Financial review

22 July 2020

Whilst Ofcom is directly accountable to Parliament, our funding comes from fees charged out to the sectors we regulate.

We are committed to being a cost-conscious, value for money organisation in discharging our duties. Over the past 15 years, we have continued to deliver year on year, like-for-like real-terms budget reductions.

We are also a net contributor to HM Treasury; Ofcom collected £373.3m of fees and penalties in 2019/20, of which we retained £56.8m to fund our spectrum management and other relevant duties. The balance was passed to DCMS as our sponsor department, the UK Consolidated Fund, as well as the Department of Finance and Personnel - Northern Ireland (DFPNI) and to the Treasuries of the Isle of Man, the Bailiwick of Jersey and the Bailiwick of Guernsey.

Our responsibilities include the collection and transfer of licence fees collected under the Wireless Telegraphy Act 2006 (WTA), geographic telephone numbers, additional payments from broadcasting licensees and the levying of fines and penalties on stakeholders.

Budgeted cost recovery by sector

Spectrum 40%; Network and services 37%; TV 9%; BBC regulation 8%; Post 3%; Radio 2%; Orphan 2%; Networks and information systems regulation 0%. Total £124.2 milion

£373.3m of fees and payments collected under Section 400 of the Communications Act 2003

Wireless Telegraphy Act Payments - £262.3m, Government Fees - £107.0m, Financial Penalties - £1.9m, Additional payments - £0.7m, Geographical numbering - £1.3m

Financial performance

In 2019/20, our cash outturn of £124.0m was within 0.2% of our budget of £124.2m.

Almost 62% of our total cost base relates to staff costs, with a significant part of the remaining cost base fixed in relation to property and systems costs.

Note 2 of the accounts within Section C reconciles the total operating expenditure as presented in the Statement of Comprehensive Net Income to Ofcom’s actual operating outturn. The note also reconciles income on the same basis and presents Ofcom’s actual operating outturn and income by sector. The actual operating outturn represents the accrual-based costs for the financial year and excludes non-cash items such as depreciation, amortisation and provisions.

Ofcom present the costs relating to Spectrum Clearance separately to clearly differentiate from the core Ofcom operational activity. Further detail on this is set out on page 56.

Operating income

The £125.0m (2018/19: £124.3m) of income received in 2019/20 covers Ofcom’s core responsibilities (excluding Spectrum Clearance). As part of this, we also received £0.7m of grant funding from Innovate UK under the Regulators Pioneer Fund, for innovative work on the use of blockchain for UK telephone number management.

Operating expenditure

Non-staff expenditure relating to Ofcom’s core responsibilities in 2019/20 increased by £1.9m to £47.9m (2018/19 £46.0m), which excludes payroll staff costs. The main operating variances from the prior year are due to:

  • IT costs increased by £1.4m as we refreshed our IT estate;
  • Temporary staff and recruitment costs increased by £0.8m to cover vacancies; most of the increase in temporary staff costs is as a result of the need to quickly staff up in the network security and resilience area whilst permanent recruitment was underway for the specialist skills required, and also in the People & Transformation Team following a restructure. Both areas have now completed permanent appointments;
  • Outsourced Services increased by £0.4m in respect of preparatory work for the upcoming auction of 700 MHz and 3.6 – 3.8 GHz Spectrum bands;
  • Premises costs decreased by £0.8m as we recognised a rates credit in respect of Riverside House. Following the introduction of IFRS 16, property lease costs are presented on a separate line in the operating expenditure, Depreciation ROU lease assets.

Staff costs increased by £2.4m to £79.2m (2018/19 £76.8m). The average staff numbers were 937 full time equivalents (FTE) (2018/19 902 FTE). The increase in costs year on year relates to the annual pay award (£1.8m) and growth in our Technology team as we build our data and network security and resilience capabilities.

Reduced restructuring activity has seen restructuring costs decrease by £0.6m to £0.3m (2018/19 £0.9m).

Surplus/deficit for financial year

Funding surplus or deficit

The operating revenue required by Ofcom to fulfil its duties and deliver its programme of work for any financial year is calculated based on Ofcom’s statement of charging principles. This approach specifies the actual funds that need to be collected to discharge cash liabilities during the year. Any surplus funds arising as a consequence of budgetary savings achieved during the financial year are returned to stakeholders through a reduction in the annual tariffs raised in the two following financial years.

The funding surplus for the financial year is set out in Note 2 to the accounts and totals £8.6m (2018/19 £3.3m surplus).

Accounting surplus or deficit

An accounting surplus is required to cover expenditure not reflected in the Statement of Comprehensive Net Income, including capital expenditure and deficit recovery payments necessary in respect of the two defined benefit pension plans.

An accounting deficit occurs where depreciation, amortisation and other non-cash transactions are greater than the income received to cover the cash costs of capital items and the defined benefit pension plans.

The accounting surplus for the financial year after tax, recorded in the Statement of Comprehensive Net Income for the year under review, was £226.7m (2018/19: £229.6m deficit). The significant variance to the prior year reflects the inclusion of the provision of £232m in the 2018/19 financial statements which was funded by DCMS and settled in this financial year. The large accounting surplus and deficit over the past two years are non-recurring events

Spectrum Clearance

All costs relating to Spectrum Clearance are reported separately from Ofcom’s core responsibilities in the financial statements.

