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Office for Students publishes its first accounts direction

  • United Kingdom
  • Education - Briefings

10-07-2018

Introduction

Institutions will be acutely aware that the issue of Vice-Chancellor and senior staff pay has been one of the most topical matters in higher education for most of the last 12 months and more. In our briefing of 15 June 2018  we commented on the publication by the Committee of University Chairs (CUC) of its Higher Education Senior Staff Remuneration Code and accompanying documents. In our briefing we pointed out that the Office for Students (OfS) had welcomed the CUC publication as a “positive step towards greater pay restraint and transparency for university leaders” and had stated that it would be publish its accounts direction later in the month and that this would set out increased expectations around transparency for senior pay.

That accounts direction has now been issued and contains important requirements in relation to the need to justify the total remuneration package for the head of the provider and the need to disclose the relationship between the head of provider’s remuneration and that for all other employees, expressed as a pay multiple.

The accounts direction is made up of 2 parts:

Part A applies to higher education institutions that were funded by HEFCE from 1 August 2017 to 31 March 2018 and are funded by the OfS from 1 April 2018 to 31 July 2019. In preparing their audited financial statements for the years ended 31 July 2018 and 31 July 2019, such higher education institutions must follow the OfS’s accounts direction and the ‘Statement of recommended practice: Accounting for further and higher education’ (SORP), or any successor to the SORP. If there are any inconsistencies between the requirements of the SORP and the OfS accounts direction then the OfS accounts direction will prevail. The latest date for submission of higher education institutions’ audited financial statements for 2017-18 is Monday 3 December 2018.

Part B applies to those higher education providers not covered by Part A that have been registered by the OfS. Compliance with the accounts direction for these providers is only necessary once the provider has been registered with the OfS for at least 12 months at the financial year end.

Therefore, if a provider which falls under Part B has a financial year end of 30 June and it is registered with the OfS on 15 May 2018, it will need to follow the new OfS accounts direction for its financial statements for the year ending 30 June 2019 and follow the next accounts direction (to be published by the OfS in spring 2019) for its financial statements for the year ending 30 June 2020. If, however, a provider’s financial year end is 30 June and it is registered with the OfS on 30 September 2018, it will only need to follow the accounts direction published in the spring of 2019 for its financial statements for the year ending 30 June 2020 because this is the first year end after registration that falls more than 12 months after registration.

Further education and sixth form colleges are required to comply with the OfS’s accounts direction in the same way but are also subject to the accounts direction published by their primary regulator, the Education and Skills Funding Agency (ESFA). Where the requirements of the OfS’s and the ESFA’s accounts direction overlap, disclosure should be made only once for the purposes of both organisations.

Although there are some differences between the requirements set out in Parts A and B the sections on senior staff pay and severance payments are the same.

Senior staff pay

The accounts direction states that, whilst it focuses primarily on the remuneration of heads of providers, the OfS will address issues of senior staff pay beyond that of the head of provider in 2019.

The accounts direction specifically states that providers must have regard to the ‘Higher Education Senior Staff Remuneration Code’ published by the CUC. In relation to institutions covered by Part B it makes it clear that they must have regard to the Code irrespective of whether the provider is a member of the CUC.

There are four sets of disclosure which must be made in the ‘staff costs’ note to the financial statements.

Firstly, the number of staff with a basic salary of over £100,000 per annum, broken down into pay bands of £5,000 (rather than the bands of £10,000 previously required by HEFCE). This information must be provided in tabular form. As with the HEFCE accounts direction, providers do not need to include staff who joined or left part-way through a year but who would have received salary in these bands in a full year. However, it is worth noting that, under the OfS accounts direction, where a proportion of the salary is reimbursed by the NHS, only the portion paid by the institution must be disclosed.

The OfS Regulatory Framework published earlier this year stated (at paragraph 454) that the OfS’ first accounts direction would require publication of “Full details of the total remuneration package and job title for each member of staff with a basic salary of over £150,000 per annum, including bonuses, pension contributions and other taxable benefits.” Significantly, this requirement is NOT included in the current published accounts direction.

