for Budget Responsibility (OBR) discusses the EU settlement in Annex B (PDF, 2.5MB) of their Economic and Fiscal Outlook - March 2018, the details in the report are still subject to negotiation and so there is insufficient certainty at this stage for us to complete a formal assessment of impact on the UK public sector finances.

Carillion insolvency

Following Carillion Plc declaring insolvency on 15 January 2018, the UK government announced that it will provide the necessary funding required by the Official Receiver, to ensure continuity of public services through an orderly liquidation. The Official Receiver has been appointed by the court as liquidator, along with partners at PwC that have been appointed Special Managers. The defined benefit pension schemes of former Carillion employees are currently being assessed by the Pension Protection Fund (PPF) prior to any transition into the PPF scheme.

We are currently investigating the various impacts of the liquidation of Carillion on the public sector finances, including in relation to the public-private partnership projects in which Carillion was involved and the additional funding that the government has provided in order to maintain public services. We will announce our findings in due course.

Prior to liquidation, Carillion held approximately 450 contracts with government, representing 38% of Carillion’s 2016 reported revenue.

Student loans in the national accounts

The Treasury Select Committee published the report of its inquiry into the student loan system and related financial implications on 18 February 2018. The report recommends that ONS re-examines the classification of student loans as financial assets, that is, loans, and considers whether there is a basis to treat them differently from other loans in the national accounts and public sector finances.

Student loans in the UK are different from typical loans. Notably, they have a high degree of contingency in that repayments are conditional on subsequent income, and under certain conditions the loan obligation itself may be cancelled. Estimates of the proportion of student loans that will be cancelled, or written off, in the future have been rising in recent years, and are a significant proportion of the total value.

However, the national accounts and public sector finances in the UK are compiled to international standards. These accounting standards are very clear on the treatment of loans and it is this treatment that ONS currently applies to student loans. Where the guidance in these standards is more difficult, and subject to interpretation, is around the recording of financial assets with a significant expected loss – student loans with their contingency on future income are a financial asset with this feature.

To consider the treatment of such financial assets and the accounting issues they raise, we have begun work with international agencies and other National Statistical Offices. This is a complex topic that could have potential implications for all countries with income-contingent loans. However, it is planned that through this work, initiated by ONS, an appropriate statistical treatment in national accounts can be agreed internationally. If this treatment were different to that currently applied to student loans then we would aim to implement it as soon as possible after the new treatment has been agreed, although the time required could depend on the complexity of any new accounting approach.

Any new statistical treatment would almost certainly have no impact on the public sector net cash requirement (PSNCR) and public sector net debt (PSND), this is because these measures are only affected by the actual cash flows relating to student loans and not, for example, any interest that is accrued but not paid. By contrast there could be an impact on public sector net borrowing (PSNB) and public sector net financial liabilities (PSNFL) as these measures are impacted by interest that is accrued but not paid and loan cancellations. The extent of any impact is unknown and would depend on the details of any new internationally-agreed treatment.

The treatment of student loans will be further discussed in the article, due to be published on 17 July 2018, on future potential methodological and classification changes to the public sector finances.

Student loan sale

On 6 December 2017, the government announced it had sold part of the student loan “book” for £1.7 billion. We have now completed a formal classification review of the sale and its accounting treatment and announced the conclusions on 23 April 2018. We concluded that the sale is a “genuine” sale that transfers ownership and control of an asset from the public sector to the private sector. The implications for the public sector finances are that the PSNCR and PSND are both reduced by the £1.7 billion cash value received from the sale, PSNFL is increased by approximately £1.8 billion – the difference between the nominal value of the loans sold and the sale price – while PSNB is not impacted. These impacts have been reflected in the public sector finances.

This classification and the impact on the public sector finances is consistent with the international standards for the accounting of loans. However, as noted previously, we have begun to consider with the international statistical community how UK student loans are most appropriately recorded within national accounts. Following this work and its conclusion, if the recording of student loans was revised then consequently the recording of the student loan sale might also need to be changed. However, whether there would be an impact and the extent of any such impact depends on the details of any new internationally-agreed treatment.

Pension Protection Fund and public sector pension schemes

In January 2018, we reconfirmed the national accounts sector classification of the Pension Protection Fund (PPF) as a public financial corporation, identifying it specifically as a public pension fund, a slight change from the previous classification as a public insurance corporation.

The PPF was established in 2005 under the provisions of the Pensions Act 2004. It is a statutory fund of last resort providing compensation to members of defined benefit pension schemes, when there is a qualifying insolvency event in relation to the employer. It is funded by levies paid by the pension schemes for which it provides protection as well as the assets of schemes that transfer into the PPF and its own investments. The latest published accounts for the PPF show that as of March 2017, it had actuarial pension liabilities of £22.0 billion and net assets of £28.7 billion, with £17.0 billion of these assets stated to be government bonds.

Currently, the PPF is not included in the outturn statistics of the public sector finances and before we implement any change to this position we have initiated a wider review of the recording of public sector pension funds (including the PPF) within the public sector finances. This is necessary, as although the UK public sector finances are based on the principles and building blocks of national accounts, and in particular the European System of Accounts 2010: ESA 2010, there are still decisions to be made regarding how public sector pension funds (including the PPF) should best be reflected within the fiscal aggregates published in public sector finances (such as whether funded pension schemes should be recorded from the perspective of the net pension liabilities of the government as an employer or whether the transactions, assets and liabilities of the pension funds themselves should also be included).

In spring 2018, the Public Sector Finances Technical Advisory Group (PSFTAG) evaluated the different options for recording pensions in the PSF and made a series of recommendations. We are now consulting on these recommendations. Once the consultation period ends on 31 August 2018, we will review the responses and decide a way forward. We will then publish a response and plans for implementation in autumn 2018.

In September 2017, we published an article explaining the national accounts recording of public sector employee pension schemes and how these are currently reflected in the public sector finances.

On 7 March 2018, we published official statistics on the total obligations, or gross liabilities, of UK pension providers including the UK government. This article included estimates for State Pensions, funded and unfunded public sector employee pension schemes and private sector pension schemes.

The treatment of pensions will be further discussed in the article, due to be published on 17 July 2018, on future potential methodological and classification changes to the public sector finances.