East Thames Annual Report and Financial Statements 2014/15
Strategic Report Including the Operating and Financial Review
Report of the Board Independent auditor’s report
Financial Statements
Annual Report and Financial Statements 2014/15
East Thames Annual Report and Financial Statements 2014/15
Company information Registered Office 29-35 West Ham Lane London E15 4PH Auditors Grant Thornton UK LLP Kingfisher House 1 Gilders Way St James Place Norwich Norfolk NR3 1UB Bankers Barclays Bank plc Business Banking 1 Churchill Place London E14 5HP East Thames Group Limited The company is a registered provider of social housing, a registered charity and a company limited by guarantee. East Thames Group Limited is the strategic arm of the Group, setting overall strategic direction for its nine subsidiaries. The Group also provides governance, human resources, ICT, business support, internal audit, risk and compliance, marketing and communications, and financial services to each of its subsidiaries to ensure consistency of approach and to achieve effective economies of scale. All subsidiaries are wholly controlled and/or owned and mutual agreements ensure their independence. Registered Charity Number: 1084952 Registered Company Number: 4091100 Registered by the Homes and Communities Agency Number: LH 4309 Board Members Details of all Board Members are presented on pages 38 to 40. Executive Directors Details of all Executive Directors are presented on page 41.
2-3
Subsidiaries of East Thames Group Limited: East Homes Limited Registered under the Co-operative and Community Benefit Societies Act Number: 22557R Registered by the Homes and Communities Agency Number: LH 2833 East Living Limited Registered under the Co-operative and Community Benefit Societies Act Number: 27902R East Potential Limited Registered Charity Number: 1053142 Registered Company Number: 03123368 East Place Limited Registered Company Number: 04301063 East Thames Partnership Limited Registered Company Number: 04701731 East Treasury Limited Registered Company Number: 04660101 East Finance plc Registered Company Number: 07984573 East Regen Limited Registered Company Number: 04660100 East Homes Services Limited Registered Company Number: 08747446
East Thames Annual Report and Financial Statements 2014/15
Strategic Report Including the Operating and Financial Review
Report of the Board Independent auditor’s report
Financial Statements
East Thames Annual Report and Financial Statements 2014/15
Our partners and supporters We would like to say a huge thank you to all the organisations listed here, who have given us the support we need to carry out the work we do, whether that means mentoring a young person, offering work placements to our residents or giving us the funding we need to build new homes and create sustainable communities. If you would like to help us make a difference by working with local people and changing lives, please call our fundraising team on 020 8536 3982 or email russ.mclean@east-thames. co.uk. If you would like more information about East Thames or want to keep up to date with all our latest news: Visit the website at www.east-thames.co.uk Follow us on Twitter @EastThamesGroup Visit our Facebook page at www.facebook.com/ EastThames
4-5
Our local authority partners
East Thames Annual Report and Financial Statements 2014/15
Our partners and supporters
Strategic Report Including the Operating and Financial Review
Our partners and supporters
Report of the Board Independent auditor’s report
Financial Statements
East Thames Annual Report and Financial Statements 2014/15
Contents Message from Group Chairman, Tina Tietjen
8
Message from Group Chief Executive, Yvonne Arrowsmith
9
Strategic report
10
About East Thames
12
Strategic aim 1: help residents cope with a difficult external environment Strategic aim 2: support the regeneration of East London and Essex Strategic aim 3: improve our capacity to manage our business and sustain growth
14
Report of the Board
30
Report of the Board
32
Governing East Thames
33
Internal controls and risk management
34
Internal controls assurance
36
Board’s conclusion on internal control 36 Whistleblowing 36 Board composition and roles Former Board Members
37 37
15
Board membership
38
16
Senior team
41
Corporate social responsiblity
17
East Thames Committee structure
42
Financial review
18
East Thames Committee structure
43
18
Key governance and risk Committees
44
Group highlights Development and performance of the Group’s business during the financial year Value for money Principal risks and uncertainties Capital structure, treasury policy and compliance with lenders covenants
6-7
20 22 26 28
The Group Risk Management and Audit Committee (GRMAC) 45 Statement of responsibilities
Independent auditor’s report
47
48
Independent auditor’s report to the members of East Thames Group Limited
50
Financial statements
54
Financial statements
56
Notes to the financial statements
62
East Thames Annual Report and Financial Statements 2014/15
Strategic Report Including the Operating and Financial Review
Report of the Board Independent auditor’s report
Financial Statements
East Thames Annual Report and Financial Statements 2014/15
Message from Group Chairman, Tina Tietjen self-sustaining continues. Our performance on sales was strong again this year and will support the development of new homes. However, we know that we must strengthen the efficiency of our operations. We have begun this process by introducing tighter controls and accountability to our financial management processes, and will improve our performance further by rationalising our central overhead costs. In addition to this we will be implementing a major review of our housing portfolio, which will enable us to refine our footprint and improve our management efficiency. This will also release funds to support investment in our existing stock. Last year I reported that housing had made headlines for the first time. This year it has been the topic on everyone’s lips as political parties sought to win our votes based on their commitments to create more homes and increase home ownership. We await the policy drafts on Right to Buy and have modelled the impact of the one per cent year-on-year rent decrease. We remain covenant compliant but at a lower margin than we would like, so we are taking steps to improve the margin. However, like associations across the UK, we are concerned that these policies risk limiting our ability to develop more genuinely affordable homes. We will be working closely with colleagues in the g15 (London’s 15 largest housing associations) and the National Housing Federation to make sure our voice is heard by the government in the discussions to come. Despite the challenges ahead, we will remain committed to our mission: To make a positive and lasting contribution to the neighbourhoods in which we work. This year we have set ourselves an additional challenge: to achieve top performance in our provision of high quality homes and value for money services in East London and Essex by 2020. To deliver this we’ll be focusing on 8-9
five key areas: our culture, systems, performance, finance and reputation. We will continue to put customers at the heart of everything we do. Our appointment this year of our first Director of Customer Service and Transformation is a commitment to this focus.
Our plans to improve our systems and performance monitoring will be shaped around the customer experience, with the aim of increasing our customer satisfaction results significantly. We will also continue to work closely with our partners, particularly local authorities, to ensure that we’re helping them to address their particular housing needs. Excellence in governance is fundamental to our success, and our rating demonstrates compliance with the standard set by the regulator. Strong finances are more important than ever, as the need for housing associations to be increasingly
We have taken the important decision to streamline our housing offer in favour of shared ownership and genuinely affordable rents, which we will support through our private sales activity. This means that we will no longer offer intermediate market rent or market rent properties. Finally, as the smallest member of the g15 we’re proud of our work to contribute, not just to social housing and care, but to the social regeneration of our communities. For this reason we’ll be working hard in 2015/16 to make sure our stories are told.
East Thames Annual Report and Financial Statements 2014/15
As a landlord to more than 15,000 households, this means putting our emphasis squarely on landlord and customer services.
It has been a difficult year for residents affected by welfare reform. Our benefit advisors are working closely with them, targeting support at those who need it most and linking residents with our employment support service to help them access jobs. We are now working to replicate these positive results across all
It’s been a good year for our development team. In the last year alone we completed 269 new homes. Our regeneration of the New Union Wharf estate on the Isle of Dogs swung into action and the first new block is now nearly complete. This project will transform a 1970’s estate into one of the best places to live on the Thames. New residents have now settled into our Kings Park development in Havering and we’re starting to see a real community take shape. While over on the Ocean Estate in Tower Hamlets our new developments, Vivo and So Stepney, were named the best new places to live in London at the Mayor of London’s 2015 London Planning Awards. Of course true social and economic regeneration is about transforming communities and transforming lives, something we’re extremely proud of delivering. For every £1 we invested in our social and economic regeneration services last year, we
To continue delivering these services at a time of reduced funding, and in order to make the improvements we know are needed, we’re working to make East Thames the best it can be. That’s why we’ve launched our new ‘Good to Great’ transformation programme, putting the emphasis firmly on improved customer experience. We have also unveiled a new three year strategic plan and associated strategic aims to help deliver our vision of becoming a top performing housing association. There’s a lot of work to be done in the coming months, but I’m excited to be here and look forward to working with East Thames staff and the Board to deliver the great services our customers deserve.
Financial Statements
We’ve achieved high satisfaction levels with our housing and lettings services and, thanks to the good work of our customer accounts team, our rent arrears are at their lowest ever level.
customer services, including repairs, which is quite rightly a priority for residents. We have worked closely with our repairs partner Interserve to continuously improve the service. We are starting to see a real improvement in delivery which we believe is becoming evident to residents.
Independent auditor’s report
I have seen a huge amount of good work here at East Thames since I joined in October. Staff are passionate about what they do, we have a great development track record and we’re getting more people into employment than ever before. Our vision is to build on these areas of success to become a top performing housing association by 2020.
As someone who started their career in nursing, East Thames’ care and support service is something I’m especially passionate about. Like others in the sector, we are facing the increasing challenge of delivering services against a backdrop of public funding cuts. With less money available we are thinking carefully about how to protect these services and how to continue providing services to more vulnerable people. Our response has been to look at innovative new ways of working. We’re excited to be piloting assistive technology in three of our care schemes which really could revolutionise the way we deliver care and support.
Report of the Board
generated over £6 in social value, the monetary value put on an increase in individual wellbeing. We’ve achieved this through the hard work of our employment and inclusion team who helped 283 people find work. We have also developed a partnership with Eastbury School on the Gascoigne Estate in Barking. Here East Thames staff have delivered training, mentoring and employability skills and even arranged a weeklong work placement at Cambridge University for five lucky pupils.
Strategic Report Including the Operating and Financial Review
Message from Group Chief Executive, Yvonne Arrowsmith
East Thames Annual Report and Financial Statements 2014/15
Strategic report Including the Operating and Financial Review
10 - 11
East Thames Annual Report and Financial Statements 2014/15
Strategic Report Including the Operating and Financial Review
Report of the Board Independent auditor’s report
Financial Statements
East Thames Annual Report and Financial Statements 2014/15
About East Thames East Thames is one of the largest providers of affordable housing in East London and Essex. We own and manage more than 15,000 homes. Our mission is to make a positive and lasting contribution in the neighbourhoods in which we work. We do this by: --
Providing affordable homes for people in East London and Essex. This includes social rented homes and a range of affordable rented and home ownership options;
--
Building quality new homes in East London and Essex and improving neighbourhoods;
--
Providing care and supported accommodation for people with more intensive needs, including young people at risk of being made homeless, elderly people, people with mental health needs and learning disabilities and women fleeing domestic violence;
--
Offering a range of programmes to help people get back into work or training, as well as initiatives to strengthen communities.
12 - 13
East Thames Annual Report and Financial Statements 2014/15
During 2014/15 we measured our performance against the following three aims from our 2013-2016 three year strategic plan: --
Strategic aim 1: help residents cope with a difficult external environment;
--
Strategic aim 2: support the regeneration of East London and Essex;
--
Strategic aim 3: improve our capacity to manage our business and sustain growth.
Strategic Report Including the Operating and Financial Review
Our performance
Report of the Board Independent auditor’s report Financial Statements
East Thames Annual Report and Financial Statements 2014/15
Our performance Strategic aim 1: help residents cope with a difficult external environment
Supporting our residents means more than just meeting their housing needs. We’re committed to providing reliable landlord services, employment and training support, welfare benefit advice and care
and support for vulnerable adults. In the past year some of our key achievements have included:
86% Trialling new assistive technology with older residents and residents with learning disabilities at three of our schemes. The technology offers enhanced safeguarding by logging movement so support staff can proactively target visits to residents who need face-to-face support.
80%
3.2%
ÂŁ580k 14 - 15
Implementing a repairs improvement plan which has delivered initial improvements to the service, for instance 80% of residents said their appointments had been kept. Customer satisfaction, however, is at 56% and targets remain unmet. We continue to work with our repairs partner Interserve to address these remaining issues.
Helping residents keep rent arrears to a minimum. Despite the difficult economic climate we have decreased our current rent arrears to just 3.2% of our total rental income by targeting financial support and benefit advice at those who show early signs of struggling financially.
Helping our residents access more than ÂŁ580k in benefits. We also expanded our welfare benefits team to increase the benefits, budgeting and financial advice available to residents.
86% of residents are satisfied with our housing services, such as tenancy verifications and welcome visits (2014: 86%).
73% 73% of residents moved on successfully from our care schemes (2014: 79%).
283
25
983
Supporting 283 local people into paid work, 116 of which were East Thames residents.
Helping 25 new social enterprises and charity groups to launch from our Starting Point business facility in Barking.
Fitting 983 homes with new kitchens, bathrooms, central heating or window replacements.
East Thames Annual Report and Financial Statements 2014/15 Strategic Report Including the Operating and Financial Review
Our performance Strategic aim 2: support the regeneration of East London and Essex
Successfully gaining planning permission to build 80 new homes in Walthamstow across two sites - Sutherland Road and Wood Street. This achievement highlights our excellent collaborative working relationship with Waltham Forest Council and demonstrates our joint commitment to delivering more affordable housing for local people.
282 Completing 269 new homes during the year.
269
Financial Statements
Securing planning permission to develop 1,575 new homes on the eastern side of the Gascoigne Estate in Barking. Phase 1 of the ambitious proposal will result in 421 new homes being built by 2017, along with gardens and a new public square.
Starting 282 new homes during the year (2014: 271).
Independent auditor’s report
1,575
225
Starting the next phase of the regeneration of the Ocean Estate in Stepney which will deliver a further 225 new homes to the area.
Rebecca, a Kings Park resident
Achieving recognition for our development and regeneration work at a number of important industry awards. VIVO and So Stepney, built as part of the Ocean Estate regeneration in Stepney, were named the best new places to live in the Mayor of London’s 2015 London Planning Awards and Kings Park secured the prize for best large development in the First Time Buyers Readers’ Awards.
80
17
17 people went into full time employment after completing our constructions skills training course, Construct your Career.
Report of the Board
The demand for quality, affordable homes remains strong in East London and Essex and we have continued to deliver developments which have enabled local neighbourhoods to thrive. Our strong partnerships, particularly those with the Greater London Authority, the Homes and Communities Agency and local authorities, have been integral to this. In the past year, some of our key achievements have included:
“We love our new apartment; it’s perfect for our new family. We received a lot of support from East Thames too, from the first day we came to view the show flat to the day we moved into our new home.”
East Thames Annual Report and Financial Statements 2014/15
Our performance Strategic aim 3: improve our capacity to manage our business and sustain growth
160
160 new homes sold during the year (2014: 282). 12 for outright sale (2014: 172) and 148 for shared ownership (2014: 110);
We have made good progress in making East Thames more efficient and improving our surplus. We have strengthened our bottom line and have been able to reinvest surpluses into the business, delivering new homes and services for our
£3.5m
Generating a £3.5 million surplus through the outright sale of homes (2014: £19.9 million).
customers. Over the past year, some of our key achievements have included:
£5m
Generating a £5 million surplus we generated through the sale of shared ownership homes.
3.2% Appointing Yvonne Arrowsmith as the Group’s new Chief Executive. Yvonne joined from Family Mosaic, bringing a wealth of experience in the housing and care and support sectors.
The percentage of our rent arrears stand at 3.2% of our total rental income (2014: 3.4%).
63% The percentage of shared owners who bought additional shares and now own 100% of their home, paying no rent.
60%
£16m
Successfully securing £16 million in funding from the Greater London Authority to build new affordable homes. The money is being used to deliver 624 affordable homes in regeneration schemes such as New Union Wharf in Tower Hamlets and the Gascoigne Estate in Barking.
Launching a new corporate vision and a wide ranging transformation programme, entitled ‘Good to Great’. The programme will seek to improve culture, performance, systems and processes, financial strength, and brand and reputation.
16 - 17
The percentage of staff who took part in the Best Companies survey ensuring we maintained our ‘Ones to Watch’ status for the third year in a row.
25% We have lowered our void properties costs by 25% to £2.4 million (2014: £3.2 million).
Achieving regulatory compliance with the Homes and Communities Agency.
East Thames Annual Report and Financial Statements 2014/15
Report of the Board
At East Thames we are committed to investing in our local community for the benefit of all residents. It’s about more than building homes and providing employment support. It’s about: making sure that the benefits of our regeneration projects reach the whole community; that we take on our own trainees when we have vacancies; and that as many people as possible benefit from our experience, resources and time. Last year we invested £1.4 million into our social economic and regeneration programmes and attracted more than £360,000 in external funding. We have calculated that for every £1 we invest in these activities, we generate £6.30 in social value.
Not only does this work increase wellbeing for each individual, many of the participants go on to work more closely with East Thames, shaping the services we deliver to others. In 2014/15: 13 of our employment and training participants went on to secure permanent positions at East Thames;
--
We trained 60 volunteers. 33 of these went on to volunteer in our care schemes supporting vulnerable adults or young people;
--
We supported 105 of our residents to take an active role in a resident or tenant group.
We also ensure that our development and regeneration work delivers social value, which is why our contracts with development partners set targets for work experience, apprenticeships and local employment. We ask our
--
Our development sites employed 21 apprentices;
--
38 people gained construction qualifications.
As part of our regeneration of the Gascoigne Estate in Barking, benefits are extending beyond the construction site and into the local secondary school, Eastbury Comprehensive, where we have offered employability support to pupils of all ages: --
12 members of East Thames staff mentored school students;
--
Staff have attended training days, provided mock interviews and supported assessment days and projects for students;
--
East Thames arranged for five sixth formers to benefit from residential work experience placements in catering at the University of Cambridge.
“I love working at East Thames and I feel at home here.” Kadisha, who found permanent employment at East Thames after completing our Routes to Work programme
Financial Statements
--
contractors, for example, to create one new apprenticeship for a local young person for every £3 million we spend with them. As a result we saw a number of employment and training successes at our development sites in 2014/15:
Independent auditor’s report
Our projects with the biggest impact are those that: help people find work; deliver training to build confidence and get people job ready; and those which give people employability skills and experience, via regular volunteering or by taking an active role in a tenant group. Together these activities have generated a net benefit that is worth £3.7 million.