Secondly, full details of the total remuneration package for the head of provider. Separate values must be disclosed for:

• Basic salary

• Payment of dividends (including, but not limited to, dividends paid in lieu of salary)

• Performance-related pay and other bonuses awarded during the financial year, including any deferred payment arrangements and separate disclosure of any amounts waived

• Pension contributions and payments in lieu of pension contributions

• Salary sacrifice arrangements

• Compensation for loss of office

• Any sums paid under any pension scheme in relation to employment with the provider

• Other taxable benefits – this must include the nature of each of the taxable benefits and the estimated money value of each of the benefits (in particular company cars, subsidised loans including mortgage subsidies, and subsidised accommodation)

• Non-taxable benefits that are available only to senior members of staff or the head of the provider – providers must disclose the nature of each of the non-taxable benefits and the cost of providing each of them – there is no need to disclose non-taxable benefits that simply flow from being a member of the provider’s staff and that are given to, or as a minimum are available to, all members of staff

• Other remuneration – again disclosure must be of the nature of any other types of remuneration and the cost to the provider of providing each type of remuneration – examples given are compensation for loss of benefits, ex-gratia and remuneration payments while on sabbatical, and payments for consultancy work that are made to the individual (via the provider), rather than to the provider, for work delivered using the provider’s resources

This disclosure is similar to the HEFCE accounts direction but requires more detailed information. Where there is a change in the head of the provider disclosure must be set out separately for each individual, and provide the start and end dates of appointments for both the current financial year and previous financial year. Where a previous head of provider continues to receive remuneration in an employed or consultancy role after they cease to be the head of the provider this should be included in the total with an explanation.

Thirdly, a justification for the total remuneration package for the head of the provider - including reference to the context in which the provider operates, the value and performance delivered by the head of the provider and an explanation of the process adopted for judging their performance.

Fourthly, the relationship between the head of provider’s remuneration and that for all other employees, expressed as a pay multiple - in fact, two pay multiples are required, one by reference to median basic pay of all other staff and the other by reference to median total remuneration of all other staff.

Severance payments

In this section the accounts direction specifically states that providers must have regard to the ‘Guidance on decisions taken about severance payments in HEIs’ published by the CUC. Again, in relation to institutions covered by Part B it makes it clear that they must have regard to the guidance irrespective of whether the provider is a member of the CUC.

Here there are another four sets of disclosure which must be made in the ‘staff costs’ note to the financial statements as follows:

1. The total amount of any compensation for loss of office paid across the whole provider (irrespective of the basic salary of an individual), and the number of people to whom this was payable. Note that while the new accounts direction currently does not require institutions to separately report compensation for loss of office paid to staff earning over £100,000 per annum (other than the Head of Institution), the OfS has said (as mentioned above) that it will address issues of senior staff pay beyond that of the head of provider in 2019.

2. The amount of compensation for loss of office paid to the head of the provider. If relevant, the disclosure should also state separately the amount of compensation paid for loss of office at the provider as one figure and, as a separate figure, the total compensation paid for loss of office at any of the provider’s parent or subsidiary undertakings or any other office(s) connected to the provider’s affairs.

3. Where the compensation paid to the head of the provider includes benefits other than cash, the provider must disclose the nature of the benefit in detail and the estimated money value of the benefit. The source of funding for any compensation paid or benefits given must be disclosed.

4. Where the compensation paid to the head of the provider includes additional pension contributions relating to the employment with the provider (whether these are voluntary contributions or otherwise), the amount of the pension contribution must be disclosed.

Other sections in Part A

Under the section on disclosures about management and governance, the accounts direction states that higher education institutions that were funded by HEFCE from 1 August 2017 to 31 March 2018 and are funded by the OfS from 1 April 2018 to 31 July 2019 must include a statement of corporate governance in their financial statements. This must set out a description of the provider’s corporate governance arrangements and a statement of the responsibilities of the governing body. This statement of corporate governance may be combined with the statement of internal control (see below) provided that all of the required disclosures are made.

As mentioned, the provider must include a statement of internal control in its financial statements. This statement relates to a provider’s arrangements for the prevention and detection of corruption, fraud, bribery and other irregularities. It must include an account of how a number of principles of internal control have been applied – these principles repeat what was contained in the HEFCE accounts direction. In addition the statement of internal control must set out any significant internal control weaknesses or failures that have arisen during the financial year (or after the year end but before the financial statements are signed) and information about actions taken or proposed to deal with significant internal control weakness or failure.