Clearance of the 700 MHz band continues as a major programme of work for Ofcom. The band is being cleared to make the spectrum available for mobile data. The incumbent users of the 700MHz band, digital terrestrial television (DTT) and programme making and special events devices (PMSE), will move to alternative frequencies.

Government has made grant-in-aid funding available for the grant scheme to allow Ofcom to disburse grants to scheme participants.

More information on the programme is provided in annex 8.

Spectrum Clearance expenditure amounted to £76.7m in 2019/20 (2018/19: £72.5m), which includes £73.7m of grants paid to grant scheme participants.

We received income totalling £79.2m (2018/19: £72.1m). The surplus of £2.6m will be adjusted for as part of 2020/21 grant-in-aid.

Additional funds collected on behalf of HM Treasury

Ofcom prepares a separate set of Financial Statements for the purposes of Section 400 of the Communications Act 2003. These transactions are not included in the Financial Statements. The fees, payments and penalties are reported, with further detail provided, within these Financial Statements in Note 23 to the accounts, with further information in Annex 1 on page 156.

During the 2019/20 financial year Ofcom collected £373.3m (2018/19: £1,688.6m1

1 £1.3bn of receipts were collected in 2018/19 relating to the conclusion of the spectrum auction of the 2.3 and 3.4 GHz bands. ) on behalf of HM Treasury of which £56.8m (2018/19: £54.3m) was retained to fund some of Ofcom’s core responsibilities, including Spectrum Management. The variance to the previous year was due to the spectrum auction completed in 2018/19.

A total of £312.8m was transferred to Government accounts in the financial year.

Tariffs

Ofcom published the 2020/21 Tariff Tables on 31 March 2020, based on the budget of £131.9m set for 2020/21 and incorporating the differences between the budgeted costs for 19/20 and the actual results, per sector.

The 2020/21 budget has increased from the 2019/20 budget due to our new Video Sharing Platform (VSPs) regulatory duty and increased spend on both the Universal Service Obligation and Network Security and Resilience work areas. The 2020/21 budget is in line with the HM Treasury’s spending cap set for Ofcom.

The fees and charges will vary by sector as they reflect planned work for 2020/21, along with the variances between the 2019/20 budget and the actual final expenditure.

As shown in the figure below, except for costs associated with our new responsibilities to regulate the BBC from 3 April 2017, Ofcom’s 2020/21 tariffs for the various sectors (excluding the new VSP regulatory duty) are largely in line with the 5-year average.

5-year Tariff fees and charges summary

Overall tariffs have risen from £117 million in 2016/17 to £131.9 million in 2020/21. The biggest increase has been for VSPs which was non-existent in previous annual reports. The figure for 2020/21 for VSPs is £5 million. Spectrum fees have remained largely static, as have television fees. Networks and services fees have fluctuated between £38 milliong and £47 milion. Fees for BBC regulation have been relatively unchanged since 2017/18, with the figure for 2020/21 coming in at £10 million. Fees for Post have risen from £3m to £5m between 2019/20 and 2020/21, with Radio and Orphan figures remaining largely unchanged.

Pensions

Ofcom provides pension benefits through a defined contribution pension allowance that is available to all colleagues. Ofcom colleagues are employed on terms with access to a stakeholder pension plan. The allowance may be used to contribute to the Ofcom defined contribution stakeholder pension plan.

Colleagues who joined Ofcom from legacy regulators were entitled to retain membership of one of two defined benefit (DB) pension plans. Both plans are closed to new entrants and benefits accruals ceased on 31 May 2011. From this time, all existing members were provided with access to the Ofcom stakeholder plan. Notes 1(k) and 20 to the accounts provide further detail.

The actuarial valuations for both schemes as at 31 March 2018 highlighted a combined funding surplus of £0.4m. The Ofcom Defined Benefit Pension Plan actuarial valuation shows a surplus of £0.4m. The Ofcom (Former ITC) pension plan valuation liabilities have all been bought in and thus there is no surplus or deficit.

However, the 2019/20 financial statements show a surplus of £22.4m, in part because the pension liabilities under the financial statements are prepared on the basis that the liabilities are discounted in line with the yields on high-quality bonds which, under current market conditions, differ significantly from the approach used for determining Ofcom’s contributions. This also reflects the significant movements in financial markets since the date of the actuarial valuations.

Ofcom makes cash payments to the Ofcom Defined Benefit Plan and the Ofcom (Former ITC) pension plan on the basis of the actuarial valuations. Cash payments, rather than the amount charged to operating surplus as calculated under IAS19, are included in operating expenditure outturn used to calculate the tariffs charged to stakeholders each year.

As a consequence of the risk mitigation work between Ofcom and the Trustees and Actuaries of both pension plans, approximately 80% of the plans’ liabilities are now backed by annuities. As part of the ongoing activity to manage and mitigate risks of the plans, further insurance-backed benefit buy-ins in respect of pensioner members will be considered in the future.