Strategic Report Including the Operating and Financial Review
Corporate social responsiblity
East Thames Annual Report and Financial Statements 2014/15
Financial review Group highlights Group highlights - five year summary for the year ended 31 March
2015
2014
2013
2012
2011
£’000
£’000
£’000
£’000
£’000
146,369
172,715
109,373
93,842
96,292
- Turnover on continuing activities (including joint venture, excluding sales)
117,104
105,427
99,613
97,255
91,945
- Turnover on properties for sale
49,421
77,765
15,005
1,619
5,800
- Less: Turnover from joint venture
(20,156)
(10,477)
(5,245)
(5,032)
(667)
Cost of sales
(37,548)
(47,309)
(10,748)
(1,365)
(5,033)
(9,234)
(8,845)
(7,140)
(5,962)
(5,682)
(61,678)
(68,939)
(71,864)
(69,966)
(69,402)
37,909
47,622
19,621
16,549
16,175
9,493
5,334
3,277
4,024
653
(28,077)
(26,643)
(21,745)
(18,159)
(19,781)
-
(9,097)
-
-
-
(2,944)
(3,596)
(3,356)
(3,214)
(650)
-
400
-
-
-
7,770
5,541
2,932
2,441
4,820
24,151
19,561
729
1,641
1,217
456
(2,524)
(342)
(38)
(56)
24,607
17,037
387
1,603
1,161
£’000
£’000
£’000
£’000
£’000
1,007,078
966,663
915,313
809,725
767,430
Other tangible fixed assets
25,258
26,469
28,219
36,768
38,223
Investments
58,632
23,094
25,495
18,799
14,837
Income and expenditure account Summary information Group turnover Analysed as follow:
Housing depreciation Operating costs (excluding depreciation) Operating surplus Share of operating surplus/(deficit) in joint venture Net interest payable excluding joint venture Exceptional item – options buyout Share of joint venture interest Income distribution from joint venture Surplus on sale of assets Surplus before tax Tax Surplus for the year Balance sheet summary Housing properties at valuation
Net current assets/(liabilities) Total assets less current liabilities Long term creditors Provisions and other long term liabilities Reserves Total funding
18 - 19
47,394
48,810
61,676
21,853
(24,963)
1,138,362
1,065,036
1,030,703
887,145
795,527
552,131
553,316
578,162
515,205
440,937
519
515
1,041
648
576
585,712
511,205
451,500
371,292
354,014
1,138,362
1,065,036
1,030,703
887,145
795,527
East Thames Annual Report and Financial Statements 2014/15 Strategic Report Including the Operating and Financial Review
Financial review
Group highlights - five year summary for the year ended 31 March
2014
2013
2012
2011
15,125
14,011
13,390
12,743
12,828
Operating margin – social housing lettings
33.1%
33.3%
29.8%
27.1%
20.3%
Operating margin - all activities
25.9%
27.6%
17.9%
17.6%
16.8%
Interest cover - excluding asset sales
135.0%
133.2%
90.2%
91.1%
81.8%
Interest cover - including asset sales
162.7%
148.7%
103.7%
104.6%
106.1%
Interest cover - including asset sales after adding back housing depreciation
195.6%
173.5%
136.6%
137.4%
134.9%
Net gearing
46.7%
50.0%
54.0%
55.0%
51.5%
Operating cost per property managed for social housing lettings
£4,368
£4,713
£4,669
£4,921
£5,485
Accommodation figures: Total housing stock owned or managed at year end
Report of the Board
2015
The comparative years have been adjusted compared to the original published accounts for the following: i. The impact of adopting component accounting including allocation of social housing grant to components; ii. The impact of a change in the valuation of investment properties (note 34 to the financial statements); iii. Accommodation numbers have been restated to only include units of accommodation in management resulting in changes to costs per property managed. Independent auditor’s report Financial Statements
East Thames Annual Report and Financial Statements 2014/15
Financial review Development and performance of the Group’s business during the financial year Social and affordable housing General needs housing operating surplus improved by £1.7 million this year. This primarily reflects: rent increases; the full year impact of rent on units handed over in the latter part of the previous financial year; a reduction in void losses; a reduction in housing properties depreciation, and bad debts. This was offset by a £1.9 million increase in planned maintenance and the revenue element of major repairs. Stock under management has grown by 3.9% (316 units). We ceased managing 111 units during the year and took on the management of 427 new units at East Village on behalf of Triathlon Homes LLP. This followed the completed conversion of the Athletes Village into residential homes at the end of the previous financial year. The total number of intermediate rent units under management has increased by 48% (221 units). We ceased managing some units, while taking on management for 238 new units on the East Village on behalf of Triathlon Homes LLP. Affordable housing saw a slight decrease in operating surplus. Although stock under management has grown by 96% (192 units), rent receivable increased by only 40% as a high volume of units handed over in the latter part of the year. Shared ownership and ‘rent now, buy later’ saw its operating surplus drop by £0.5 million, due to an increase in staircasing sales and the re-categorising of intermediate rent, which was previously included under shared ownership. This is now shown as a separate tenure type in line with the rest of the sector. Stock under management has grown by 19.3% (424 units), 320 of these units are managed on behalf of Triathlon Homes LLP at East Village. 20 - 21
Although 38 more first tranche shared ownership units were sold this year, surpluses on these sales reduced from £3.4 million in 2014 to £2.2 million in 2015, as the margins on the units sold this year were lower. Performance in all other areas was broadly in line with the previous year. Care and support activities Care and support (consisting of foyers, supported housing and residential care homes) saw income increase slightly by £0.1 million with costs up by £1.8 million. This was primarily caused by the re-allocation of housing properties depreciation and bad debts from general housing resulting in a small deficit this year. Stock under management has dropped by 10.6% (199 units) on the previous year, reflecting the challenging market within which these services operate. Non-social housing activities Surpluses on outright sales reduced to £3.5 million in the year (2014: £19.9m). This reflects the phasing of our development portfolio. A surplus of £2.6 million was made on a land sale at Bromley by Bow. Performance in all other areas was broadly in line with the previous year. Overall group performance We have used the following key measures to manage our financial position this year: --
Operating margin, which measures the overall profitability of our business;
--
Interest cover, which measures our ability to service our loans from operating cash flow;
--
Gearing, being a measure of the level of borrowing.
The results for 2015 demonstrate a continuous trend of improvement in our operating margin, interest cover and gearing. The results reflect the continuing impact of the ‘Improving East Thames’ transformation programme, alongside other value for money initiatives and growth in the number of units owned and under management.
Operating margin A surplus of £3.5 million was achieved from outright sales (2014: £19.9 million) and £2.8 million from first tranche sales of shared ownership properties (2014: £3.4 million). The operating surplus from social housing lettings increased to £29.8 million (2014: £28.6 million). The underlying margin on recurring social housing operations, excluding depreciation, increased to 43.2% (2014: 42.3%). Turnover arising from all categories of social housing lettings increased by £4.3 million this year, whilst operating costs only increased by £3.1 million, of which £1.9 million was an increase in planned maintenance expenditure. Management costs were only 0.6% greater than 2014 reflecting the impact of the Improving East Thames programme and our work on improving value for money in this area. Operating costs per property managed for social lettings also decreased by 7.3% from the previous year. Interest cover The Group interest cover, as calculated by comparing operating surplus to interest cost, is 195.6% (2014: 173.5%) and shows a significant improvement, arising from the high level of sales in addition to the cost saving measures noted above. Gearing The Group’s gearing, as calculated by comparing total borrowings to asset values, has reduced to 46.7% (2014: 50.0%), and is significantly better than both our internal target of 65% and the limit of 70% imposed by our lenders. Note that the lenders’ covenants are based on East Homes Limited’s results. East Homes Limited gearing as at 31 March 2015 was 49.0%.
East Thames Annual Report and Financial Statements 2014/15
was funded from operational cash flow;
--
A surplus on asset sales of £7.7 million (2014: £5.5 million), largely from shared ownership leaseholders acquiring further equity in their home.
--
Housing assets shown at valuation increased by £40.3 million. Revaluation accounted for £20.7 million of this increase, the remaining £19.6 million increase reflects the 282 new homes started in the year;
--
The total amount invested in new affordable homes was £65.1 million (2014: £61.4 million). This was partly funded by social housing grant receipts of £15.4 million (2014: £10.1 million) and utilisation of £2.0 million of the recycled capital grant fund. The balance
The strong cash flow, in excess of immediate investment needs, resulted in a reduction in net debt of £6.1 million at the year-end;
--
Net current assets were £47.4 million (2014: £48.8 million), a decrease of £1.4 million. This reduction reflects an increase in stock held for sale to £31.2 million (2014: £30.0 million), an increase in debtors to £12.8 million (2014: £10.6 million) and a decrease in cash of £2.2 million. Creditors due within one year were up to £45.1 million (2014: £42.6 million). The increase in stock reflects our continuing investment in mixed tenure programmes, including shared ownership and private sale to support the funding of affordable homes;
--
Revenue reserves have increased to £63.6 million (2014: £31.8 million), reflecting the high level of property sales the Group continues to achieve;
--
Our investment in Triathlon Homes, the affordable housing element of the former Athletes Village, increased in overall value to the Group from £5.0 million to £40.7 million. The increase in value comprised the revaluation of the Group’s share of housing properties, amounting to £29.2 million and growth in the net asset value of the investment to £6.5 million. During the latter part of the previous year, properties started to be handed over resulting in both sales of shared ownership properties and lettings of social and intermediate rent units. This is a long term investment and one that will create a positive return for the Group. The Group is also responsible for the management of these units on behalf of Triathlon Homes.
Financial Statements
Interest payable amounted to £28.1 million (2014: £26.7 million), reflecting the development programme and the completion of schemes;
--
Independent auditor’s report
--
Position of the Group at year end -- Total assets less current liabilities were £1.1 billion at the year end, marginally above the previous year;
The recycled capital grant fund stood at £13.5 million (2014: £10.6 million) reflecting the increased level of staircase sales in the year;
Report of the Board
Other factors Other factors influencing the results for the year are as follows:
--
Strategic Report Including the Operating and Financial Review
Financial review
East Thames Annual Report and Financial Statements 2014/15
Financial review Value for money Our strategic approach to value for money We have a strong social purpose and our new strategic plan makes it clear we want to refocus on our core social housing activities: providing affordable housing, care and support services and social and economic regeneration (SER) programmes to make a positive and lasting contribution to the neighbourhoods in which we work. Providing value for money homes and services forms a key strategic aim within this. The external environment has become tougher in recent years, with on-going austerity measures. This
means we need to continue to deliver services and build much needed homes with fewer resources, to demonstrate real value for money. We have just adopted a value for money strategy, and good progress has been made, as discussed at the Board meeting in June 2015. Our costs and performance To understand how we compare with other similar providers, we benchmark our performance against peer groups, in particular, the g15 group of London housing associations. We are pleased that our performance has significantly improved in a range of areas: -- We have reduced rent arrears
despite the growing impact of welfare reform and difficult economic conditions for our residents; --
We have reduced our general needs void turnaround times to 25.8 days (2014: 44.8 days). This had a positive impact on the overall void loss which decreased by ÂŁ0.7 million;
--
We have greatly improved the performance of our customer contact centres. 84% of all calls were answered within our 20 seconds target; the average time it took to answer calls was 30 seconds and we reduced the proportion of abandoned calls.
Notes *across general needs properties and housing for older people; Latest benchmarking data available from the g15 is for 2014.
2014/15 performance compared with the g15
East East Thames Thames 2015 2014
East Thames 2013
g15 median 2014
g15 upper quartile 2014
Current tenant arrears*
3.88%
3.93%
3.83%
4.18%
3.69%
Void loss as a percentage of rent*
0.57%
1.01%
0.48%
1.05%
0.82%
39.7
48.5
34.8
32.7
25.4
76.4%
52.5%
42%
73.7%
83.6%
30
25
245
43
25
97.9%
84.2%
na
84.2%
85.5%
99.83%
99.72%
99.99%
99.80%
100.00%
16.3
11.5
7.4
11.2
11.0
Number of days to re-let properties* Percentage of properties accepted on first offer Average time taken to answer inbound telephone calls (in seconds) Percentage of calls dealt with at first contact Percentage of units with a valid gas certificate Average number of calendar days taken to complete repairs We are aware of the challenges we are facing particularly in relation to repairs and complaints: --
--
Our maintenance partner experienced operational problems with the repairs service in the first 18 months of the contract. A comprehensive improvement plan was implemented in August 2014. This has reduced the number of complaints, cleared the backlog of repairs and significantly increased satisfaction levels, which were up to 73.5% in March 2015 (and 79.5% in May); In 2015/16, we will focus on reducing the time it takes to complete repairs and improving the standard of communal repairs,
22 - 23
which we have identified are key drivers of customer satisfaction; --
To improve our approach to complaints, we are rolling out customer service training to all our staff from 2015/16 and will implement a revised complaints process supported by customer relationship management (CRM) technology.
Our overheads are high compared to our peers and we now have plans in place to reduce these from 16.9% of turnover in 2015 to 13% by 2019/20 at the latest. The cost of our corporate offices account for a high proportion of our overheads so we started rationalising
these a few years ago, selling offices and gradually renting out floors of West Ham Lane in 2014 and 2015. We are considering this further. A full overhead review is currently underway to give a roadmap for cost reduction. More fundamentally we have launched the ‘Good to Great’ transformation programme, which will use lean methodology to review and streamline our systems and processes to generate efficiencies and focus on customer value. We have also been looking closely at our operating efficiency and compared this with the rest of the g15 to identify areas of opportunity.
East Thames Annual Report and Financial Statements 2014/15 Strategic Report Including the Operating and Financial Review
Financial review 2014/15 unit costs compared with g15 Indicator
East Thames 2014
East Thames 2013
g15 median 2014
g15 upper quartile 2014
Total cost of housing management per property
£597
£555
£541
£568
£487
Total cost of major works and cyclical maintenance per property
£923
£472
£1,056
£1,274
£1,019
Total cost of responsive repairs and void works per property
£854
£700
£999
£882
£787
16.4%
16.9%
17.2%
11.6%
10.6%
Overhead costs as percentage of turnover
Notes Total cost per property include direct costs, third party costs and overheads; 2013 and 2014 data was increased by 2.3% to reflect the inflation uplift as recommended by Housemark; 2015 figures are provisional and subject to final validation of Housemark data.
Our 2014/15 performance is lower quartile for overall gross margin and our overall net margin is the lowest of all g15 members. This arises from our care and support work, which operates on a very low margin, which
reduces the combined result. Our core social housing lettings margin has decreased slightly to 33.1% (2014: 33.3%) compared to a g15 median of 30.2% and a
Report of the Board
East Thames 2015
top quartile result of 45.1%. Our performance is second quartile. But if we compare ourselves to organisations which directly manage care and support schemes, our performance is top quartile.
2014/15 margins compared with the g15 Indicator
East Thames 2014
East Thames 2013
g15 median 2014
g15 upper quartile 2014
Gross margin (all activities)
28.0%
28.5%
20.0%
28.7%
39.4%
Net margin (all activities)
14.5%
9.1%
0.3%
22.0%
31.3%
Social housing lettings margin
33.1%
33.3%
29.8%
30.2%
45.1%
In order to improve performance, we have developed a series of new strategies. Given our mix of activities, we do not expect to achieve upper
Working with Ark Consultancy, we have developed a stock assessment model to evaluate all homes for which we have repairing and maintaining liabilities. Based on the available stock data, we have identified 1,659 that underperform and are now considering the options.
our social housing lettings gross margin despite increasing our planned maintenance expenditure by £1.9 million.
2014/15 stock performance Outcome
Number of units
Percentage of total units
Surplus/ (deficit) per unit pa
Assets performing well against both social and financial tests and making a return for the business
7,903
73.4%
£1,133
Assets performing well in one of the tests and making a return for the business
1,199
11.1%
£417
Assets underperforming against both tests and/or not making a return for the business
1,659
15.4%
(£758)
10,761
100.0%
£762
Total
Financial Statements
Our assets In 2014/15 we adopted strategic asset management principles, based on a detailed and comprehensive understanding of the performance of our stock. This enables us to make informed decisions on the level of investment required to maintain our stock at a decent homes plus standard, and enables us to assess the future of underperforming properties.
quartile performance overall, but within each business stream, we are targeting improvements. As an example, we have already improved
Independent auditor’s report
East Thames 2015
East Thames Annual Report and Financial Statements 2014/15
Financial review Operating margins, by tenure, achieved in the past two years: Tenure type
Valuation (EUV-SH) £m 2015
General needs housing
Rental Operating income surplus £m £m 2015 2015
Operating margin % 2015
Operating margin % 2014
Gross yield % 2015
Gross yield % 2014
647.5
51.6
22.0
42.6%
38.1%
8.0%
7.7%
Foyers
29.1
3.4
(0.5)
(14.7%)
23.2%
11.7%
12.2%
Supported housing
63.2
13.6
(0.2)
(1.5%)
10.4%
21.5%
19.9%
4.0
4.5
0.7
15.6%
(10.9%)
112.5%
104.6%
185.6
14.6
6.5
44.5%
36.9%
7.9%
8.8%
31.6
2.5
1.3
52.0%
83.4%
7.9%
10.5%
961.0
90.2
29.8
33.0%
31.4%
9.4%
9.5%
17.9
1.8
0.9
50.0%
12.4%
10.1%
4.5%
978.9
92.0
30.7
33.4%
31.2%
9.4%
9.4%
Residential care homes Shared ownership Affordable rent Total social housing lettings Commercial property Total social housing and commercial In March 2015 the Board approved our asset management strategy and plans to tackle underperforming properties. This will increase the value of our stock overall and shape our property portfolio so it better meets the needs of our current and future residents. We took the decision to withdraw from some housing products that did not fit in with our core social purpose, or for which we did not have the necessary management expertise.
We have a significant amount of care and supported housing stock, some of which could become hard to let. We have therefore commenced a programme to: --
Dispose of care and support assets where we do not manage the properties or provide the care services;
--
Dispose or convert to shared ownership our portfolio of market rent and intermediate market rent homes, key worker and ‘rent now, buy later’ units;
--
Maximise the performance of mid-performing assets through redevelopment or investment.
From 2015/16 we will generate £12 million proceeds from stock rationalisation sales or conversions, which will be reinvested in our stock and build our financial strength. We currently spend £2.3 million per year on planned works, which is less than required. From 2015/16, we will invest an additional £5.4 million a year for the next five years.
Our value for money achievements In our 2014 value for money assessment, we outlined a number of improvement activities, almost all of which have now been achieved. Actions outlined in the 2014 value for money assessment
Met
Comments
Complete stock condition surveys across all our stock by March 2016.
P
Completed – At the end of March 2015, we have completed condition surveys on 97% of stock and are on track to reach 100% by end of 2015/16.
Achieve 100% decent homes by March 2015.
P P
Completed.
P P
Exceeded – We converted 42 units to shared ownership.
Dispose of 12 units as part of an asset churn approach in 2014/15 and raise £500,000 net proceeds. Convert 25 vacant ‘rent now, buy later’ units to shared ownership. Develop an asset management strategy and property options appraisal model.
24 - 25
Exceeded – 22 poor performing units were disposed of, generating a £2.8 million capital receipt.
Completed – The asset management strategy was approved by Board in March 2015 and the property options appraisal model is up and running, enabling us to assess the financial and social performance of our stock.
East Thames Annual Report and Financial Statements 2014/15 Strategic Report Including the Operating and Financial Review
Financial review Met
Comments
Develop a social and economic regeneration strategy and adopt the HACT impact measurement tool.
P
Completed - The new strategy was approved by Board in November 2014 and the HACT model has been used to assess the social and economic value of our 2014/15 social and economic regeneration programme.
Reduce our void loss to bring it back in line with g15 upper quartile performance.
P O
Completed - The void loss for general needs and housing for older people has decreased to 0.57% (2014: 1.01%).
Improve the process for handling anti-social behaviour cases.
O
Work-in-progress - There has been solid improvement in our communication with customers, but again further work is needed to improve satisfaction.
Achieve £140,000 savings through our finance improvement project
P P
Completed - Recurring savings have been achieved.
Improve the complaints handling process.
Make better use of our corporate offices and let the fourth floor at our West Ham Lane office. Additional value for money achievements include: --
Our social return We have reviewed our approach to social and economic regeneration (SER) to maximise the impact and value for money of our resources and enhance the well-being of our residents.
We use the HACT Toolkit to measure the social impact of our SER projects. For every £1 we invested, this generated £6.30 in social impact value in 2014/15.
--
Delivering £535,000 of procurement revenue savings against a target of £490,000;
--
Recruiting 100 permanent flexible workers to reduce the use of
Continuous improvement We have set targets for the next three years that will improve our performance to above median or upper quartile. This applies to a wide range of performance measures as well as key cost ratios such as housing management costs per unit, maintenance costs per unit and overheads expressed as a percentage of turnover. We have launched the ‘Good to Great’ transformation programme to support our vision to become an upper quartile housing association and transform East Thames into a genuinely customer centric organisation that is at the forefront of service delivery. Our scrutiny arrangements continue to be effective. The Housing Scrutiny Panel carries out inspections of our services, looking at delivery from a
agency staff in our care schemes, resulting in £160,000 actual savings in 2014/15 and £660,000 estimated savings in 2015/16.
customer perspective and making recommendations for improvement. In 2014/15, the panel reviewed our complaints and voids services and made recommendations, which we have implemented as part of our improvement projects. The panel has selected planned works and communications as the areas to be reviewed in 2015/16. Board assurance Value for money is intrinsic to all applicable discussions with the Board. The Board uses a range of regular activities and reports to gain assurance on value for money and views self-assessment as an opportunity to satisfy itself that East Thames produces accurate performance reports and demonstrates commitment to compliance with the regulatory standard.
Financial Statements
Our new approach is to create a core offer for our residents with enhanced programmes in targeted neighbourhoods focused on social, economic and environmental wellbeing. We have adopted a data led methodology to identify needs and priorities and target our SER programmes, using Community Insight statistics and feedback from our operational teams.
Completed - the fifth and fourth floors are now both tenanted.
Independent auditor’s report
Reducing our five telecommunications providers to one, saving more than £250,000 per annum from 2015/16;
Work-in-progress - This is an area that we are focusing on. We have reduced response times, but other work is still required.
Report of the Board
Actions outlined in the 2014 value for money assessment
East Thames Annual Report and Financial Statements 2014/15
Financial review Principal risks and uncertainties Key risks
Nature of risk
Mitigation and management
Further benefit cuts
The freeze on working-age benefits for two years from 2016/17 and the lowering the benefit cap from £26,000 to £23,000 will affect rent collection, arrears and operating cash-flow. The social effect will impact on social and economic activities, regeneration and housing management.
We are analysing the impact these changes will have on our customers. In preparation we are: upskilling staff, particularly the welfare benefits team, to support affected residents; ensuring our communications keep residents up to date on any changes affecting their benefit entitlement; and ensuring residents are aware of the support we can provide.
Extension of Right to Buy to housing association tenants
The announcement that Right to Buy discounts will be extended to housing associations tenants could lead to a depletion of our social housing stock.
Key uncertainties remain including the practicalities of like for like replacement and funding arrangements. In preparation, however, we are including the impact of Right to Buy in the stress testing of our business plan. We are reviewing the number of East Thames residents who are likely to qualify for the Right to Buy discounts. And we are contributing to discussions on the policy through our work with the National Housing Federation and our g15 contemporaries.
Housing market
New properties for sale are exposed to adverse change in the property market. A material and sustained downturn in the property market would adversely affect the Group’s business plan.