Under the section on disclosures for an exempt charity, the accounts direction states that the OfS is taking a different approach to HEFCE and, beyond the requirements that apply to all registered providers, it will place minimal additional obligations on exempt charities. Therefore a provider that is an exempt charity is only required to state that it is an exempt charity in its audited financial statements and produce financial statements in accordance with the OfS’ requirements, as well as in accordance of any relevant Statement of Recommended Practice. Providers are also referred to regulatory advice note 5 (which the OfS issued on 18 May 2018) containing guidance for higher education providers that are exempt charities.

Under paragraph 28 of the accounts direction, the external auditor must report to the governing body on whether in all material aspects the financial statements give a true and fair view of the state of the provider’s affairs; the financial statements have been properly prepared in accordance with the financial reporting standards; funds, from whatever source, administered by the provider for specific purposes have been properly applied to those purposes and managed in accordance with relevant legislation; where applicable, funds provided by HEFCE, the OfS and Research England have been applied in accordance with the relevant terms and conditions attached to them and the requirements of OfS’s accounts direction have been met.

Finally, in relation to signature and publication, the provider’s financial statements must be signed by the accountable officer, and by the chair of the governing body or one other member appointed by that body; the external auditor must sign the report to the governing body that is included in the financial statements and providers must publish their audited financial statements on their website within two weeks of them being signed by the required individuals, and at the latest, four months after the end of the financial year to which they relate.

Other sections in Part B

In relation to those providers who were not higher education institutions funded by HEFCE from 1 August 2017 to 31 March 2018 but have been registered by the OfS, the section on disclosures about management and governance states that if a provider is in receipt of public funding, it must include a statement of internal control in its financial statements for the financial year end that falls immediately after the provider begins to receive funding from the OfS or from Research England on behalf of UK Research and Innovation.

According to the OfS, a provider’s arrangements for internal control will depend on its size and complexity and it is for the provider to determine the most appropriate way to ensure that appropriate arrangements are in place. It is envisaged that these are likely to be the same arrangements that the provider would want in place to give it and its shareholders, trustees and/or members assurance that it is are able to prevent and detect fraud and other irregularities.

However, as with institutions covered by Part A, the statement of internal control must include an account of how the listed principles of internal control have been applied and must set out any significant internal control weaknesses or failures that have arisen and information about actions taken or proposed to deal with significant internal control weakness or failure.

Finally, providers covered by Part B are under the same obligations as those under Part A in relation to the report from the external auditor and the signature and publication of audited financial statements (see above for more details).

Comment

Whilst there are many similarities between the OfS accounts direction and its HEFCE predecessor (albeit that more information is required to be disclosed under the new accounts direction), the most important differences would appear to be the requirement for providers to justify the total remuneration package of the head of provider; the need to publish the pay multiples between the head of provider and the median pay of all staff and the requirement to publish aggregate amounts of compensation for loss of office paid to all employees.

It will be interesting to see how much detail providers go into (or feel they have to go into) in justifying the remuneration package. In its press release, accompanying the account direction, the OfS stated that the justification would need to be “detailed” and the requirement to publish pay multiples would provide additional visibility and transparency “and enable us all to ask tough questions as necessary”.

Although the OfS has acknowledged that decisions about the levels of senior staff remuneration are for individual governing bodies to determine, it has stated that it “can and will intervene if there is evidence that a provider’s poor management and governance is leading to a lack of transparency about the setting of senior pay, or where the pay is not justified”.

Furthermore, where a provider is in breach of an ongoing condition (for example, ongoing condition E3, on accountability, states that the governing body of a higher education provider registered with the OfS must ensure the provider’s compliance with the OfS accounts direction), the OfS has a number of sanctions available to it, including suspension from the register. Sir Michael Barber, Chair of the OfS, was quoted in the Independent, following the publication of the OfS accounts direction, as saying that the OfS would look for levels of remuneration that “stick out like a sore thumb” and that if that happened the OfS “have powers to intervene university by university”.

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