Prudent values are included in scheme appraisals and are supported by independent professional advice. Close monitoring of actual and planned sale programmes is undertaken. We have identified alternative-use plans in the event that expected values fail to materialise and/or sales are delayed. We include alternative scenarios in the testing of our 30 year plan. The 30 year plan also seeks to strengthen our core operating performance and eliminate dependence on sales.
Economic conditions
Our principal exposures here consists of inflation and interest rate risks, our ability to raise finance to fund our development plan and the impact of the economy on outright and shared ownership sales.
Where possible we seek to manage costs within the inflationary envelope that exists for our income streams, both rent and other income sources. Currently rents, our main source of income, are linked to a CPI plus 1% formula. In 2016 this will change and rents will reduce by 1% per annum for the next four years. With respect to interest rates, 84% of our current debt is fixed and we seek to maintain borrowing within the fixed/variable limits set out in our treasury policy. We have facilities in place to cover the foreseeable future, which fully covers the funding required for our contractually committed development projects. All but £50 million of our funding facilities are covered by security.
26 - 27
East Thames Annual Report and Financial Statements 2014/15 Strategic Report Including the Operating and Financial Review
Financial review
Mitigation and management
Maintenance partnership
The maintenance partnership with Interserve may not lead to improvement in service delivery which may lead to detriment to reputation and reduction in Board, staff, resident and regulatory confidence.
Across East Thames and Interserve, roles and responsibilities have been redefined and areas of overlap have been addressed. Systems, processes and procedures have been improved and governance arrangements are embedded within the day to day operations of the partnership.
Impact of FRS 102
FRS 102 will have a major impact on the presentation of all registered providers’ accounts. These changes will require communication and explanation to protect our stakeholder relationships, particularly those with lenders.
We have made an initial assessment of the impact FRS 102 will have on the Group’s business plan and financial capacity. We have appointed a dedicated resource who will ensure a smooth transition and who will provide regular progress reports to the Group’s Treasury and Group Risk Management and Audit Committee.
New regulatory standard
The new HCA Governance and Financial Viability standard introduces new requirements with an increased focus on: Board skills; assets and liabilities registers; and stress testing. If the business cannot adequately respond, our viability and social housing assets may be at undue risk.
We have undertaken extensive training on the new requirements with Group Board, Group Executive and Group Operations and ensured the information is cascaded throughout the organisation as appropriate. We have reviewed systems and processes to ensure new information requirements are met and carried out multivariate analysis and robust stress testing.
Regulatory changes
Changes to the government’s rent setting policy were announced in the Summer Budget in July 2015. Rent increases for the next four years will change to an absolute reduction of 1% per annum on all social rents. This change does not affect past or current performance but will be factored into future increases and therefore the plans of the organisation.
The Group is mindful that there are certain potential caveats that may mitigate the impact and will be exploring these as the full details are announced. Further commentary is included as a Post Balance Sheet Event within these Accounts, see note 33.
Independent auditor’s report
Nature of risk
Report of the Board
Key risks
Financial Statements
East Thames Annual Report and Financial Statements 2014/15
Financial review Capital structure, treasury policy and compliance with lenders covenants
2042 Sterling Bond for East Finance plc (another Group special purpose borrowing vehicle) is fully on-lent to East Homes.
The wider Group treasury management policy sets out the controls and parameters for treasury activities which are delegated to and approved annually by the Board of East Treasury Limited (a Group borrowing vehicle). The policy determines how all the Group’s subsidiaries operate in relation to treasury matters. The Group complies with these policies.
Debt repayment profile The treasury policy prescribed by East Thames Group Limited for its subsidiary undertakings includes as an objective that East Homes does not, in the near term, have to refinance material amounts of debt in any one year. The weighted average maturity of debt facilities across the association is 22 years, or 18 years if the LOBO loans are cancelled at the Group’s discretion at the next re-pricing dates.
The main objectives of the treasury management policy are: to ensure that the Group has sufficient cash to fund operational activities and new investments; to ensure the Group’s finances remain risk adverse; to ensure lenders’ covenant compliance is maintained, and to ensure the Group uses its financial resources prudently. Loan structure As at 31 March 2015, the Group had total loan facilities of £727.1 million and outstanding loans of £539.6 million with £187.5 million of unused facilities. The loan facilities were as follows: Lender
Facility £m
Sterling Bond
250.0
Barclays Bank
207.5
Nationwide Building Society
137.8
Lloyds Banking Group
75.0
RBS
50.0
Orchardbrook Limited
5.5
The Housing Finance Corporation Limited
1.3
Total
727.1
East Treasury Limited, which acts as a borrowing vehicle for the Group, had borrowed £282.9 million of bank loans which were directly on lent to East Homes. The £282.9 million consisted of term loans, including £50 million of Lender’s Option Borrower’s Option (LOBO) loans which are subject to periodic re-pricing. The £250 million 30 year 28 - 29
Fixed charge security All loan facilities are secured using individual properties owned by the Group. Loan facilities arranged by East Treasury Limited and the bond arranged by East Finance plc are secured through the Prudential Trustee Company Limited. All other loans are secured directly by East Homes. In addition the Group has provided property security in favour of hedge counterparties as support for adverse mark-to-market valuations of interest rate swaps. Financial risk management The Group uses various financial instruments, including loans and cash, and other items such as rental arrears and trade creditors that arise directly from its operations. The main purpose of these financial instruments is to provide finance for the Group’s operations. The existence of these financial instruments exposes the Group to a number of financial risks. The main risks arising from the Group’s financial instruments are considered by the directors to be interest rate risk, liquidity risk and credit risk. The Board reviews and agrees policies for managing each of these risks and they are summarised below. Interest rate risk management The wider Group’s treasury management policy seeks to protect the Group from adverse interest rate volatility, to provide an appropriate
level of certainty of interest costs and to ensure that the Group is able to comply with the financial covenants attached to financing agreements. This policy seeks to make prudent use of approved financing and investment instruments within our loan portfolio. The policy seeks to maintain at least 70% of the total Group debt outstanding at fixed interest rates whilst recognising that it may be necessary to operate either above or below this level on a shorter term basis. The policy allows for a significant proportion of debt to be hedged by way of a combination of embedded fixes and stand-alone interest rate swaps. At 31 March 2015, 84% of the drawn debt was hedged by way of embedded fixes or interest rate swaps. These hedges give rise to a mark-to-market value that recognises the change in market interest rates since inception of the hedge. At 31 March 2015 the mark-tomarket value on the £150 million net notional of fixed interest rate and inflation swaps amounted to a £107.1 million contingent liability, which is substantially secured by charging the association’s properties. Property security of £87.1 million is provided in support of the markto-market liability of the swaps. As interest rates increase it is anticipated that this mark to market liability will reduce. The weighted average cost of debt, inclusive of margins and hedging activities was 5.1% as at 31 March 2015. Lender Option Borrower Option (“LOBO”) loans amounted to £50 million. No property security is required for the mark-to-market values of the fixed rate obligations embedded in these transactions.
East Thames Annual Report and Financial Statements 2014/15
Liquidity risk management The Group seeks to manage financial risk by ensuring sufficient liquidity is available to meet foreseeable needs and invest cash assets safely and profitably.
Loan covenant compliance Loan covenants are all based on the results of East Homes Limited and relate to interest cover, gearing, and asset cover. These are monitored monthly and reported to lenders annually. The Group was in compliance with all covenants throughout the year to 31 March 2015 for all loan facilities including the Sterling Bond provided via East
49%
≤70%
Interest cover (annual): total interest as % net surplus
186%
≥95%
Interest cover (3 year rolling): total interest as % net surplus
156%
≥105%
Going concern The Group’s business activities, financial position and factors likely to affect its future are set out in this strategic report. The Group has committed and drawn long term debt facilities, undrawn long term loan facilities (at 31 March 2015: £187.5 million) and cash (at 31 March 2015: £48.6 million) which provide resources to support the development programmes. Operating cash flow is positive and we maintain sufficient liquidity to manage short term working capital requirements. The Group’s business plan, sensitised for key risk factors outlined in the operating and financial review, shows that debt facilities can be repaid whilst also continuing to comply with lenders’ covenants. The Board has a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future, being at least 12 months after the date on which the report and accounts are signed. For this reason, the Board continues to adopt the going concern basis for the financial statements. In reaching this conclusion, the Board has considered the possible
Statement of compliance In preparing this Strategic Report including the Operating and Financial Review, the Board has followed the principles set out in the Statement of Recommended Practice 2010 (SORP): Accounting for registered social housing providers. In approving the Strategic Report including the Operating and Financial Review, the directors are also approving the Strategic Report in their capacity as directors of the company. The Strategic Report including the Operating and Financial Review was approved by the Board on 4 September 2015 and signed on its behalf by:
Tina Tietjen Group Chairman
Duncan Beardsley Treasurer
Financial Statements
Credit risk management The Group’s principal credit risk relates to tenant arrears. This risk is managed by providing support to eligible tenants with their application for housing benefit and to closely monitor the arrears of self-funding tenants. As noted previously, proposed changes to the benefits system have been identified as a key risk to the Group.
Actual Covenant
Gearing: % of borrowings to total assets
Independent auditor’s report
Cash management At 31 March 2015 the Group had £48.6 million of cash and deposits. This included £6.7 million of restricted cash, details of which can be found in note 17. The Group operates conservative investment parameters that state cash may only be invested with limitations by counterparty. The policy limits investment institutions to those authorised by the Financial Conduct Authority as UK deposit takers and which also satisfy the wider Group’s minimum credit rating criteria. Such deposits are primarily placed with the Group’s clearing bank.
Covenant
impact of changes announced in the Chancellor’s Budget statement on 8 July 2015, including the impact on the future rental income streams. Based on initial research the Board is satisfied that it does not impact the immediate or long-term viability of the organisation and will not lead to covenant breaches. The Board has concluded that it is appropriate to prepare the Group accounts on a going concern basis.
Report of the Board
The Group’s treasury policy requires that sufficient liquidity in cash and lending facilities are in place to fund the Group’s business activities for at least 12 months. Current projections indicate that the Group has sufficient committed funding facilities to comfortably fund its current development programme and other known requirements for at least the next 12 months.
Finance plc. The results below are based on the most stringent bank covenant tests.
Strategic Report Including the Operating and Financial Review
Financial review
East Thames Annual Report and Financial Statements 2014/15
Report of the Board
30 - 31
East Thames Annual Report and Financial Statements 2014/15
Strategic Report Including the Operating and Financial Review
Report of the Board Independent auditor’s report
Financial Statements
East Thames Annual Report and Financial Statements 2014/15
Report of the Board The Board of East Thames Group Limited is pleased to present its report together with the audited financial statements of East Thames Group Limited (the company), a company limited by guarantee, and East Thames Group (the Group) for the year ended 31 March 2015. Principle activities, business review and future developments Details of the Group’s principal activities, its performance during the year and factors likely to affect its future development are contained within the Strategic Report including the Operating and Financial Review, which precedes this report. Compliance with our adopted governance code East Thames Group has adopted the UK Corporate Governance Code (UK CGC) as its preferred code. This reflects the fact that the Group as a whole consists of a number of different legal entities and the Board feels that this is a more appropriate code for our operating environment. We will continue to monitor new good practice around corporate governance and will consider adopting changes where they are appropriate for the Group. We have undertaken a review of compliance with the UK Corporate Governance Code and fully comply with this except for the following provisions:
32 - 33
--
--
Where organisations should report that they are a going concern in their annual and six monthly published accounts (UK CGC Provision C1.1.3). East Thames is not required to publish six monthly accounts, so this is not applicable. We do however remain a going concern and did during the whole of the reporting period; Where organisations are required to consult and have an ongoing relationship with shareholders (UK CGC Provisions D2.4; E1.1 and E1.2). East Thames has a closed shareholding membership and therefore this is not applicable. We do however engage with our major stakeholders on an on-going basis.
In compliance with the UK CGC provisions, the Board has considered whether the Annual Report and Financial Statements, taken as a whole, is fair, balanced and understandable, and provides the information necessary for Board Members of East Thames Group Limited to assess the Group’s performance, the business model and strategy. The Board consider this responsibility has been met. Board effectiveness We undertake an annual review of Board effectiveness through a series of individual Board Member appraisals. These consist of a Board effectiveness questionnaire, 360
degree feedback on the performance of individual Board Members and any identified development needs. Every three years, this annual review is externally facilitated with the next scheduled to be undertaken in September 2015. We are conscious of the need to continually develop our knowledge and skills so we can respond to our operating environment. Board development sessions this year have focused on: --
Changes to the Homes and Communities Agency regulatory framework and particularly requirements around more robust stress testing of business plans;
--
The implications of the introduction of new accounting requirements under FRS 102.
During the coming year we will be reviewing our entity and Committee structures to rationalise this where possible and make it fit for purpose going forward. Risk During the course of the year we have developed a risk appetite statement and key risk indicators which identify the possibility of future adverse impacts.
East Thames Annual Report and Financial Statements 2014/15
Strategy;
--
Oversight of internal controls and risk management;
--
Authorisation of strategic development schemes;
--
New business areas or decisions to close existing business areas;
--
Remuneration policy;
--
Treasury policy and fundraising;
--
Appointment and removal of Non-Executive Directors; the Chief Executive and the Company Secretary.
Financial Statements
The Board has delegated certain responsibilities to a number of Groupwide Committees. The minutes of Committee meetings are considered by the Board on an ongoing basis and an overview presented by the respective Committee Chairman at each meeting. Terms of reference for the Boards and Committees along with full details of all Committee members, including career background and external appointments are available on our website.
Independent auditor’s report
--
Report of the Board
The East Thames Group Limited Board, as part of an integrated governance structure, is responsible for the success of the Group, providing strategic leadership, monitoring delivery of its objectives and managing its risk. It ensures that the right people and resources are in place in order to deliver our strategic aims and to benefit the communities in which we work. Our delegated authorities are currently under review, however the Board has established a formal schedule of matters reserved for the Board which require its approval. These are:
Strategic Report Including the Operating and Financial Review
Governing East Thames
East Thames Annual Report and Financial Statements 2014/15
Internal controls and risk management The Board has overall responsibility for ensuring that there is a robust system of internal control across the Group and for reviewing its effectiveness. The system of internal control is designed to manage, rather than eliminate risk, and to provide: --
Reasonable assurance that strategic objectives will be achieved;
--
Reasonable assurance that there will be no material misstatement or loss.
During 2014/15 we operated under the Committee of Sponsoring Organisations (COSO) model. This is a principle based approach to internal controls based on five overarching components. The Board’s approach to risk management can only provide reasonable assurance, not absolute assurance, against material loss or misstatement. The Board is supported by an oversight structure which includes the Group Risk Management and Audit Committee. Our risk management process has been in place for a number of years and can be summarised as a process which: --
Identifies risk to the business;
--
Assesses and quantifies risk in terms of probability and impact;
--
--
Develops plans to mitigate risks and reassess these on an ongoing basis; Reports risk and mitigation to the relevant Committee and Board.
34 - 35
Assurance The Group Risk Management and Audit Committee and the Board have reviewed the effectiveness of the Group’s internal controls system. This is undertaken by a review of internal controls statements based on the COSO principles, completed by Assistant Directors/Operational Directors as well as Executive Directors. These are reviewed by our Group Executive prior to a summary report being considered by the Committee. This summary report also includes the view of the Chief Executive and the Head of Internal Audit on the system of internal controls in place. 1. The control environment The control environment is the organisational structure and the culture embedded in the organisation which allows business processes, tasks, policies and procedures to be carried out to meet objectives. As part of this we look to: --
Demonstrate commitment to integrity and ethical values;
--
Exercise oversight responsibility;
--
Establish structure, authority and responsibility;
--
Demonstrate a commitment to competence;
--
Enforce accountability.
2. Risk assessment Risk assessment involves identification and analysis of risk and also includes fraud risk. Risks include internal and external events or circumstances that may occur and adversely affect the Group. Once risks are identified, management consider their impact; the likelihood of them happening; and how they can be managed. As part of this we look to:
--
Specify suitable objectives;
--
Identify and analyse risk;
--
Assess the risk of fraud;
--
Identify and analyse significant change.
3. Control activities Internal control activities are tools, policies and procedures deployed to mitigate risks in order to achieve objectives. Control activities help identify, prevent or reduce risks. Control activities occur throughout the organisation at all levels and in all functions and include items such as approvals; authorisations; verifications; reconciliation; documentation; separation of duties; and safeguarding of assets. As part of this we look to: --
Select and develop control activities;
--
Select and develop general controls over technology;
--
Deploy thorough policies and procedures.
4. Information and communication Information and communication is related to information security, data quality, data protection and how information is communicated internally and externally. As part of this we look to: --
Use relevant information;
--
Communicate internally;
--
Communicate externally.
5. Monitoring activities Monitoring activities involves ongoing evaluation and monitoring of risks and control processes. The organisation also assesses any internal control deficiencies identified and communicates internally/ externally. As part of this we look to: --
Conduct ongoing and/or separate evaluations;
--
Evaluate and communicate deficiencies.
East Thames Annual Report and Financial Statements 2014/15 Strategic Report Including the Operating and Financial Review
Internal controls assurance
Report of the Board
--
--
A comprehensive and regularly updated 30 year business plan covering all activities. This is subject to periodic independent review. The Group prepares an annual budget and publishes regular management accounts and financial forecasts which are considered by the Group Executive team and the Board;
Appraisal and consideration of investment in new property or regeneration schemes by the Group Executive, Development and Property Committee and, where required, the Board;
--
Oversight of the investment in strategic change programmes;
--
Full compliance with the UK Corporate Governance Code;
--
A comprehensive system to manage health and safety and statutory compliance risk. At a minimum, the Board receives an annual report on health and safety and at each Board meeting receives “comply or explain” key performance indicators;
--
--
A comprehensive set of regularly reviewed and updated policies, procedures and delegated authorities covering all major policy/operational areas; An anti-fraud policy covering the prevention, detection and
--
A comprehensive system of performance reporting which is considered by the Board, Customer Experience Committee and Housing Scrutiny Panel on a “comply or explain” basis.
The Board obtains assurance on the systems of internal control via reports and a comprehensive system of audit and assurance that includes: --
Scrutiny by the Group Risk Management and Audit Committee, which meets at least four times each year and on behalf of the Board: --
Reviews the systems of risk management and internal control;
--
Plans the work of internal audit;
Financial Statements
A comprehensive system and set of processes to identify, manage and mitigate strategic and operational risks. This system has been embedded into the operational culture of the business. The effectiveness of the system is reviewed by the Group Risk Management and Audit Committee. The Board is involved in both the identification and management of strategic risks and receives reports on both strategic and summarised operational risks. The Group Executive team leads on the system and has oversight of operational risks which have been identified, reviewed and
--
reporting of fraud. All suspected frauds are recorded in the fraud register and are investigated in line with the anti-fraud policy. The Group has an anti-money laundering policy and a money laundering reporting officer;
Independent auditor’s report
managed throughout the business;
The key elements of the system of internal controls include:
East Thames Annual Report and Financial Statements 2014/15
Internal controls assurance Board’s conclusion on internal control The Board has considered the system of internal control and the annual report from the Group Risk Management and Audit Committee. In November 2014 the Group received a regulatory upgrade from the Homes and Communities Agency and is now judged to be compliant with the standard. The Board has concluded that there are no weaknesses in internal controls sufficient to lead to material misstatement or loss.
Whistleblowing
--
Receives internal audit reports;
--
Reviews incidents of fraud, reporting on these to the Board annually;
--
Reviews the work of external audit and considers the audit findings report of the external auditor;
--
--
Considers the annual reports on internal controls provided by the Chief Executive and Head of Internal Audit, and reports its findings to the Board. This report is based on comprehensive declarations by all Assistant Directors, Operational Directors and Executive Directors on the internal controls operating in their areas.
A combined programme of risk-based and core internal audit activity. The programme is considered and approved by the Group Risk Management and Audit Committee. The Head of Internal Audit meets regularly
36 - 37
with the Chairman of the Group Risk Management and Audit Committee. Internal audits are undertaken by the internal audit team together with external expertise for specialist audit areas; --
Commissioning specialised assurance during the year either as part of planned system improvements or where a particular control risk has been identified;
--
Recommendations from the Group’s external auditors over systems of controls which are considered by the Group Risk Management and Audit Committee;
--
The Board of East Treasury (and East Finance in relation to the public bond) considering treasury strategy, policies and procedures annually;
--
Procedures for the recruitment, development, retention and training of suitably qualified staff.
The Group Risk Management and Audit Committee oversees the Group’s Whistleblowing policy which enables employees to raise issues on a confidential basis. The Committee ensures that any whistleblowing incidents are independently investigated. There were no cases reported to the Committee during the reporting year.
East Thames Annual Report and Financial Statements 2014/15
The Chairman is responsible for leading the Integrated Board, its effectiveness and governance. She sets the Board leadership tone for the company and ensures the Board’s relationship with both management and stakeholders remains strong.
The Senior Independent Director chairs the Governance and Remuneration Committee and is available to discuss any concerns which the Non-Executive Directors or the Group Executive have, which cannot be resolved through normal channels, that is with the Chairman of the Group or Chief Executive . Other responsibilities of the role include: --
--
Ensuring that issues and concerns raised by Board Members are communicated to the other Non-Executive Directors and that appropriate action is taken; Chairing meetings with other Non-Executive Directors (at which the Chairman is not present) to discuss the Chairman’s annual performance evaluation;
Integrated Board
Providing a sounding board for the Group Chairman and supporting the delivery of the Chair’s objectives.
Length of service The length of service for NonExecutive Directors is six years. This can be extended annually, by up to a further three years in exceptional circumstances. During 2014/15 two Non-Executive Directors retired having completed their six years’ service. Length of service of current Board members 0 - 2 years
33%
2 - 4 years
45%
4 - 6 years
22%
Former Board Members East Homes Paula Higson (Chairman) Angela Williams (resident)
East Potential Malcolm Basing (Chairman)
The Board Members listed below stood down during the course of the year due to retirement. June Barnes Date resigned: 30 September 2014 Board attendance: 5/5
Marianne Skelcher Date resigned: 23 September 2014 Board attendance: 4/5
East Living John Drew (Chairman)
Shirley Watson Date resigned: 1 September 2014 Board attendance: 3/4
Financial Statements
Core Members Yvonne Arrowsmith James Scott Larissa Joy Duncan Beardsley East Thames Group Tina Tietjen (Chairman) Ashley West
--
Independent auditor’s report
Board effectiveness is monitored and managed through a variety of processes including Board Member appraisal, monitoring attendance at Board meetings and dialogue with the regulator.
The Chief Executive is responsible to the Board for the day to day operations of the Group; for recommending strategy; and for implementing this once agreed by the Board.
Report of the Board
The Boards of East Thames Group, East Homes, East Living and East Potential operate within an overlapping Board structure known as the Integrated Board. Under this arrangement there are a number of core Directors who sit on each Board. This arrangement allows for a ‘one group’ approach to be undertaken but within the confines of our established entity structure. The Integrated Board comprises the Chairman, one Executive Director and eight independent NonExecutive Directors.
Strategic Report Including the Operating and Financial Review
Board composition and roles
East Thames Annual Report and Financial Statements 2014/15
Board membership
Board Member
Tina Tietjen Remuneration: £17,537 Tina is the independent Chairman of the Board and a member of the Governance and Remuneration Committee. She was appointed in September 2010.
Yvonne Arrowsmith Remuneration: not applicable in Yvonne’s capacity as a Board Member. Yvonne is an Executive Director and the Chief Executive of East Thames. She was appointed in October 2014.
Malcolm Basing Remuneration: N/A Malcolm is an independent NonExecutive Director and Chairman of East Potential. He is also a member of the Customer Experience Committee and the Governance and Remuneration Committee. He was appointed in May 2012.
Tina has a wealth of experience in the public, private and voluntary sectors, and also provides consultancy services on leadership and change management. In 2010 she was awarded an OBE for her services to the transport industry. Tina is the Chair of the Billing Code of Practice for Energy UK and is also a consultant with Business in the Community. Tina was previously Chair of the Air Transport User Council and Royal Women’s Voluntary Service (now RVS).
Yvonne was formerly Group Operations Director at Family Mosaic, where her portfolio included housing, care and support, social and economic regeneration and the customer contact centre. She has worked in housing associations covering London, Essex and the South East of England for the past 20 years, initially within care and support, moving into general operations in the last decade. Prior to this Yvonne worked for the NHS, having originally trained as a registered nurse.
External appointments
None
None
--Trustee of the Royal College of Psychiatry. --Independent NonExecutive Director of Merrill Lynch.
Boards and attendance
East Thames Group 10/10
East Thames Group 5/5 East Homes 5/5 East Living 5/5 East Potential 5/5 East Finance 2/2 East Regen Ltd 2/2 East Treasury 2/2
East Potential 9/10
38 - 39
Malcolm has a strong background in a range of senior marketing, management, financial and trading positions worldwide.
East Thames Annual Report and Financial Statements 2014/15 Strategic Report Including the Operating and Financial Review
Board membership
John Drew Remuneration: £8,362
Paula Higson Remuneration: £ 8,362
Larissa Joy Remuneration: £4,187
Duncan is an independent NonExecutive Director, Chairman of the Treasury Committee and therefore a Director of East Treasury, East Finance and East Regen. He was appointed in October 2013.
John is an independent Non-Executive Director and Chairman of East Living. He is a member of the Customer Experience Committee and the Governance and Remuneration Committee. He was appointed in May 2013.
Paula is an independent Non-Executive Director, Chairman of East Homes and Chairman of the Customer Experience Committee. She is also a member of the Governance and Remuneration Committee and a member of the Development and Property Committee and therefore a Director of East Place and East Thames Partnership. Paula was appointed in May 2013.
Larissa is an independent Non-Executive Director, and Chair of the Governance and Remuneration Committee. She is a qualified lawyer.
--Director of John Drew Limited. --Senior Associate of the Prison Reform Trust. --Chair of the Medway Safeguarding Children Board.
East Thames Group 10/10 East Living 10/10 East Homes 10/10 East Living 10/10 East Potential 10/10 East Treasury 4/4 East Regen Ltd 4/4 East Finance 4/4
Paula has 16 years of experience at Board level including two years as the Chief Operating Officer/ Interim CEO at NHS Direct and five years as the Senior Director of Managed Migration at the UK Border Agency.
--Director of Paula Higson Associates Limited. --Director of Firm Foundations for Children and Adolescents CIC.
--Director House of Illustration. --Chair of the House of Illustration. --Chairman of The Foundling Museum.
East Homes 7/10 East Place Ltd 4/5 East Thames Partnership Ltd 4/5
East Thames Group 5/6 East Homes 5/6 East Living 5/6 East Potential 5/6
Financial Statements
--Director of Aceshow Management Limited. --Director of Gardners Charity.
John received a CBE for services to youth justice. He spent four years as the Chief Executive of the Youth Justice Board of England and Wales and eight years as the Director of Housing and Community Services/ Director of Social Services at the London Borough of Redbridge. He has extensive experience of both adult social services and children’s social care and has lived and worked in East London for over 25 years.
Independent auditor’s report
Duncan previously served as Group Treasurer for Hammerson plc and has over 25 years of corporate finance and treasury experience including treasurer at The Rank Organisation plc.
Larissa is a consultant to professional services organisations and counts EY among her clients. She is a former Partner and Global Chief Operating Officer of Actis LLP, a private equity firm. She was formerly Vice Chairman at WPP’s Ogilvy and Mather, and European Chief Operating Officer of Weber Shandwick. She was a founding Director and Chair of the Remuneraton Committee of V Inspired (formerly Russell Commission).
Report of the Board
Duncan Beardsley Remuneration: £9,094
East Thames Annual Report and Financial Statements 2014/15
Board membership
Board Member
James Scott Remuneration: £6,229
Ashley West Remuneration: £9,975
Angela Williams Remuneration: £4,750
James is an independent Non-Executive Director. He is Chairman of the Development and Property Committee and a Director of East Place and East Thames Partnership. James was appointed in September 2014 having previously served as a Committee Member.
Ashley is an independent Non-Executive Director and Chairman of the Group Risk Management and Audit Committee. He was appointed in March 2010.
Angela is an independent NonExecutive Director, a resident member of the East Homes Board and a member of the Customer Experience Committee. She was appointed in March 2011.
James is a qualified solicitor.
Ashley has held a number of senior finance positions in the private sector, including Kingsway Group plc and J Henry Schroder Limited. He was also formerly Chairman of MHS Homes in Kent.
--Chair of PFI --Chair of Medway Community Estates. Lighting Ltd --Chair of the Audit --Chair of DW Committee at the Windsor Ltd. Office of the Kent --Deputy Chair Police and Crime of Dartford, Commissioner. Gravesham and --Director of Berrie Swanley CCG. Radcliffe Limited. --Chair of Weblight Ltd.
External appointments
--Director of Planning & Regeneration at Urban and Civic Limited
Boards and attendance
East Thames Group 5/6 East Thames Group 9/10 East Homes 5/6 East Living 5/6 East Potential 5/6 East Place 5/5 East Thames Partnership 5/5
40 - 41
Angela is a Newham resident and currently works with the London Borough of Ealing as a Regulatory Service Officer.
None
East Homes 7/10
East Thames Annual Report and Financial Statements 2014/15
The Group Executive consists of the Chief Executive and other members of the Group’s senior management team. They act as executives within the authority delegated by the Board.
The Chief Executive and the other
Executive Directors are employed on permanent contracts with a notice period of six months. They are entitled to participate in the Social Housing Pension Scheme on the same terms as all other eligible staff. The aggregate remuneration package of all Executive Directors is included in note 10 to the financial statements.
Report of the Board
June Barnes retired as Chief Executive in September 2014. She was replaced by Yvonne Arrowsmith in October 2014. Trevor Burns was
permanently appointed Executive Director of Development, Sales and Asset Management in August 2014, while Simon Bass, Executive Director of Corporate Resources and Olu Olanrewaju, Executive Director of Communities and Neighbourhoods served throughout the year.
Strategic Report Including the Operating and Financial Review
Senior team
Yvonne Arrowsmith Chief Executive Yvonne was formerly Group Operations Director at Family Mosaic, with a large portfolio responsible for housing, care and support, social and economic regeneration and the customer contact centre. She has worked in housing associations covering London, Essex and the South East of England for the past 20 years, initially within care and support services, moving into general operations in the last decade. Prior to this Yvonne worked for the NHS, having originally trained as a registered nurse.
Olu Olanrewaju Executive Director of Communities and Neighbourhoods
Simon joined East Thames at the start of 2013. He is responsible for overseeing the finance and treasury functions as well as a wide range of support services and business improvement activities.
Trevor joined East Thames in January 2009 as Assistant Director of Development before taking on his current role in August 2014.
Olu joined East Thames in October 2013 as Interim Director of Communities and Neighbourhoods and took on the role permanently in December 2013. He has a wide remit including all the Group’s landlord services, customer service, care and support, and repairs.
A trained auditor and chartered accountant, Simon has worked in the public, private and charity sectors, specialising in finance, corporate resources and business change. He is an associate member of the Association of Corporate Treasurers, Treasurer of Praxis Community Projects and Chairman of Praxis Enterprises CIC.
Trevor has worked in the social housing sector for over 25 years, both developing and managing a range of award winning housing and regeneration projects. He has a particular passion for regeneration, supported housing, and the role customers have to play in creating an exciting new place to live.
Olu has previously served as a member of East Thames’ Board, first as Chairman of East Homes in April 2001, then as Vice Chairman of the Group, from April 2007 to September 2008. He has two decades of experience in housing, including senior roles at several housing associations. He is also on the Board of a small housing charity and is a trustee at Common Purpose.
Financial Statements
Trevor Burns Executive Director of Development, Sales and Asset Management
Independent auditor’s report
Simon Bass Executive Director of Corporate Resources
East Thames Annual Report and Financial Statements 2014/15
East Thames Committee structure
Committees
Committee
Group Risk Management and Audit Committee
Treasury Committee
Primary function
To oversee the risk management and internal controls frameworks on behalf of the Board, to oversee financial reporting for the Group and to be the main interface for the internal and external auditors.
To oversee treasury matters and to make recommendations on debt financing to the Board. The Committee also acts as the Board for East Treasury, East Finance and East Regen.
Integrated Board Members
--Ashley West --Duncan Beardsley
--Duncan Beardsley
Independent Committee Members
-- Steve Prince --Asif Bhatti --Malcolm Zack
--Calum Mercer -- Brian Mulholland
Executive Directors
None
--Yvonne Arrowsmith --Simon Bass
No. of meetings in 2014/15
5
4
42 - 43
East Thames Annual Report and Financial Statements 2014/15 Strategic Report Including the Operating and Financial Review
East Thames Committee structure
Report of the Board
Development and Property Committee
Customer Experience Committee
To oversee human resource and governance issues and ensure that these are at the forefront of best practice; to recommend remuneration policy and pay to the Board; and to ensure compliance with the Homes and Communities Agency’s Regulatory Framework and our adopted Codes of Governance and of Conduct. To oversee the appointment of new Non-Executive Directors and Committee members.
To oversee development and asset management activity for the Group. The Committee has delegated authority to agree schemes on behalf of East Homes within set financial and/or unit numbers. The Committee also acts as the Board for East Place, East Thames Partnership and the East Homes Development Committee.
To oversee service performance to our residents; to understand the customer journey and to act as the main interface between the Board and the elected resident Housing Scrutiny Panel.
--Larissa Joy --Tina Tietjen --Paula Higson --John Drew --Malcolm Basing
--James Scott --Paula Higson
--Paula Higson --Angela Williams --Malcolm Basing --John Drew
None
--Nick Berry --Angela Forbes
--Nozmul Hussein --Jennifer Sano --Christopher Nyeki
None
--Simon Bass --Trevor Burns
--Olu Olanrewaju
3
5
5
Independent auditor’s report
Governance and Remuneration Committee
Financial Statements
East Thames Annual Report and Financial Statements 2014/15
Key governance and risk Committees East Thames’ key governance and risk Committees are the Governance and Remuneration Committee and the Group Risk Management and Audit Committee.
The Governance and Remuneration Committee The Committee considered the following matters during 2014/15: --
A line by line compliance exercise against the UK Corporate Governance Code following changes made to the code during the year;
--
A review of our compliance with the Homes and Communities Agency regulatory framework and changes made to the framework during the year;
--
A review of independence criteria for Non-Executive Directors;
--
Engagement with our executive search consultant to recruit new Non-Executive Directors and Committee members and ensure effective succession planning;
--
A review of proposed changes to our entity structure;
--
The agreement of Executive Director remuneration;
--
A review of intragroup agreements;
--
A review of the Board and Committee appointments, membership and renewal policy;
--
A review of the code of conduct.
44 - 45
All Board and Committee appointments are made on an open and transparent basis, and (with the exception of resident appointments) are currently undertaken through an external candidate search company, Saxton Bampfylde. Appointment panels are generally made up of the Group Chairman and members of the Governance and Remuneration Committee or lead Board member for a particular area plus one executive member. During 2014/15 six non-executive appointments were made to Boards and Committees across the Group (those applicable to these financial statements are covered in the table entitled Integrated Board membership). Details of Board Member remuneration are disclosed in note 10 and in the section above relating to Board membership. Diversity The Board is committed to recruiting Non-Executive Directors from different backgrounds and with different perspectives, skills and
Board composition
knowledge. We believe diversity contributes to a high performing Board. In the context of making the best appointments possible we take decisions which aim to improve our gender and ethnicity mix and, where possible, ensure that Board members have a connection to the areas in which we work. Conflicts of interest The Group operates a policy to identify and, where appropriate, manage existing or potential conflicts of interest. With the introduction of our Integrated Board membership structure it was agreed that conflicts between companies within the Group would be specifically permitted as allowed under section 180 of the Companies Act 2006. The Governance and Remuneration Committee monitors all conflicts of interest on an ongoing basis and receives a report annually. There were no specific conflicts of interest which arose during the course of the year.
Target Achievement
Female (2014: 60%)
50%
50%
Achieved
BME (2014: 10%)
10%
30%
Work-in-progress
Live or work in area of operation (2014: 30%)
30%
25%
Achieved
East Thames Annual Report and Financial Statements 2014/15
The Group Risk Management and Audit Committee (GRMAC)
Appointments to the Committee are by nomination made by the Board. The Committee operates to a Terms of Reference, formally considered and reviewed on an annual basis by the Board.
In discharging its responsibilities in connection with the preparation of the financial statements for the year to 31 March 2015, the Committee is responsible for reviewing the appropriateness of the Group’s accounting policies, assumptions, judgements and estimates as applied by the executive management to the financial statements. Following a review and debate about the issues that have impacted the Group in relation to the year ended 31 March 2015, the Committee identified the following as being significant matters in relation to the accuracy of financial reporting:
The Committee met five times during the year and considered a range of matters during 2014/15 that included a review of internal controls and their effectiveness, the 2014 financial statements, a review of risk management strategy and policy (including an ongoing review of corporate risks), ensuring that effective value for money and risk appetite initiatives are established
Independent auditor’s report
The Committee endorses the principles set out in the FRC Guidance on Audit Committees. The Board has formal and transparent arrangements for considering how it applies the Group’s financial
within the Group, the results of internal audit reviews (including management actions to address identified weaknesses), the result of the external financial statement audit of 2014, the performance of the company’s auditors, ongoing reporting around fraud, theft and bribery and to receive other reports as appropriate within the Committee’s terms of reference.
Report of the Board
Details of those making up the Committee can be found on pages 56-57. None of the Committee members have any personal or financial interests in the matters considered, potential conflicts of interest arising from crossdirectorships, or any day to day involvement in running the business. Meetings of the Committee were attended by Executive Directors and the Company Secretary, who acts as secretary to the Committee. In addition, the Head of Internal Audit attends each meeting and the external auditor, Grant Thornton UK LLP, attended on two occasions during the year
reporting and internal control principles and for maintaining an appropriate relationship with its auditors. Whilst all directors have a duty to act in the interest of the Group, the Committee has a particular role acting independently from the executive, to ensure that the interests of stakeholders’ are properly protected in relation to financial reporting and internal control.
Strategic Report Including the Operating and Financial Review
Key governance and risk Committees
Financial Statements
East Thames Annual Report and Financial Statements 2014/15
Key governance and risk Committees Matter considered
Action
Valuation of properties Although conducted externally by independent valuers, the valuation of the Group’s housing and investment property portfolio is inherently subjective, requiring significant judgement. The outcome is significant for the Group in terms of its investment capacity and financial position. The Committee’s consideration of valuation also encompassed a review of properties for impairment and/ or for realisable value.
The Committee has reviewed the judgements made in respect of the Group’s properties and has considered the detailed narrative provided by management in this regard relating to properties held for letting, used by the Group or that are held for sale. The Committee agreed with the judgements made by management – including the reduction in carrying value of an investment property (refer to note 34 of the financial statements) and therefore concluded that the valuations of the Group’s properties are appropriate.
Impact of the summer budget Subsequent to 31 March 2015 the Chancellor’s Budget statement indicated that there will be lower than expected increases in rental revenues. This announcement potentially impacts upon the future revenues and the values at which properties are included in the Group’s financial statements. In considering the basis on which the financial statements are prepared it is necessary to assess whether these changes introduce a material uncertainty with regard to the Group’s viability in the foreseeable future its investment capacity and financial position.
The Committee has considered the possible impact of changes announced in the Chancellor’s Budget statement on 8 July 2015 including the impact on future rental income streams and covenant compliance. The Committee is satisfied that this matter does not impact on the immediate or long-term viability of the Group and will not lead to covenant breaches.
Effectiveness of the external auditor During the year, the Committee reviewed Grant Thornton UK LLP’s fees, effectiveness and whether the agreed audit plan had been fulfilled, and the reasons for any variation from the plan. The Committee also considered its robustness and the degree to which Grant Thornton UK LLP was able to assess key accounting and audit judgements, and the content of the management report issued by the external auditor. This was performed through meeting with the external auditor and discussing the issues they had addressed. The Committee concluded that both the audit and the audit process were effective. Audit independence The Group Risk Management and Audit Committee considers the external auditor to be independent and has satisfied itself as to the
46 - 47
effectiveness of the external auditor. The Committee has noted there is no requirement for it to consider the rotation of its auditor. The Committee will keep this matter under regular review and will act in accordance with the EU regulations and the Code as appropriate. Grant Thornton UK LLP has acted as the Group’s auditors since 2005/06 although the position has been tendered on two occasions since then, most recently in 2013/14. The current Responsible Individual first acted in that capacity for the yearended 31 March 2014 and there has been appropriate rotation of other key personnel involved in the audit process.
audit independence has been adopted whereby non-audit services undertaken by the auditor are approved prior to work being carried out. Fees for non-audit work cannot exceed £50,000 (including the service charge audit) without the appointment being approved by GRMAC. In the year to 31 March 2015, certain fees were paid to the auditors for non-audit work as disclosed in note 7. The nature and scope of such work has been discussed with the auditors and the Committee are satisfied that independence has been appropriately safeguarded (including where appropriate by the use of different team members).
The Group’s policy on awarding nonaudit work to its auditor is designed to ensure that the Group receives the most appropriate advice without compromising the independence of the auditor. A policy for reviewing
The narrative relating to the Group Risk Management and Audit Committee has been considered and approved by the members of the Committee.
East Thames Annual Report and Financial Statements 2014/15
Statement of the responsibilities of the Board for the report and financial statements
Company Law requires the Board to prepare financial statements for each financial year. Under that law the Directors have elected to prepare the financial statements in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting Standards and applicable laws). Under Company Law, the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs and the surplus or deficit of the Group.
--
Select suitable accounting policies and then apply them consistently;
--
Make judgements and accounting estimates that are reasonable and prudent;
--
They are also responsible for safeguarding the assets of the company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.
Public benefit statement The Board confirm that they have referred to the guidance contained in the Charity Commission’s general guidance on public benefit when reviewing the Group’s aims and objectives and in planning future activities and setting the grant making policy for the year. The report of the Board was approved by the Board on 4 September 2015 and signed on its behalf by:
In so far as each of the Directors is aware: --
--
There is no relevant audit information of which the company’s auditors are unaware; The Directors have taken all steps that they ought to have taken to make themselves aware of any relevant audit information and to establish that the auditors are aware of that information.
The Board is responsible for the maintenance and integrity of the corporate and financial information on the Group’s website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. External auditors Grant Thornton UK LLP have expressed their willingness to
Tina Tietjen Group Chairman
Financial Statements
State whether applicable UK Accounting Standards and the Statement of Recommended Practice (SORP) Accounting by Registered Housing Providers Update 2010, have been followed, subject to any material departures disclosed and explained in the financial statements;
The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the company’s transactions and disclose with reasonable accuracy at any time the financial position of the company and Group and enable them to ensure that the financial statements comply with the Companies Act 2006.
continue in office and will be deemed reappointed for the next financial year in accordance with section 487(2) of the Companies Act 2006 unless the company receives notice under section 488(I) of the Companies Act 2006.
Independent auditor’s report
In preparing these financial statements, the Board is required to:
Prepare the financial statements on the going concern basis unless it is inappropriate to presume that the company will continue in business.
Report of the Board
The Board is responsible for preparing the strategic report including the operating and financial review and financial statements in accordance with applicable law and regulations.
--
Strategic Report Including the Operating and Financial Review
Statement of responsibilities
East Thames Annual Report and Financial Statements 2014/15
Independent auditor’s report
48 - 49
East Thames Annual Report and Financial Statements 2014/15
Strategic Report Including the Operating and Financial Review
Report of the Board Independent auditor’s report
Financial Statements
East Thames Annual Report and Financial Statements 2014/15
Independent auditor’s report to the members of East Thames Group Limited
Our opinion on the financial statements is unmodified. In our opinion the financial statements: --
give a true and fair view of the state of the Group’s and the parent company’s affairs as at 31 March 2015 and of the Group’s and the parent company’s surplus for the year then ended;
--
have been properly prepared in accordance with applicable law and United Kingdom Accounting Standards (United Kingdom Generally Accepted Accounting Practice), the Housing and Regeneration Act 2008 and the Accounting Direction for Private Registered Providers of Social Housing 2012; and
--
have been prepared in accordance with the requirements of the Companies Act 2006.
Who we are reporting to This report is made solely to the company’s members, as a body, in accordance with Chapter 3 of Part 16 50 - 51
of the Companies Act 2006. Our audit work has been undertaken so that we might state to the company’s members those matters we are required to state to them in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company and the company’s members as a body, for our audit work, for this report, or for the opinions we have formed.
What we have audited East Thames Group Limited’s financial statements comprise the consolidated income and expenditure account, the consolidated statement of total recognised surpluses and deficits, the consolidated note of historical cost surpluses and deficits, the consolidated reconciliation of movements in Group funds, the consolidated balance sheet, the consolidated cash flow statement, the parent company income and expenditure account, the parent company balance sheet and the related notes. The financial reporting framework that has been applied in their preparation is United Kingdom Generally Accepted Accounting Practice, the Housing
and Regeneration Act 2008 and the Accounting Direction for Private Registered Providers of Social Housing 2012.
Our assessment of risk In arriving at our opinions set out in this report, we highlight the following risks that are, in our judgement, likely to be most important to users’ understanding of our audit.
East Thames Annual Report and Financial Statements 2014/15
Housing properties for rent (completed)
There is a risk that the stated valuation may have been based on inappropriate assumptions or not prepared on an Existing Use Valuation basis (for Social Housing) as required by the Statement of Recommended Practice: Accounting by Registered Social Housing Providers (update 2010).
We obtained the valuation of housing properties, reviewed and considered the assumptions they were prepared under and discussed the basis of valuing completed housing properties with the independent valuer who determined the valuation for the Group. Where assumptions were used that we considered were key estimates used for the preparation of the valuation, we discussed their inclusion with the valuer. We also determined the consistency of assumptions applied from year to year and the consistency of information used by the valuer with that recorded in the Group’s housing management system.
Housing properties for rent (in the course of construction)
There is a risk that the cost of additions to such assets is overstated or that cost overruns could lead to impairment against the Group’s planned financial or public benefit parameters.
For a sample of schemes in the course of construction (and therefore reported at cost rather than valuation), on a sample basis we verified the cost of additions to third party or internally generated documentation and compared actual spend (plus estimated costs to completion) with the original scheme appraisal to consider whether there are indications of impairment (having regard to planned subsidies and the wider public benefit objects of the Group).
Housing properties for sale (completed and in the course of construction):
Although the Group is building such properties in areas of high demand and has in recent years reported profits on the sale of such assets, there remains a general risk that volatility in demand (as well as scheme specific risks) could lead to net realisable value being below costs incurred.
For properties held for sale (both completed and those in the course of construction) we obtained and corroborated information to support the assertion that such properties will be sold for a value equal to or in excess of their cost (i.e. the value at which they are included in the financial statements). Such information included details of sales made after 31 March 2015, scheme appraisals (including where applicable the costs to complete construction), marketing information and consideration of previous sales values.
Financial Statements
The accounting policies for each of the risks outlined on the right are set out in note 1 to the financial statements. As noted on pages 46-47 these matters were considered by the General Risk Management and Audit Committee as being a significant issue for consideration in their work. In its report, the Committee also describes the action it took in respect of these matters.
Our response: Our audit work included, but was not restricted to, the following procedures:
Independent auditor’s report
The risk: Housing properties (comprising fixed assets for rental and current assets held for sale) comprise 87% of the Group’s total assets. We consider there to be a risk of significant misstatement with a requirement for the directors to exercise a high degree of judgement in respect of the valuation of the Group’s housing properties. Due to their materiality in the context of the financial statements as a whole the values ascribed to such assets had the greatest effect on our overall audit strategy and the allocation of resources in planning and completing our audit.
The elements of this risk that were considered included:
Report of the Board
Valuation of properties
Risk
Strategic Report Including the Operating and Financial Review
Independent auditor’s report to the members of East Thames Group Limited
East Thames Annual Report and Financial Statements 2014/15
Independent auditor’s report to the members of East Thames Group Limited Our application of materiality and an overview of the scope of our audit Materiality We define materiality as the magnitude of misstatement in the financial statements that makes it probable that the economic decisions of a reasonably knowledgeable person would be changed or influenced. We determined materiality for the audit of the group financial statements as a whole to be £20 million which is 2% of housing properties at valuation. This benchmark is considered the most appropriate because this is a key measure used by the board of directors in the consideration of the financial position of the group. We use a different level of materiality, performance materiality, to drive the extent of our testing and this was set at 75% of financial statement materiality for the audit of the group financial statements. We used this level of materiality when auditing the carrying value of housing properties held for letting (excluding those in the course of construction). In auditing other elements of the group financial statements we used a lower level of financial statement materiality, specific materiality and this was set at £2.5 million (which is £1.7% of group turnover). This benchmark is considered the most appropriate as turnover is one of the principal considerations for members of East Thames Group Limited in assessing the ongoing financial performance of the group. In undertaking our work on other elements of the group financial statements, we used a performance materiality of £1.9 million to direct the extent of our testing (being 75% of £2.5
52 - 53
million). We also determine other lower levels of specific materiality for certain areas such as directors’ remuneration and related party transactions.We determined a threshold at which we will communicate misstatements to the Group Risk Management and Audit Committee to be £125,000. In addition we will communicate misstatements below that threshold that, in our view, warrant reporting on qualitative grounds. Overview of the scope of our audit We conducted our audit in accordance with International Standards on Auditing (UK and Ireland). Our responsibilities under those standards are further described in the ‘Responsibilities for the financial statements and the audit’ section of our report. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. We are independent of the Group in accordance with the Auditing Practices Board’s Ethical Standards for Auditors, and we have fulfilled our other ethical responsibilities in accordance with those Ethical Standards. The Group comprises eleven components, all of which were the subject of statutory audits. Only one component (the joint venture Triathlon Homes LLP) was not audited by the Group engagement team. Triathlon Homes LLP represents 7% of the Group’s net funds and contributed 27% of the surplus for the financial year. Where the work was not conducted by the Group engagement team, we determined the level of involvement we needed to have in the audit work at that component to be able to conclude whether sufficient appropriate audit evidence had been obtained, as a basis for our opinion on the Group financial
statements as a whole. Materiality levels were set individually for each component having regard to the Group materiality levels and the size and nature of those components’ activities. The materiality levels applied to the Group’s components ranged from £125,000 to £2.5 million.
Other reporting required by regulations Our opinion on other matters prescribed by the Companies Act 2006 is unmodified. In our opinion the information given in the Strategic Report and Report of the Board for the financial year for which the financial statements are prepared is consistent with the financial statements.
Matters on which we are required to report by exception We have nothing to report in respect of the following: Under the ISAs (UK and Ireland), we are required to report to you if, in our opinion, information in the annual report is: --
materially inconsistent with the information in the audited financial statements; or
--
apparently materially incorrect based on, or materially inconsistent with, our knowledge of the group acquired in the course of performing our audit; or
--
otherwise misleading.
East Thames Annual Report and Financial Statements 2014/15
In particular, we are required to report to you if: we have identified any inconsistencies between our knowledge acquired during the audit and the directors’ statement that they consider the annual report is fair, balanced and understandable; or
--
the annual report does not appropriately disclose those matters that were communicated to the Group Risk Management and Audit Committee which we consider should have been disclosed.
Under the Companies Act 2006 we are required to report to you if, in our opinion: -- adequate accounting records have not been kept by the parent company, or returns adequate for our audit have not been received from branches not visited by us; or the parent company financial statements are not in agreement with the accounting records and returns; or
--
certain disclosures of directors’ remuneration specified by law are not made; or
--
we have not received all the information and explanations we require for our audit.
Responsibilities for the financial statements and the audit What an audit of financial statements involves: A description of the scope of an audit of financial statements is provided on the Financial Reporting Council’s website at www.frc.org.uk/ auditscopeukprivate.
Tobias Wilson Senior Statutory Auditor for and on behalf of Grant Thornton UK LLP Statutory Auditor, Chartered Accountants Norwich 16 September 2015
Financial Statements
What the directors are responsible for: As explained more fully in the Statement of the responsibilities of the board, the directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view.
What we are responsible for: Our responsibility is to audit and express an opinion on the financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board’s Ethical Standards for Auditors.
Independent auditor’s report
--
Report of the Board
--
Strategic Report Including the Operating and Financial Review
Independent auditor’s report to the members of East Thames Group Limited
East Thames Annual Report and Financial Statements 2014/15
Financial statements
54 - 55
East Thames Annual Report and Financial Statements 2014/15
Strategic Report Including the Operating and Financial Review
Report of the Board Independent auditor’s report
Financial Statements
East Thames Annual Report and Financial Statements 2014/15
Financial statements Consolidated income and expenditure account for the year ended 31 March 2015 Note
2015 £’000
2014 £’000
Turnover: continuing activities (including share of joint venture)
166,525
183,192
Less: share of joint venture turnover
(20,156)
(10,477)
Group turnover
3
146,369
172,715
Cost of sales
3
(37,548)
(47,309)
Operating costs
3
(70,912)
(77,784)
37,909
47,622
9,493
5,334
47,402
52,956
-
400
Operating surplus: continuing activities Share of operating surplus in joint venture Operating surplus including share of joint venture
Income from joint venture Surplus on sale of fixed assets – housing properties
5
7,770
5,541
Net interest payable and similar charges (excluding joint venture)
8
(28,077)
(26,643)
Breakage costs
8
-
(9,097)
Share of interest payable by joint venture
(2,944)
(3,596)
Surplus on ordinary activities before taxation
24,151
19,561
456
(2,524)
24,607
17,037
Tax on surplus on ordinary activities Surplus for the financial year The notes on pages 62 to 103 form part of these financial statements.
56 - 57
11
East Thames Annual Report and Financial Statements 2014/15 Strategic Report Including the Operating and Financial Review
Financial statements Consolidated statement of total recognised surpluses and deficits for the year ended 31 March 2015
2015 £’000
2014 £’000
24,607
17,037
Unrealised surplus on revaluation of housing properties
27
20,682
44,128
Unrealised surplus on revaluation of investment properties
27
-
236
Unrealised surplus on revaluation of housing properties owned by joint venture
27
29,218
-
Surplus for the financial year
Total recognised surpluses for the year Prior year adjustment
74,507
61,401
34
(1,696)
-
72,811
61,401
Total recognised surplus since the last report
Report of the Board
Note
Note of historical cost surpluses and deficits for the year ended 31 March 2015
Excess of actual depreciation over historical cost depreciation Realisation of property revaluation surpluses Realisation of restricted and designated reserves Historical costs surplus on ordinary activities before taxation Tax on surplus on ordinary activities Historical cost retained surplus
2014 £’000
24,151
19,561
300
299
6,760
1,827
104
111
31,315
21,798
456
(2,524)
31,771
19,274
2015 £’000
2014 £’000 Restated
511,205
451,500
Independent auditor’s report
Reported surplus on ordinary activities before taxation
2015 £’000
Reconciliation of movements in Group’s net assets for the year ended 31 March 2015 Note
-
(1,696)
Opening funds, as restated Total recognised surpluses relating to the year
Prior year adjustment
511,205 74,507
449,804 61,401
Closing total funds
585,712
511,205
The notes on pages 62 to 103 form part of these financial statements.
34
Financial Statements
Opening total net assets, as previously stated
East Thames Annual Report and Financial Statements 2014/15
Financial statements Consolidated balance sheet at 31 March 2015 Note
2015 £’000
2014 £’000 Restated
Housing properties at valuation
12
1,007,078
966,663
Other tangible fixed assets
13
25,258
26,469
1,032,336
993,132
Fixed assets Tangible assets
Investments Investment in joint venture: Share of gross assets
14a
86,672
61,863
Share of gross liabilities
14a
(46,015)
(56,871)
40,657
4,992
Investment properties
14b
16,131
17,930
Investments shared equity
14c
1,844
172
Cost of HomeBuy and Starter Home Initiative
14d
17,602
18,848
Less: social housing grant
14d
(17,602)
(18,848)
58,632
23,094
1,090,968
1,016,226
Investment in HomeBuy and Starter Home Initiative:
Total fixed assets Current assets Properties for sale
15
31,175
29,966
Debtors
16
12,764
10,617
Cash at bank and in hand
17
48,575
50,814
92,514
91,397
(45,120)
(42,587)
47,394
48,810
1,138,362
1,065,036
Creditors: amounts falling due within one year Net current assets Total assets less current liabilities
58 - 59
18
East Thames Annual Report and Financial Statements 2014/15 Strategic Report Including the Operating and Financial Review
Financial statements
2015 £’000
2014 £’000 Restated
Creditors: amounts falling due after more than one year
19
552,131
553,316
Provision for liabilities
25
519
515
552,650
553,831
Capital and reserves Share capital
26
-
-
Revenue reserve
27
63,597
31,826
Restricted reserve
27
92
139
Designated reserve
27
-
57
Revaluation reserves
27
522,023
479,183
585,712
511,205
1,138,362
1,065,036
Group funds
The financial statements were approved by the Board on 4 September 2015 and signed on its behalf by:
Tina Tietjen Chairman
Duncan Beardsley Treasurer
Independent auditor’s report
The notes on pages 62 to 103 form part of these financial statements.
Report of the Board
Note
Henry Potter Company Secretary
Financial Statements
East Thames Annual Report and Financial Statements 2014/15
Financial statements Consolidated cash flow statement for the year ended 31 March 2015 Note
2015 £’000
2014 £’000 Restated
28
69,364
118,675
135
563
(30,089)
(30,152)
-
(9,097)
(500)
-
(30,454)
(38,686)
(898)
9
-
(612)
(68,857)
(61,444)
(506)
(469)
Purchase of shared equity investment
(1,672)
-
Social Housing Grant received
15,395
10,043
Social Housing Grant repaid
-
(5)
Sales of investment properties
-
4,200
19,677
15,698
510
301
1,329
1,164
-
(220)
(34,124)
(31,344)
3,888
48,654
(6,127)
(26,312)
Net cash inflow from operating activities Returns on investments and servicing of finance Interest received Interest paid Breakage fees paid Loan issue costs paid Net cash outflow from returns on investments Corporation tax (paid)/received Capital expenditure and financial investments Purchase of investment properties Purchase and construction of housing properties Purchase of other tangible fixed assets
Sales of housing properties Sales of HomeBuy Sales of Starter Homes Initiatives Investment in joint venture Cash outflow from capital expenditure and financial investments Cash inflow before financing Financing Housing loans repaid Cash (outflow) from financing
30
(6,127)
(26,312)
(Decrease)/increase in cash in the year
30
(2,239)
22,342
60 - 61
East Thames Annual Report and Financial Statements 2014/15 Strategic Report Including the Operating and Financial Review
Financial statements Parent income and expenditure account for the year ended 31 March 2015 2015 £’000
2014 £’000
Turnover
3
18,113
16,768
Operating costs
3
(17,912)
(17,480)
201
(712)
Operating surplus/(deficit) Interest payable
(1)
-
(200)
-
Donation from group entities
-
712
Break-even for the financial year
-
-
Gift Aid repaid
The notes on pages 62 to 103 form part of these financial statements.
Report of the Board
Note
During the year Gift Aid repayments were made to certain Group entities, following issue of ICAEW Tech 16/14 BL. The Gift Aid repaid represents a repayment of £200,000 to East Regen Limited.
Parent balance sheet as at 31 March 2015 2015 £’000
2014 £’000
14e 13
13 1,033
13 1,432
1,046
1,445
10,691
2,882
Current assets Debtors
16
Cash at bank and in hand
10
3
10,701
2,885
(8,697)
(4,330)
Net current assets/(liabilities)
2,004
(1,445)
Total assets less current liabilities
3,050
-
3,050
-
-
-
-
-
-
-
3,050
-
Creditors: amounts falling due within one year
18
Creditors: amounts falling due after more than one year
19
Independent auditor’s report
Investment in subsidiaries Fixed assets
Note
Capital and reserves Revenue reserve
26
Members’ funds
The notes on pages 62 to 103 form part of these financial statements. The financial statements were approved by the Board on 4 September 2015 and signed on its behalf by:
Tina Tietjen Chairman
Duncan Beardsley Treasurer
Henry Potter Company Secretary
Financial Statements
Share capital
East Thames Annual Report and Financial Statements 2014/15
Notes to the financial statements 1. Legal status The company is registered under the Companies Act 2006 and is a registered charity. The company is also registered as a housing provider with the Homes and Communities Agency.
2. Accounting policies Basis of accounting The financial statements of the Group and company are prepared in accordance with UK Generally Accepted Accounting Principles (UK GAAP) and the Statement of Recommended Practice: Accounting by Registered Social Housing Providers Update 2010 and comply with the Accounting Direction for Private Registered Providers of Social Housing 2012. The Group has taken true and fair overrides to the requirements of the Companies Act 2006 with regards to social housing grant and investment and commercial property. Further details are given in the relevant accounting policies below. The Group has taken advantage of the exemption to prepare a cash flow statement for the parent company. Prior year adjustment The Group has restated the carrying value of investment property as the basis of assessment was not considered appropriate. Details of the change are set out in note 34. There is no effect on reported earnings for either 2015 or 2014. Joint ventures The Group’s interests in joint ventures comprise ventures where there is shared control. The investments in joint ventures are accounted for under the gross equity method and are carried in the consolidated balance sheet at the Group’s share of their net assets at the date of acquisition and of their postacquisition retained profits and losses together with any goodwill arising on the acquisition, net of amortisation. The Group’s share of the results of joint ventures is included in the consolidated income and expenditure 62 - 63
account. Goodwill relating to the joint venture reflects the requirement of its members’ agreement to contribute resource in the form of staff time and expertise. The increase in the value of such contributions gives rise to goodwill as no additional equity or profit sharing rights arise from incremental contributions. The amortisation of such goodwill over its useful economic life of 20 years commenced at the end of the joint venture development stage (31 March 2014). Going concern The Board has a reasonable expectation that the Company and the Group has adequate resources to continue in operational existence for the foreseeable future, being a period of at least 12 months after the date on which the report and financial statements are signed. For this reason, it continues to adopt the going concern basis in the financial statements. Further details are given in the Strategic Report including the Operating and Financial review on page 42, including consideration of the effects of the 2015 Summer Budget Statement. Basis of consolidation The Group accounts consolidate the accounts of the parent Company and all its subsidiaries at 31 March using acquisition accounting. Turnover Turnover comprises rental income receivable in the year, management fees, income from shared ownership first tranche sales, sales of properties built for sale, and other services included at the invoiced value (excluding VAT where applicable) of services supplied in the year, and revenue grants receivable in the year. Revenue recognition Rental income is recognised from the point when properties under development reach practical completion or otherwise become available for letting. Rental income is recognised net of rent and service charge losses from voids. Management fee income is receivable when the conditions for receipt of the
fees under the relevant contractual agreements have been met. Income from first tranche sales and sales of properties built for sale is recognised at the point of legal completion of the sale. Revenue grants and other income are recognised in turnover when the conditions for receipt of agreed grant funding have been met. Supporting People funding regime Charges for support services funded under Supporting People are recognised as they fall due under the contractual arrangements with administering authorities. Value added tax The Group charges value added tax (VAT) on some of its income and is able to recover part of the VAT it incurs on expenditure. The income and expenditure account includes VAT to the extent that it is suffered by the Group and not recoverable from HM Revenue & Customs. The balance of VAT payable or recoverable at the yearend is included as a current liability or asset. Interest payable Interest is capitalised on borrowings to finance developments to the extent that it accrues in respect of the period of development, if it represents either: a) interest on borrowings specifically financing the development programme after deduction of social housing grant (SHG) in advance; or b) interest on the Group’s borrowing as a whole after deduction of interest on SHG received in advance to the extent that they can be deemed to be financing the development programme. Other interest payable is charged to the income and expenditure account in the year. Derivatives The Group uses interest rate swaps to reduce its exposure to volatility in the
East Thames Annual Report and Financial Statements 2014/15
Pensions The Group participates in a funded multi-employer defined benefit and contribution scheme, the Social Housing Pension Scheme (SHPS), the Pension Trust’s multi-employer growth plan and the NHS statutory multi-employer scheme. It has not been possible to identify the share of underlying assets and liabilities belonging to individual participating employers of these schemes. The income and expenditure charge represents the employer contribution payable to the scheme for the accounting period.
Housing properties Housing properties are principally properties available for rent, shared ownership, ‘rent now, buy later’ and intermediate/market rent.
Housing properties under construction are stated at cost less related social housing grant and other capital grants. Cost includes the cost of acquiring land and buildings, development costs, interest charges incurred during the
Shared ownership properties under development are split proportionally between current and fixed assets based on the element relating to expected first tranche sales. The first tranche proportion is classed as a current asset and related sales proceeds are included in turnover. The remaining element is classed as fixed asset and included in housing properties at cost, less any provisions needed for impairment. Donated land Land donated by local authorities and others is added to the cost at market value of the land at the time of the donation. Where the land is not related to a specific development and is donated by a public body, an amount equivalent to the increase in value between market value and cost is added to other grants. Where the donation is from a non-public source, the value of the donation is included as income. Social housing grant Social housing grant (SHG) is receivable from the Homes & Communities Agency (the HCA) and the Greater London Authority (the GLA) and is utilised to reduce the capital costs of housing properties including land costs. It is allocated to the land and structure components of the associated asset in proportion to their cost. Grant receivable in respect of identifiable components is allocated to those components.
SHG released on sale of a property may be repayable but is normally available to be recycled and is credited to a Recycled Capital Grants Fund or Disposal Proceeds Fund and is included in the balance sheet in creditors. SHG repayable in certain circumstances is included as a current liability until it is repaid. The repayment of SHG is generally subordinated to the repayment of housing loans by agreement with the HCA or the GLA. Where individual components are disposed of, and this does not create a relevant event for recycling purposes, any grant which has been allocated to the component is released to the income and expenditure account. Upon disposal of the associated property, the group is required to recycle these proceeds; as such a contingent liability is disclosed to reflect this. Other grants Other grants include grants from local authorities and other organisations. Capital grants are utilised to reduce the capital costs of housing properties including land costs. These include amounts attributable to land donated by public authorities. Grants in respect of revenue expenditure are included in the income and expenditure account in the same period as the expenditure to which they relate and when attached conditions have been met.
Financial Statements
Completed housing properties of all tenure types are stated at Existing Use Value for Social Housing (EUV-SH). Full revaluations of the properties by an external valuer are undertaken every three years and interim valuations are carried out where there are indications of a significant change in value.
Economic benefits are enhanced if works result in an increase in rental income, a reduction in future maintenance costs or a significant extension to the useful economic life of a property.
SHG due from the HCA or received in advance is included as a current asset or liability. SHG received in respect of revenue expenditure is credited to the income and expenditure account in the same period as the expenditure to which it relates.
Independent auditor’s report
From 1 July 2014 contributions to the SHPS defined benefit scheme have been closed to all employees. Existing and new employees are now contributing to the SHPS defined contribution scheme. Employer contributions to the pension scheme are charged to the income and expenditure account as incurred.
development period and expenditure incurred in respect of improvements. Works to existing properties which replace a component that has been treated separately for depreciation purposes, along with those works that result in enhancing the economic benefits of the assets, are capitalised as improvements.
Report of the Board
interest rates on floating rate loans. The notional principal of those interest rate swaps is not reflected in the Group’s balance sheet. Payments made under interest rate swaps are recognised in the payment period and adjusted against interest payable on the loans. Costs associated with restructuring any interest rate swaps are written off in the same period that the restructure took place.
Strategic Report Including the Operating and Financial Review
Notes to the financial statements
East Thames Annual Report and Financial Statements 2014/15
Notes to the financial statements 2. Accounting policies continued True and fair override Under the requirements of the SORP Update 2010, capital grants are shown as a deduction from the cost of housing properties on the balance sheet (see note 11). This is a departure from the rules of the Companies Act 2006 which does not permit income to be set off against assets. In the opinion of the Board it is a relevant accounting policy reflecting the subsidised costs of the assets and is comparable to that adopted by other registered social landlords. It has been adopted in order to present a true and fair view. Depreciation is not provided on investment properties. This accounting treatment is a departure from the requirements of the Companies Act concerning depreciation of fixed assets. However, since investment properties are not held for consumption, the Board considers that systematic annual depreciation of these properties would be inappropriate and not give a true and fair view on their values as reflected in the financial statements. Depreciation is only one of the many factors reflected in the annual valuation and the amount which might otherwise have been shown cannot be separately identified or quantified. Depreciation of housing properties Freehold land, shared ownership properties and assets held in the course of construction are not depreciated. Shared ownership properties are not depreciated reflecting an assessment that the expected residual values are anticipated to result in an immaterial charge (in turn reflecting the fact that the shared owner has the significant equity and is responsible for the maintenance of the property). Properties held on leases are amortised over the life of the lease or their estimated useful economic life, if shorter. The Group separately identifies the major components which comprise 64 - 65
its housing properties, and charges depreciation so as to write-down the cost of each component, net of grant receivable, to its estimated residual value, on a straight line basis, over its estimated useful economic life. Depreciation is calculated using the valued amount of the property and its components. Depreciation is charged to the income and expenditure account and the excess of actual depreciation over historic cost is included in the statement of historic cost surpluses and deficits, credited to the revenue reserve and debited against the revaluation reserve. Social housing grant is allocated to the land and structure components of housing properties only. The Group depreciates the major components of its housing properties over the following years: Components
Years
indication that impairment may have occurred. Where there is evidence of impairment, fixed assets are written down to their recoverable amount being the higher of the net recoverable value or value in use to the association. Any such write down is charged to operating surplus. Other tangible fixed assets Other classes of other tangible fixed assets are stated at cost less depreciation. Depreciation is provided on a straight line basis on the cost of other tangible fixed assets to write them down to their estimated residual values over their expected useful lives on a straight line basis over the following years: Component
Years
Freehold offices other than head office
25
Head office
30
Lifts
25
Kitchens
20
Bathrooms
30
Boilers
15
Other heating systems
30
Equipment and furniture
7
External doors and windows
30
Service equipment
5
Roofs
60
Motor vehicles
4
Electrical installations
30
IT equipment
3
Structure
60-150
These useful economic lives apply equally to the Group’s rented and supported housing and care stock of housing properties. Properties held on leases are amortised over the life of the lease or their estimated useful economic life if shorter. Impairment Housing properties including those with individual components, which are depreciated over a period in excess of 50 years, are subject to impairment reviews annually. Other assets are reviewed for impairment if there is an
IT development
5-7
Leased assets Rentals payable under operating leases are charged to the income and expenditure account on a straight-line basis over the lease term. Properties for sale (including shared ownership properties) Completed properties for outright sale and properties under construction are valued at the lower of cost and net realisable value. Cost comprises materials, direct labour and direct development overheads. Net realisable value is based on estimated sales price after allowing
East Thames Annual Report and Financial Statements 2014/15
for all further costs of completion and disposal.
Subsequent tranches are dealt with in the same way as fixed asset property sales and shown as a separate item after operating surplus in the income and expenditure account. Properties for sale within current assets also include other developments for sale such as properties for outright sale. Starter Homes Initiative Where properties built for sale are disposed of during the year, the disposal proceeds are included in turnover, and the attributable costs are included in cost of sales.
Investment and commercial property Properties held for their investment potential are accounted for as investment properties under SSAP 19 “accounting for investment properties”. These properties are held at fair value.
Current asset investments and liquid resources Current asset investments are stated at the lower of cost and net realisable value. Liquid resources are readily
The subsidiaries East Place Limited, East Regen Limited and East Thames Partnership Limited are subject to corporation tax. Other subsidiaries, including East Homes Limited, may be liable to corporation tax on those activities that are not exempt, either through charitable/public benefit objectives or being a registered charity. Subsidiaries that are not registered charities are subject to corporation tax at the prevailing rates, but may make Gift Aid donations to reduce their liability to taxation. Gift Aid The Group has a Gift Aid policy in force whereby the subsidiaries have entered into an arrangement to pay to Group entities a sum of money equivalent to some or all of its taxable profits. Provisions Provisions are recognised when the Group has a present legal or constructive obligation as a result of past events. It is more likely than not that an outflow of resources will be required to settle the obligation and the amount can be estimated reliably. Finance costs Direct costs associated with obtaining debt finance including loan and bond issue costs, are deferred and written off over the expected life of the related instrument.
Financial Statements
If there is an indication of impairment the assets are written down to the lower of net realisable value and value in use. Commercial property under construction is recorded at the lower of cost and net realisable value, and on completion will be treated as investment properties. Changes in current market value are taken to the revaluation reserve.
The majority of the Group’s activities are not subject to corporation tax. Any charge for taxation is based upon taxable profit for the year and takes into account deferred tax where applicable.
The difference between the market value of investment properties and the historical cost carrying value is credited to the revaluation reserve. When the properties are revalued, the difference between the valuation and carrying value of housing properties is also credited to the revaluation reserve.
Independent auditor’s report
The Group receives grant via the Homes and Communities Agency to enable key workers to purchase their own homes. The loan is included in fixed asset investments at cost together with the associated grant.
Taxation The parent company is a registered charity and is not generally subject to corporation tax.
Reserves The Group establishes restricted reserves for specific purposes where their use is subject to external restrictions in accordance with the wishes of the funder or donor, and designated reserves where reserves are earmarked for a particular purpose.
Report of the Board
First tranche shared ownership sales are included in turnover. First tranche elements of shared ownership housing properties are disclosed as properties for sale within current assets and are stated at the lower of cost and net realisable value.
disposable current asset investments. They include some money market deposits, held for more than 24 hours that can only be withdrawn without penalty on maturity or by giving notice of more than one working day.
Strategic Report Including the Operating and Financial Review
Notes to the financial statements
East Thames Annual Report and Financial Statements 2014/15
Notes to the financial statements 3. Particulars of turnover, cost of sales, operating costs and operating surplus 2015 GROUP
Turnover
Cost of sales
Operating costs
Operating surplus/ (deficit)
£’000
£’000
£’000
£’000
90,174
-
60,343
29,831
Regeneration and development services
230
-
254
(24)
Community involvement
643
-
1,781
(1,138)
2,074
-
2,074
-
15,508
10,647
2,095
2,766
Sales of properties developed for sale to other registered providers
-
-
-
-
Improving East Thames
-
-
-
-
Abortive costs
-
-
185
(185)
Housing management – East Village
853
-
722
131
Home ownership services
329
-
534
(205)
Other
868
-
1,119
(251)
20,505
10,647
8,764
1,094
110,679
10,647
69,107
30,925
Social housing lettings: Other social housing activities:
Support charges - fixed contracts First tranche shared ownership sales
Total – other social housing activity Total – social housing activities
*Restated due to "Housing management – East Village" and "Home ownership services" being reallocated from "social housing letting costs" to "other social housing activities".
66 - 67
East Thames Annual Report and Financial Statements 2014/15 Strategic Report Including the Operating and Financial Review
Notes to the financial statements
2014 Operating costs
Operating surplus/ (deficit)
£’000
£’000
£’000
£’000
85,840
-
57,226
28,614
374
-
785
(411)
838
-
2,136
(1,298)
3,806
-
3,806
-
13,490
8,695
1,416
3,379
6,418
6,418
-
-
-
-
713
(713)
-
-
48
(48)
353
-
580
(227)
203
-
293
(90)
1,063
-
1,049
14
26,545
15,113
10,826
606
112,385
15,113
68,052
29,220
Independent auditor’s report
Cost of sales
Report of the Board
Turnover
Financial Statements
East Thames Annual Report and Financial Statements 2014/15
Notes to the financial statements 3. Particulars of turnover, cost of sales, operating costs and operating surplus 2015 GROUP Non-social housing activities
Turnover
Cost of sales Operating costs Operating surplus/ (deficit)
£’000
£’000
£’000
£’000
Development for sale – outright sales
20,733
16,336
944
3,453
Development for sale – other sales
13,180
10,565
17
2,598
-
-
-
-
435
-
304
131
1,342
-
540
802
-
-
-
-
35,690
26,901
1,805
6,984
146,369
37,548
70,912
37,909
Impairment (write back)/write off on investment properties Market rent Commercial rent Commercial income other Total - non-social housing activities Total – all activities
The comparatives for 2014 have been re-analysed to separately show market rent in non-social housing activities (previously included in Social Housing Lettings). PARENT Other income and expenditure
2015 Turnover
Cost of sales
17,402
-
17,912
(510)
-
-
-
-
Commercial rent
196
-
-
196
Other
515
-
-
515
Total
18,113
-
17,912
201
Group recharge Improving East Thames
68 - 69
Operating costs Operating surplus/ (deficit)
East Thames Annual Report and Financial Statements 2014/15 Strategic Report Including the Operating and Financial Review
Notes to the financial statements
2014 Turnover
Cost of sales Operating costs
Operating surplus/ (deficit)
£’000
£’000
55,957
29,819
6,269
19,869
1,900
2,377
-
(477)
-
-
(35)
35
1,586
-
2,724
(1,138)
884
-
774
110
3
-
-
3
60,330
32,196
9,732
18,402
172,715
47,309
77,784
47,622
Cost of sales Operating costs
Operating surplus/ (deficit)
2014 Turnover
-
16,768
(767)
-
-
712
(712)
60
-
-
60
707
-
-
707
16,768
-
17,480
(712)
Financial Statements
16,001
Independent auditor’s report
£’000
Report of the Board
£’000
East Thames Annual Report and Financial Statements 2014/15
Notes to the financial statements 4. Particulars of income and expenditure from social housing lettings GROUP
General needs housing
Foyers
Supported housing
£’000
£’000
£’000
47,706
2,084
4,898
2,734
1,014
2,045
Support charges – resident subsidy
-
-
1,642
Revenue grants from local authorities and other agencies
4
(131)
4,610
Nomination fees
-
-
-
1,123
455
425
51,567
3,422
13,620
2,504
1,353
2,241
13,419
724
1,274
Support
-
-
7,190
Rent payable to landlords
-
-
202
Routine maintenance
4,637
828
994
Planned maintenance
2,277
84
817
Revenue element of major repairs expenditure
354
93
150
Rent losses from bad debts
228
296
147
6,147
543
755
Operating costs on social housing lettings
29,566
3,921
13,770
Operating surplus/(deficit) on social housing lettings
22,001
(499)
(150)
331
277
762
Rent receivable net of identifiable service charges Service charge income
Other income Turnover from social housing lettings Service charge costs Management
Housing properties depreciation
Void losses
70 - 71
East Thames Annual Report and Financial Statements 2014/15
Affordable housing
2015
2014
£’000
£’000
£’000
£’000
£’000
£’000
401
3,089
8,779
2,409
69,366
64,957
-
6
2,050
110
7,959
8,040
-
-
-
-
1,642
2,117
4,090
-
-
-
8,573
8,257
-
-
-
-
-
16
3
(3)
632
(1)
2,634
2,453
4,494
3,092
11,461
2,518
90,174
85,840
11
33
2,190
86
8,418
8,721
698
949
2,733
736
20,533
20,413
3,069
-
-
-
10,259
9,535
9
-
-
-
211
180
-
114
425
44
7,042
7,227
-
7
122
27
3,334
1,484
-
7
149
8
761
-
-
-
18
-
689
821
-
585
771
295
9,096
8,845
3,787
1,695
6,408
1,196
60,343
57,226
707
1,397
5,053
1,322
29,831
28,614
47
193
649
105
2,364
3,195
Financial Statements
Shared ownership and ‘rent now, buy later’
Independent auditor’s report
Intermediate rent
Report of the Board
Residential care homes
Strategic Report Including the Operating and Financial Review
Notes to the financial statements
East Thames Annual Report and Financial Statements 2014/15
Notes to the financial statements 5. Sale of fixed assets – housing properties
GROUP Sales of older and shared ownership properties Sales of investment properties HomeBuy Starter Homes Initiative
72 - 73
Sales proceeds
Carrying value of fixed assets
Social housing grant transfer to RCGF and DPF
2015 surplus
2014 surplus
£’000
£’000
£’000
£’000
£’000
19,677
5,621
6,879
7,177
4,915
-
-
-
-
291
510
-
347
163
81
1,329
-
899
430
254
21,516
5,621
8,125
7,770
5,541
East Thames Annual Report and Financial Statements 2014/15 Strategic Report Including the Operating and Financial Review
Notes to the financial statements 6. Units of accommodation in management GROUP
2015
2014
General housing
7,716
7,827
Intermediate rent
386
403
1,181
1,203
440
548
1,881
1,720
‘Rent now, buy later’
344
401
Affordable rents
393
201
12,341
12,303
725
298
51
79
-
41
Intermediate rent
296
58
Low cost home (shared) ownership
401
81
Total accommodation managed for others
1,473
557
Total social housing owned and managed
13,814
12,721
52
57
108
-
Fully staircased (long leased) properties
1,121
1,066
Total owned
1,281
1,123
Market rent
-
5
Social housing and housing for older people
7
-
Shared equity
23
23
Total accommodation managed for others
30
167
1,311
1,290
15,125
14,011
Social housing owned
Foyers Low cost home (shared) ownership
Total owned
Report of the Board
Supported housing and housing for older people
Accommodation managed for others General housing Supported housing and housing for older people
Non social housing owned Market rent Temporary housing
Total non-social housing managed Total social and non-social housing owned and managed
Financial Statements
Accommodation managed for others
Independent auditor’s report
Foyers
East Thames Annual Report and Financial Statements 2014/15
Notes to the financial statements 7. Operating surplus Group 2015 £’000
Group 2014 £’000
Parent 2015 £’000
Parent 2014 £’000
Depreciation of housing properties
9,234
8,845
-
-
Depreciation of other fixed assets
1,717
1,575
-
517
-
(35)
-
-
206
153
-
-
Fees payable to the Company’s auditor for the audit of the financial statements
36
17
38
17
Audit of the financial statements of the Company’s subsidiaries pursuant to legislation
84
77
-
-
Fees payable to the Company’s auditor for non - audit services (advice relating to, VAT advice (£6,000) service charge audits (£30,000) and Covenant compliance (£2,000)
39
43
-
-
2015 £’000
2014 £’000
135
510
- repayable in more than five years
(30,089)
(30,152)
(29,954)
(29,642)
-
53
1,606
2,388
Interest payable capitalised on commercial properties for sale under construction
517
757
Interest receivable transferred to the RCGF/DPF
(70)
(54)
(176)
(145)
(28,077)
(26,643)
-
(9,097)
(28,077)
(35,740)
3.50%
5.00%
The operating surplus is arrived at after charging:
Impairment on investment properties Operating leases on land and buildings
8. Net interest payable and similar charges GROUP Interest receivable Interest payable on loans and leases:
Interest payable from other registered providers Interest payable capitalised on housing properties under construction
Amortisation of loan issue costs Net interest payable and similar charges Breakage costs on restructuring of cancellable swaps Net charge to the income and expenditure account Capitalisation rate used to determine the finance costs during the period 74 - 75
East Thames Annual Report and Financial Statements 2014/15 Strategic Report Including the Operating and Financial Review
Notes to the financial statements 9. Employees
Group 2014 Restated
Parent 2015
Parent 2014 Restated
Administration
376
364
166
155
Care staff
292
351
-
-
668
715
166
155
Group 2015 £’000
Group 2014 £’000
Parent 2015 £’000
Parent 2014 £’000
19,343
21,424
5,028
6,630
Social security costs
1,921
2,175
550
739
Other pension costs
2,217
1,451
1,287
598
23,481
25,050
6,865
7,967
Recharged from Group entities
-
-
95
145
Recharged to Group entities
-
-
(1,536)
(2,116)
23,481
25,050
5,424
5,996
Number of employees expressed in full-time equivalents at end of year (35 hours per week)
Report of the Board
Group 2015
Staff costs Wages and salaries
Independent auditor’s report
Financial Statements
East Thames Annual Report and Financial Statements 2014/15
Notes to the financial statements 9. Employees (continued) Staff remuneration by bands (number of full-time equivalents, including company directors) Pay Band (Based on basic salary)
Group Group 2015 2014
Ratio of highest to lowest earners
Parent 2015
Parent 2014
£160,001 to £170,000
1
-
1
-
£150,001 to £160,000
1
2
1
1
£120,001 to £130,000
3
2
2
2
£100,001 to £110,000
-
1
-
1
£90,001 to £100,000
7
3
6
3
£80,001 to £90,000
7
5
4
4
£70,001 to £80,000
-
1
-
1
£60,000 to £70,000
23
16
16
13
Total
42
30
30
25
East Thames Group Limited currently operates a defined contribution scheme with SHPS for active members. The defined benefit scheme is now closed to all members but the employer remains responsible for valuation deficits which may arise. East Thames Group Limited also participates in the Pension Trust’s Growth Plan.
76 - 77
2015 £’000
2014 £’000
Gross salary highest earner
167
151
Gross salary lowest earner
14
14
1:12
1:11
Ratio
During the accounting period East Thames Group Limited paid contributions, in respect of the defined contribution scheme, at the rate of 1% to 12%. Member contributions varied between 1% and 10% for this scheme. East Thames Group Limited employs 10 staff who are members of the NHS Pension Scheme. Employees pay contributions averaging 8.1% and East Thames Group Limited
pay contributions of 14%. The NHS Pension Scheme is a defined benefit scheme. The estimated contribution for 2015/16 is £2.4 million for the SHPS contribution scheme, £308,000 for the Pension Trust’s Growth Plan and £30,000 for the NHS scheme. For more detailed disclosures on the above mentioned pension schemes, see note 35.
East Thames Annual Report and Financial Statements 2014/15 Strategic Report Including the Operating and Financial Review
Notes to the financial statements 10. Directors emoluments
Board and Committee Members Fees payable to the eight nonexecutive members of the East Thames Group Limited Board totalled £81,000 (2014: £30,000). In addition, expenses reimbursed to eight non-executive members
totalled £3,000 (2014: £15,000). Remuneration payable to the four non-executive Committee members for the year amounted to £49,000 (2014: £7,000). In addition, expenses reimbursed to two non-executive members totalled £500.
The new Chief Executive is an ordinary member of the SHPS defined contribution pension scheme and no enhanced or special terms apply. No enhanced or special terms applied to the previous Chief Executive.
Executive Directors Remuneration payable to Group Executive Directors for management services totalled £699,000 (2014: £587,000).
There are no other enhanced pension arrangements to which East Thames Group Limited or any of its subsidiaries make a contribution.
Report of the Board
The Directors are defined as the members of the Board of East Thames Group Limited, including the Chief Executive and any member of the Group Executive team (Executive Directors).
Chief Executive and Chairman’s remuneration on a £ per social housing unit basis Gross salary £
Chairman
Cost per unit 2014 £
155,000
15,125
10.25
10.78
17,537
15,125
1.16
1.14
Aggregate emoluments payable to executive directors 2014 £’000
Former Chief Executive 1
198
151
Current Chief Executive 2
78
-
Other Executive Directors
368
349
55
87
699
587
Pension contributions
1. To the date of resignation, 30 September 2014, including severance; 2. From appointment, 1 October 2014.
Financial Statements
2015 £’000
Independent auditor’s report
Chief Executive
No of units Cost per unit 2015 £
East Thames Annual Report and Financial Statements 2014/15
Notes to the financial statements 11. Tax on surplus on ordinary activities United Kingdom corporation tax:
Group 2015 £’000
Group 2014 £’000
Parent 2015 £’000
Parent 2014 £’000
Current tax on income for the year
1,561
2,875
-
-
(2,017)
(351)
-
-
(456)
2,524
-
-
Group 2015 £’000
Group 2014 £’000
Parent 2015 £’000
Parent 2014 £’000
24,151
19,561
-
-
5,072
4,499
-
-
Deficit in respect of charitable activities
(3,473)
(1,927)
-
-
Over provision in prior years*
(2,017)
(351)
-
-
(37)
(34)
-
-
-
327
-
-
(1)
(2)
-
-
-
12
-
-
(456)
2,524
-
-
Adjustments in respect of prior years Tax on surplus on ordinary activities
reconciliation:
Current tax
Surplus on ordinary activities before taxation Theoretical tax at UK corporation tax rate 21% (2014: 23%) Effects of:
Movement in tax losses Taxable income Other temporary differences Unrecognised deferred tax on losses Current tax on surplus on ordinary activities
East Place Limited has a 33% share in Triathlon Homes LLP and is required to include its share of the partnership’s taxable profits as the LLP is not a taxable entity in its own right. * The over provision of tax in prior years resulted from an additional £8.5 million Gift Aid payment being made over and above that originally anticipated when the tax charge was calculated.
78 - 79
East Thames Annual Report and Financial Statements 2014/15 Strategic Report Including the Operating and Financial Review
Notes to the financial statements 12. Tangible fixed assets – housing properties Shared ownership and rent to buy properties held for letting
Shared ownership and rent to buy properties under construction
Total
£’000
£’000
£’000
£’000
£ ’000
751,120
48,239
174,283
20,014
993,656
6,543
46,725
(101)
12,012
65,179
96
-
(96)
-
-
-
(17,521)
-
-
(17,521)
769
-
976
-
1,745
3,355
-
15
-
3,370
-
718
-
888
1,606
Schemes completed
17,009
(17,009)
19,427
(19,427)
-
Disposals
(8,214)
-
(7,443)
-
(15,657)
Redevelopment transfer
(768)
768
-
-
-
Valuation adjustment
7,292
-
(1,478)
-
5,814
777,202
61,920
185,583
13,487
1,038,192
-
4,833
-
747
5,580
8,488
-
746
-
9,234
(42)
-
42
-
-
-
-
747
(747)
-
Released on disposal
(526)
-
(183)
-
(709)
Redevelopment transfer
(118)
-
-
-
(118)
(7,802)
-
(1,352)
-
(9,154)
-
4,833
-
-
4,833
-
14,340
-
5,958
20,298
Additions
3,037
12,358
82
1,925
17,402
Schemes completed
5,743
(5,743)
4,314
(4,314)
-
(3,922)
-
(2,898)
-
(6,820)
(642)
642
-
-
-
(4,216)
-
(1,498)
-
(5,714)
-
21,597
-
3,569
25,166
At cost or valuation
At 1 April 2014 Additions Tenure change transfers Transfer to properties for sale Transfer from investment properties Works to existing properties Interest capitalised
At March 2015 Depreciation & impairment At 1 April 2014 Depreciation charged in year Tenure change transfers Schemes completed
Valuation adjustment At 31 March 2015
Independent auditor’s report
Housing properties under construction
Report of the Board
Housing properties held for letting
GROUP
Social housing grants At 1 April 2014
Redevelopment transfer Valuation adjustment At 31 March 2015
Financial Statements
Disposals
East Thames Annual Report and Financial Statements 2014/15
Notes to the financial statements 12. Tangible fixed assets – housing properties (continued) Housing properties held for letting
Housing properties under construction
Shared ownership and rent to buy properties held for letting
Shared ownership and rent to buy properties under construction
Total
£’000
£’000
£’000
£’000
£ ’000
At 1 April 2014
-
1,115
-
-
1,115
At 31 March 2015
-
1,115
-
-
1,115
At 31 March 2015
777,202
33,628
185,583
10,665
1,007,078
At 31 March 2014
751,120
27,204
174,283
14,056
966,663
GROUP
Other capital grants
Net book value
GROUP
2015 £’000
2014 £’000
-
-
3,370
1,974
761
-
4,131
1,974
2015 £’000
2014 £’000
631,196
620,614
(39)
178
631,157
620,792
2015 £’000
2014 £’000
1,006,723
966,308
355
355
1,007,078
966,663
Expenditure on works to existing properties Amount capitalised Components capitalised Amounts charged to income and expenditure account
GROUP Total accumulated capital and revenue social grant receivable Capital grants Revenue grants
GROUP Housing properties comprise: Freehold land and buildings Long leasehold land and buildings
80 - 81
East Thames Annual Report and Financial Statements 2014/15 Strategic Report Including the Operating and Financial Review
Notes to the financial statements
grant. Housing properties have been valued by professional valuers, FPD Savills, Chartered Surveyors. The last valuation of completed housing properties was prepared at 31 March 2015 in accordance with the Appraisal and Valuation Manual
of the Royal Institution of Chartered Surveyors. The analysis of the carrying value of housing properties, split between valuation and cost is as follows:
GROUP
2015 £’000
Completed properties at valuation
962,785
Housing properties under construction at cost
Report of the Board
Completed housing properties held for letting are stated at Existing Use Value for Social Housing (EUV-SH) and shared ownership properties and ‘rent now, buy later’ are stated at EUV-SH less the net present liability to repay social housing
44,293 1,007,078
In the valuing of housing properties, discounted cash flow methodology was adopted and key assumptions included: Discount rate
5.5%
Long term annual inflation rate
2.5%
Level of annual rent increase
0.5%
GROUP
2015 £’000
2014 £’000
1,291,327
1,245,845
Social housing grant
(631,196)
(620,614)
Other capital grants
(41,482)
(41,482)
(104,096)
(95,989)
514,553
487,760
Historical cost
Depreciation and impairment
- Impairment of Fixed Assets and Goodwill. During the year the Group recognised impairment of nil (2014: nil) on housing properties held at valuation.
Financial Statements
Impairment The Group considers individual boroughs to be separate income generating units (IGUs) when assessing for impairment, in accordance with the requirements of Financial Reporting Standard 11
Independent auditor’s report
The carrying value of the housing properties that would have been in the financial statements, had the assets been carried forward at historical costs less SHG, depreciation and impairment, is as follows:
East Thames Annual Report and Financial Statements 2014/15
Notes to the financial statements 13. Other tangible fixed assets GROUP
Freehold office
Equipment and furniture
£’000
£’000
30,501
2,715
-
21
30,501
2,736
At 1 April 2014
(5,642)
(2,126)
Charged in year
(1,044)
(338)
At 31 March 2015
(6,686)
(2,464)
At 31 March 2015
23,815
272
At 31 March 2014
24,860
589
Cost At 1 April 2014 Additions At 31 March 2015 Depreciation
Net book value
PARENT
Equipment and furniture
Cost
£’000
At 1 April 2014
2,063
Additions At 31 March 2015
21 2,084
Depreciation At 1 April 2014 Charged in year At 31 March 2015
(1,652) (301) (1,953)
Net book value At 31 March 2015
131
At 31 March 2014
411
82 - 83
East Thames Annual Report and Financial Statements 2014/15 Strategic Report Including the Operating and Financial Review
Notes to the financial statements
IT software development
Motor vehicles
Estate equipment
Total
£’000
£’000
£’000
£’000
£’000
4,803
5,088
68
-
43,175
99
120
-
267
507
4,902
5,208
68
267
43,682
(4,583)
(4,288)
(68)
-
(16,707)
(121)
(214)
-
-
(1,717)
(4,704)
(4,502)
(68)
-
(18,424)
198
706
-
267
25,258
220
800
-
-
26,469
Total
£’000
£’000
£’000
4,802
5,088
11,953
99
120
240
4,901
5,208
12,193
(4,581)
(4,288)
(10,521)
(123)
(215)
(639)
(4,704)
(4,503)
(11,160)
197
705
1,033
221
800
1,432
Financial Statements
IT software development
Independent auditor’s report
IT equipment
Report of the Board
IT equipment
East Thames Annual Report and Financial Statements 2014/15
Notes to the financial statements 14. Investment and related party transactions East Thames Group Limited is a registered provider and registered charity registered under the Companies Act 2006. The parent and all subsidiaries are registered in England and Wales. Main operational subsidiaries East Homes Limited
Registered Provider and a Company limited by shares, six charitable Industrial and Provident issued shares, one held by East Society that provides social Thames Group Limited. housing including low-cost home ownership.
East Living Limited
Charitable Industrial and Provident Society that provides care and supported housing.
Company limited by shares, five issued shares, one held by East Thames Group Limited.
East Potential Limited
Registered charity that manages foyers and neighbourhood regeneration programmes on behalf of the Group.
Company limited by guarantee with five members, one being East Thames Group Limited.
East Thames Group Limited exercises control over the above subsidiaries. The remaining shares in these subsidiaries are held by the Board members and independent
shareholders, which provide them with the right to vote at general meetings but do not provide them with any rights to dividends, redemption of share capital or distribution on winding up.
Other subsidiaries providing specialist and support services East Regen Limited
Non-charitable company that provides management and development services.
Company limited by shares. 100% shares held by East Thames Group Limited.
East Place Limited
Non-charitable company that undertakes commercial activities and a subsidiary of East Homes Limited.
Company limited by shares, single share held by East Homes Limited.
East Treasury Limited
Non-charitable company that raises finance and provides treasury services.
Company limited by shares. 100% shares held by East Thames Group Limited.
East Finance Plc
Non-charitable company that raises finance and provides treasury services.
Company limited by shares. 100% shares held by East Thames Group Limited.
East Thames Partnership Limited
Non-charitable company that undertakes commercial activities and a subsidiary of East Homes Limited.
Company limited by shares. 100% shares held by East Homes Limited.
East Homes Services Limited
Non-charitable company that provides housing management services to East Village and is a subsidiary of East Homes Limited.
Company limited by shares. 90% shares held by East Homes Limited and 10% shares held by Triathlon Homes LLP.
84 - 85
East Thames Annual Report and Financial Statements 2014/15 Strategic Report Including the Operating and Financial Review
Notes to the financial statements
East Thames Group Limited exercises control through the power to appoint and remove Directors/Trustees to the Boards.
a) Joint venture - Triathlon Homes LLP East Place Limited, a wholly owned subsidiary of East Homes Limited, which is in turn controlled by East Thames Group Limited, has a 33% interest in Triathlon Homes LLP, a joint venture company. Triathlon Homes LLP
Report of the Board
The Group has the following investments: is considered to be a joint venture on the basis that neither the Group nor the other members can control that entity. Decisions essential to the financial and operating policy of the entity require each party’s consent. The shareholding of the joint venture has not changed.
The following represents the Group’s share of the joint venture’s assets and liabilities at 31 March 2015 GROUP
2014 £’000
Fixed assets
72,822
48,040
Current assets
11,915
11,786
84,737
59,826
1,935
2,037
86,672
61,863
Creditors: amounts falling due within one year
(5,367)
(2,386)
Creditors: amounts falling due after more than one year
(41,148)
(54,985)
(46,515)
(57,371)
500
500
(46,015)
(56,871)
Goodwill
Members capital loan
Independent auditor’s report
2015 £’000
Details of the Group’s transactions during the year with Triathlon Homes LLP are included as follows 2015 £’000
2014 £’000
-
221
20,156
10,477
Third share of profit before taxation of Triathlon Homes LLP
6,549
1,738
Third share of profit after taxation of Triathlon Homes LLP
5,129
970
-
400
Investment by East Thames Group Limited in Triathlon Homes LLP Third share of turnover of Triathlon Homes LLP
Distribution to members from Triathlon Homes LLP
Financial Statements
GROUP
East Thames Annual Report and Financial Statements 2014/15
Notes to the financial statements 14. Investment and related party transactions (continued) b) Investment properties Investments are carried in the Financial Statements at market value. The historical cost of these properties is £15.9 million (2014: £17.7 million). The Group’s investment properties
were subject to an external valuation by a qualified valuer as at 31 March 2015. The valuations represent an assessment of the market value (as defined in the Royal Institute of Chartered Surveyor’s Valuation Standards) of the individual properties.
GROUP
Investment properties include both commercial and social investment properties. Included under social investment properties are £0.8 million (2014: £0.8 million) of grants, relating to two properties.
Investment properties completed
Investment properties under construction
Total
£’000
£’000
£’000
At 1 April 2014 (restated note 34)
17,930
-
17,930
Transfer to housing properties
(1,745)
-
(1,745)
Valuation
Disposals
(54)
(54)
At 31 March 2015
16,131
-
16,131
At 31 March 2014
17,930
-
17,930
c) Investments shared equity To progress modernisation of the Ocean Estate several properties were decanted to enable demolition on a block by block basis. In 23 cases an
incentive payment in the form of a loan was made to the leasehold tenants to cover the shortfall in the purchase price of a new property. The full purchase price of these properties was £8.6
million. East Thames Group provided a shared equity loan of £1.8 million plus expenses under the same principles as the HomeBuy scheme.
GROUP
2015 £’000
2014 £’000
Cost
1,844
172
1,844
172
2015 £’000
2014 £’000
Long-term investment in properties
18,848
20,018
Decrease in investment in properties due to sales
(1,246)
(1,170)
Cost of HomeBuy and Starter Home Initiative
17,602
18,848
(17,602)
(18,848)
-
-
d) Investment in HomeBuy and Starter Home Initiative GROUP
Less: Social housing grant
86 - 87
East Thames Annual Report and Financial Statements 2014/15 Strategic Report Including the Operating and Financial Review
Notes to the financial statements
e) Investments in subsidiaries
Cost and net book value at 31 March 2015 and 31 March 2014 established to hold the Group’s bond balance.
f) Related party transactions The Group takes advantage of FRS 8 exemptions relating to transactions with wholly owned Group members, excepting as required by the accounting direction.
East Thames Group Ltd recharges a fair proportion of the Group’s overheads to each of the Group’s entities. These overheads consist of running costs of the Group’s head office at West Ham Lane, and shared services such as finance, human resources, IT services, internal
Parent £’000
-
13 Report of the Board
This represents the Company’s investment in East Finance Plc, a special purpose borrowing vehicle
Group £’000
audit, risk management, health and safety, marketing and the like. Group overheads totalled £15.6 million (2014: £16.0 million) and were charged in agreement with the Board. Of these costs, the following were charged to non-regulated entities of the Group:
2014 £’000
1,909
3,684
East Potential Limited
300
569
East Place Limited
170
112
East Treasury Limited
166
183
1,409
1,259
-
-
East Living Limited
East Regen Limited East Homes Services Limited
Additionally, East Homes Services Limited received fees of £83,000 (2014: £nil) from East Homes Limited during the year of which £45,000 was due at 31 March 2015 (2014: £nil), and £722,000 (2014: nil) from Triathlon Homes LLP of which £271,000 was
due at 31 March 2015 (2014: £nil). In 2015 £286,872 (2014: £162,794) of administration fees was payable by Triathlon Homes LLP to East Homes Limited. At 31 March 2015 £298,756 was due to East Homes Limited (2014: £41,541). Through its subsidiary, East Place Limited, the Group owns 33% of Triathlon Homes LLP. During the year the £3.5 million cash guarantee held in a separate bank account, provided by East Homes Limited and relating to the Triathlon Homes LLP development (that is the East Village project) was fulfilled, and the cash released back unencumbered to East Homes Limited.
During the year, £1.4 million of corporation tax relating to East Place Limited’s share of Triathlon Homes LLP tax liability was recognised and accrued for by East Place Limited. During the year, East Homes Limited received interest payments of £39,934 (2014: £394,632) from Triathlon Homes LLP. Additionally, East Place Limited has a debtor of £500,000 at 31 March 2015 (2014: £500,000) due from Triathlon Homes LLP, being a loan advanced by East Place Limited to provide working capital for Triathlon Homes LLP.
Financial Statements
Through its subsidiary, East Homes Limited, the Group owns 90% of East Homes Services Limited, a cost sharing company providing housing management services. The other 10% is owned by Triathlon Homes LLP. In the year, East Homes Limited provided £805,000 (2014: £nil) of housing management services to East Homes Services Limited, of which £501,000 was due at 31 March 2015 (2014: £nil).
Independent auditor’s report
2015 £’000
East Thames Annual Report and Financial Statements 2014/15
Notes to the financial statements 15. Properties for sale GROUP
2015 £’000
2014 £’000
Shared ownership properties completed
4,886
7,768
Shared ownership properties under construction
5,500
8,625
-
10
20,789
13,563
31,175
29,966
Completed properties for sale to other registered providers Properties for sale under construction
16. Debtors Due within one year:
Group 2015 £’000
Group 2014 £’000
Parent 2015 £’000
Parent 2014 £’000
3,612
4,053
-
-
(1,436)
(1,302)
-
-
2,176
2,751
-
-
Other debtors
4,014
6,729
245
104
Prepayments and accrued income*
6,574
1,137
444
367
Amounts due from group undertakings
-
-
10,002
2,411
Other taxation
-
-
-
-
12,764
10,617
10,691
2,882
Rent and service charges receivable Less: Provision for bad and doubtful debts
* The increase is due largely to grants accrued of £5.4 million, but not received by 31 March 2015.
17. Cash at bank and in hand Cash at bank and in hand includes restricted cash of £6.2 million (2014: £8.3 million). Restricted cash balances reduced to nil (2014: £3.5 million) which was deposited with Barclays Bank as
88 - 89
a security for the Group’s obligation under the East Village project. The remaining £6.2 million (2014: £4.8 million) of the restricted cash is held in a
sinking fund on behalf of leaseholders. There are no restricted cash balances in the parent company.
East Thames Annual Report and Financial Statements 2014/15 Strategic Report Including the Operating and Financial Review
Notes to the financial statements 18. Creditors: amounts falling due within one year Parent 2015 £’000
Parent 2014 £’000
6,136
6,127
-
-
-
-
-
2,176
Rent and service charges received in advance
2,223
2,223
-
-
Corporation tax
1,521
2,875
-
-
-
-
5,783
388
760
670
581
283
9,724
4,609
1,038
1,021
21,565
22,364
1,295
462
3,016
3,545
-
-
175
174
-
-
45,120
42,587
8,697
4,330
Group 2015 £’000
Group 2014 £’000
Parent 2015 £’000
Parent 2014 £’000
529,655
536,115
3,050
-
3,154
3,712
-
-
10,431
7,067
-
-
Disposal Proceeds Fund (note 21)
1,560
870
-
-
Other creditors
7,331
5,552
-
-
552,131
553,316
3,050
-
Loans (note 22) Bank overdraft (note 22)
Amount due to group undertakings Other taxation and social security Other creditors Accruals and deferred income Recycled Capital Grant Fund (note 20) Disposal Proceeds Fund (note 21)
19. Creditors: amounts falling due after more than one year
Loans (note 22) Accruals and deferred income Recycled Capital Grant Fund (note 20)
Independent auditor’s report
Group 2014 £’000
Report of the Board
Group 2015 £’000
Financial Statements
East Thames Annual Report and Financial Statements 2014/15
Notes to the financial statements 20. Recycled capital grant fund GROUP
2015 £’000
2014 £’000
At 1 April 2014
10,612
8,239
Grants recycled
4,778
3,955
Interest accrued
64
47
Purchase/development of properties
(2,007)
(1,629)
Balance at 31 March 2015
13,447
10,612
Due within one year
(3,016)
(3,545)
Due in more than one year
10,431
7,067
GROUP
2015 £’000
2014 £’000
At 1 April 2014
1,044
1,675
685
696
Interest accrued
6
7
Major repairs and works to existing stock
-
(1,334)
1,735
1,044
(175)
(174)
1,560
870
£1.0 million (2014: £0.8 million) of the fund is due to the Housing and Communities Agency and £12.4
million (2014: £9.8 million) is due to the Greater London Authority.
21. Disposal proceeds fund
Net sale proceeds recycled
Balance at 31 March 2015 Due within one year Due in more than one year All of the fund is due to the Greater London Authority at both 31 March 2015 and 2014.
90 - 91
East Thames Annual Report and Financial Statements 2014/15 Strategic Report Including the Operating and Financial Review
Notes to the financial statements 22. Debt analysis Due within one year:
Parent 2015 £’000
Parent 2014 £’000
-
-
-
2,176
6,050
6,050
-
-
Royal Bank of Scotland (Orchardbrook loans)
70
63
-
-
THFC Bonds
16
14
-
-
6,136
6,127
-
2,176
Group 2015 £’000
Group 2014 £’000
Parent 2015 £’000
Parent 2014 £’000
5,380
5,450
-
-
Barclays Bank
150,000
150,000
-
-
Nationwide Building Society
101,800
107,850
-
-
25,000
25,000
-
-
250,000
250,000
-
-
-
-
3,050
-
1,321
1,337
-
-
(3,846)
(3,522)
-
-
529,655
536,115
3,050
-
Group 2015 £’000
Group 2014 £’000
Parent 2015 £’000
Parent 2014 £’000
301,250
301,250
-
-
- Within one year
6,136
6,127
-
2,176
- Between one and two years
6,145
6,136
3,050
-
- Between two and five years
18,491
18,468
-
-
207,615
213,783
-
-
539,637
545,764
3,050
2,176
Bank overdraft Nationwide Building Society
Due after more than one year:
Royal Bank of Scotland (Orchardbrook loans)
Lloyds Banking Group Sterling Bond Amounts due to Group undertakings THFC Bonds Capitalised costs
Loans are repayable as follows: (excluding capitalised costs) Repayable on maturity*
Independent auditor’s report
Group 2014 £’000
Report of the Board
Group 2015 £’000
Repayable by instalments:
* £1.25m THFC maturity date 02/09/2019; * £50m Barclays LOBO loans with maturity dates no later than 09/02/2068; * £250m Sterling bond maturity date 15/06/2042.
Financial Statements
- After more than five years
East Thames Annual Report and Financial Statements 2014/15
Notes to the financial statements 22. Debt analysis (continued) At 31 March 2015 the Group had total loan facilities of £727.1 million, of which £539.6 million were drawn: Lender
Borrower
Facility £m
Drawn £m
East Finance Plc
250.0
250.0
Barclays Bank
East Treasury Limited
207.5
150.0
Nationwide Building Society
East Treasury Limited
137.8
107.8
Lloyds Banking Group
East Treasury Limited
75.0
25.0
Orchardbrook
East Homes Limited
5.5
5.5
The Housing Finance Corporation
East Homes Limited
1.3
1.3
Royal Bank of Scotland
East Homes Limited
50.0
-
727.1
539.6
Sterling Bond
Total
As at 31 March 2015 total outstanding loans amounted to £539.6 million (2014: £545.8 million). With the inclusion of £3.8 million (2014: £3.6 million) of unamortised issue costs, the gross debt on the balance sheet amounted to £535.8 million (2014: £542.2 million). The loan portfolio benefits from having secured favourable interest margins on its bank borrowings and entering into hedging arrangements, resulting in a 5.1% average rate of interest on the loan portfolio, as swapped, at 31 March 2015.
92 - 93
At 31 March 2015 the net mark-tomarket exposure on £150 million net notional of interest rate and inflation swaps amounted to a £107.1 million (2014: £67.0 million) liability which is substantially secured by charging a number of the Group’s properties. The exposure to potential changes in interest rates is monitored and in particular the possible outcomes should the Lender’s Option Borrowers Option (“LOBO”) loan facility be cancelled at the Group’s discretion. The most recent LOBO call date, on a £15.0 million tranche, passed in
February 2015 without any re-pricing being signalled by the counterparty bank. This tranche now remains subject to annual call options on each anniversary until 2068. The re-pricing option attaching to the remainder of the £50.0 million LOBO consists of a £20.0 million tranche in 2018 and a £15.0 million tranche in 2023 and periodically thereafter until 2068.
East Thames Annual Report and Financial Statements 2014/15 Strategic Report Including the Operating and Financial Review
Notes to the financial statements 23. Financial assets and liabilities The Board policy on derivatives and financial instruments is explained in the Strategic Report and Board Report.
GROUP
2015 £’000
2014 £’000
Floating rate
24,075
41,324
Financial assets on which no interest is earned
24,500
9,490
48,575
50,814
The financial assets on which no interest is earned comprise current bank accounts. The remaining financial assets are at
floating rate, attracting interest at rates that vary with bank rate. The Group’s financial liabilities are sterling denominated. After taking
into account various interest rate swaps, the interest rate profile of the Group’s financial liabilities at 31 March was: 2015 £’000
2014 £’000
Floating rate
67,850
73,900
Inflation linked
20,000
20,000
Fixed rate
451,787
451,864
Total loans (note 22)
539,637 545,764
At 31 March the fixed rate financial liabilities had a weighted average interest rate of 5.1% (2014: 5.1%). The weighted average period for which the interest rates are fixed is 22 years, or
18 years if the LOBO loan facilities are cancelled at the first pre-pricing dates.
at rates based on the one-month LIBOR plus a lender’s margin.
The floating rate financial liabilities comprise bank loans that bear interest
The debt maturity profile is shown in note 22.
GROUP
2015 £’000
2014 £’000
Expiring in one year or less
6,136
6,127
Expiring after more than one year but not more than two years
6,145
6,136
714,856
617,001
727,137
629,264
Expiring after more than two years
Financial Statements
Borrowing facilities The Group has undrawn committed borrowing facilities of £187.5 million at 31 March 2015. The total facilities available at 31 March were as follows:
Independent auditor’s report
GROUP
Report of the Board
Financial assets Other than short-term debtors, financial assets held are cash deposits and cash at bank. These are sterling denominated and the interest rate profile at 31 March was:
East Thames Annual Report and Financial Statements 2014/15
Notes to the financial statements 23. Financial assets and liabilities (continued) Fair values of financial assets and liabilities GROUP
2015
2014
Book value £’000
Fair value £’000
Book value £’000
Fair value £’000
Financial assets (note 17)
48,575
48,575
50,814
49,490
Short-term financial liabilities and current portion of long-term borrowings
(6,136)
(6,136)
(6,127)
(6,127)
(533,501)
(724,243)
(539,637)
(610,777)
-
(107,119)
-
(67,042)
(491,062)
(788,923)
(494,950)
(634,456)
Primary financial instruments held or issued to finance the Group’s operations
Long-term borrowings Derivative financial instruments held to manage the interest rate profile Total The fair values have been calculated by discounting cash flows at prevailing interest rates, or to open market value where appropriate.
Gains and losses on hedges As explained in the Strategic Report of the Board, the Group uses interest rate swaps to manage floating interest
rate volatility. Changes in the fair values of these instruments, used as hedges, are not recognised in the financial statements until the hedged
GROUP
Unrecognised gains and losses on hedges at 31 March 2015
position matures. An analysis of these unrecognised gains and losses is as follows: Gains £’000
Losses £’000
Total net gains/ (losses) £’000
13,921
(121,040)
(107,119)
1,227
(7,138)
(5,911)
12,694
(113,902)
(101,208)
Of which: Gains and losses expected to be recognised in 2015/16 Gains and losses expected to be recognised in 2016/17 or later
94 - 95
East Thames Annual Report and Financial Statements 2014/15 Strategic Report Including the Operating and Financial Review
Notes to the financial statements 24. Annual obligations under operating leases GROUP
2015 £’000
2014 £’000
206
153
Operating leases on land and buildings which expire: Over five years
Group 2015 £’000
Group 2014 £’000
Parent 2015 £’000
Parent 2014 £’000
515
1,041
-
-
New and increased provisions
4
1,294
-
-
Utilised in the year
-
(1,820)
-
-
519
515
-
-
Dilapidation fund
247
265
-
-
Other
272
250
-
-
519
515
-
-
At 1 April
At 31 March
Report of the Board
25. Provision for liabilities
Comprising:
The dilapidations provision represents the estimated costs of dilapidation on office premises previously rented by the Group, but now vacated. The lease expired in
December 2013. Other provisions relate to estimated litigation and disrepair costs to tenants at one of the Group’s schemes.
Independent auditor’s report
At 31 March
26. Share capital PARENT
2015 £
2014 £
At 1 April 2014
5
7
Guarantees received during the year
2
1
(2)
(3)
5
5
Guarantees of £1 each issued
At 31 March 2015 The shares provide members with the right to vote at general meetings but do not provide any rights to
dividends, redemption of share capital or distribution on winding up.
Financial Statements
Guarantees surrendered during the year
East Thames Annual Report and Financial Statements 2014/15
Notes to the financial statements 27. Reserves GROUP
At 1 April 2014 Prior year adjustment (note 34) Restated at 1 April 2014 Surplus for the year
Revaluation Revaluation Restricted housing investment properties properties
Designated
Revenue
Total
£’000
£’000
£’000
£’000
£’000
£’000
478,903
280
139
57
-
-
-
-
(1,696)
(1,696)
478,903
280
139
57
31,826
511,205
33,522 512,901
-
-
-
-
24,607
24,607
Property revaluation adjustment
20,682
-
-
-
-
20,682
Property revaluation (joint venture)
29,218
-
-
-
-
29,218
Transfers property sales valuation realised
(6,760)
-
-
-
6,760
-
Transfer in respect of depreciation on revalued properties
(300)
-
-
-
300
-
-
-
(47)
(57)
104
-
521,743
280
92
-
Transfers between reserves At 31 March 2015 PARENT
63,597 585,712 Revenue £’000
Total £ ’000
At 1 April 2014
-
-
Break-even for the year
-
-
At 31 March 2015
-
-
Group 2015 £’000
Group 2014 £’000
Parent 2015 £’000
Parent 2014 £’000
-
79
-
-
92
60
-
-
92
139
-
-
Group 2015 £’000
Group 2014 £’000
Parent 2015 £’000
Parent 2014 £’000
-
57
-
-
Restricted reserves comprise: Donations East Potential
Designated reserves comprise: East Potential All restricted and designated reserves are for use in social and economic regeneration programmes. The Group plans its financial affairs to ensure that each year revenue income exceeds revenue expenditure. This policy ensures that the Group 96 - 97
has a margin of safety to manage unexpected expenditure. The annual surpluses ensure that East Thames Group Limited is able to meet its commitment to providers of private finance and continue to provide social housing.
Unlike commercial organisations, the Group’s rules prevent the distribution of reserves. Instead these are applied to furthering the Group’s aims and objectives. At 31 March 2015 the Group’s reserves were all used in financing investments in social housing.
East Thames Annual Report and Financial Statements 2014/15 Strategic Report Including the Operating and Financial Review
Notes to the financial statements 28. Reconciliation of operating surplus to operating cash flows GROUP
2014 £’000
37,909
47,622
-
400
10,951
10,428
102
-
-
(35)
185
48
(105)
(91)
49,042
58,372
(130)
(778)
Decrease in properties for sale
16,834
43,148
(Increase)/decrease in debtors
(2,013)
18,924
Increase/(decrease) in creditors
5,631
(991)
69,364
118,675
2015 £’000
2014 £’000
(2,239)
22,342
6,127
26,312
500
-
4,388
48,654
(176)
(145)
Net debt at the start of the year
(491,428)
(539,937)
Net debt at the end of the year
(487,216)
(491,428)
Operating surplus Distribution to members from joint venture Depreciation of fixed assets Goodwill amortised on investment in joint venture Impairment of fixed assets and investments Write off of abortive costs Sales allowances
Report of the Board
2015 £’000
Movement in working capital Decrease in provisions
Net cash inflow from operating activities
GROUP (Decrease)/increase in cash in the period Cash outflow from decrease in debt and lease financing Cash outflow from loan issue costs Change in net debt resulting from cash flows Change in net debt resulting from non-cash flows
GROUP
2014
Cash flow
Other changes
2015
£’000
£’000
£’000
£’000
Cash at hand and in bank
50,814
(2,239)
-
48,575
Loans due within one year
(6,127)
6,127
(6,136)
(6,136)
(539,637)
-
6,136
(533,501)
3,522
500
(176)
3,846
(491,428)
4,388
(176)
(487,216)
Loans due after more than one year Capitalised loan issue costs
Financial Statements
30. Analysis of net debt
Independent auditor’s report
29. Reconciliation of net cash flow to movement in net debt
East Thames Annual Report and Financial Statements 2014/15
Notes to the financial statements 31. Financial commitments GROUP
2015 £’000
2014 £’000
Expenditure contracted for but not provided in the accounts
205,243
130,911
Expenditure authorised by the Board but not contracted for
195,565
137,866
400,808
268,777
Capital commitments
The expenditure will be funded from loan facilities (£187.5 million) and grants (£53.3 million). The Group’s treasury management policy requires
a minimum of funding facilities for 12 month’s trading activities and this is monitored through weekly cash flow forecasts. Adequate funding to
cover 12 months capital expenditure is in place at the date of signing the accounts.
Limited, a subsidiary undertaking of East Thames Group Limited. At 31 March 2015, these guarantees
amounted to £3.1 million (2014: £17.6 million).
32. Contingent liabilities The Group has provided certain financial guarantees in connection with trading obligations of East Regen
33. Post balance sheet events The Group has considered the possible impact of changes announced in the Chancellor’s Budget statement on 8 July 2015 including the impact on future rental income
streams. Based on initial research the Board is satisfied that it does not impact on the immediate or long-term viability of the organisation and will not lead to covenant breaches. The Board
has concluded that it is appropriate to prepare the Group accounts on a going concern basis.
properties included in note 14b to open market value. Previously these had been valued by applying market rent on a sale and leaseback basis,
which the directors and their valuers now consider is not appropriate. Consequently this has been processed as a prior year adjustment.
34. Prior year adjustment There is no effect on reported income for either the current or preceding financial year. During the year, the Group valued its investment GROUP
Cumulative prior year adjustment to 31 March 2013
Prior year adjustment for 2014
Cumulative prior year adjustment to 31 March 2014
£’000
£’000
£’000
At 31 March as previously stated
22,289
-
19,626
Impairment charge
(1,696)
-
(1,696)
At 31 March as restated
20,593
-
17,930
At 31 March as previously stated
14,248
-
33,522
Impact on operating surplus
(1,696)
-
(1,696)
At 31 March as restated
12,552
-
31,826
Effect of change on balance sheet Investment properties (note 14b)
Revenue reserves (note 27)
98 - 99
East Thames Annual Report and Financial Statements 2014/15
35. Pension disclosure --
Social Housing Pension Scheme (SHPS) East Thames Group Limited participates in the Social Housing Pension Scheme (the Scheme). The Scheme is funded and is contractedout of the state pension scheme.
An employer can elect to operate different benefit structures for their active members and their new entrants. An employer can only operate one open defined benefit structure at any one time. An open benefit structure is one which new entrants are able to join.
The Scheme operated a single benefit structure, final salary with a 1/60th accrual rate until 31 March 2007. From April 2007 three defined benefit structures have been available, namely: Final salary with a 1/60th accrual rate;
--
Final salary with a 1/70th accrual rate;
--
Career average revalued earnings (CARE) with a 1/60th accrual rate.
From April 2010 a further two defined benefit structures have been available, namely: -- Final salary with a 1/80th accrual rate;
A career average revalued earnings (CARE) structure with a 1/120th accrual rate was made available from 1 April 2013. This structure is contracted-in to the State Second Pension scheme.
The Trustee commissions an actuarial valuation of the Scheme every three years. The main purpose of the valuation is to determine the financial position of the Scheme in order to determine the level of future contributions required, in respect of each benefit structure, so that the Scheme can meet its pension obligations as they fall due. From April 2007 the split of the total contribution rate between member and employer is set at individual employer level, subject to the employer paying no less than 50% of the total contribution rate. From 1 April 2010 the requirement for employers to pay at least 50% of the total contribution rate no longer applies. The actuarial valuation assesses whether the Scheme’s assets at the valuation date are likely to be sufficient to pay the pension benefits accrued by members as at the valuation date. Asset values are calculated by reference to market levels. Accrued pension benefits are valued by discounting expected future benefit payments using a discount rate
As at 31 March 2015 there were 122 active members of the Scheme employed by East Thames Group Limited. The annual pensionable payroll in respect of these members was £5.26 million. It is not possible in the normal course of events to identify, on a reasonable and consistent basis, the share of underlying assets and liabilities belonging to individual participating employers. The Scheme is a multiemployer scheme, where the assets are co-mingled for investment purposes, and benefits are paid out of total Scheme assets. Accordingly, due to the nature of the Scheme, the accounting charge for the period under FRS17 represents the employer contribution payable. The last formal valuation of the Scheme was performed as at 30 September 2011 by a professionally qualified Actuary using the Projected Unit Method. The market value of the Scheme’s assets at the valuation date was £2,062 million. The valuation revealed a shortfall of assets compared with the value of liabilities of £1,035 million, equivalent to a past service funding level of 67.0%. The Scheme Actuary is currently finalising the 2014 valuation but key provisional results have been confirmed. As at 30 September 2014, the market value of the Scheme’s assets was £3,123 million. There was a shortfall of assets compared with the value of liabilities of £1,323 million, equivalent to a past funding level of 70%.
Financial Statements
--
A defined contribution benefit structure was made available from 1 October 2010.
calculated by reference to the expected future investment returns.
Independent auditor’s report
The Scheme is a multi-employer defined benefit scheme. Employer participation in the Scheme is subject to adherence with the employer responsibilities and obligations as set out in the ‘SHPS House Policies and Rules Employer Guide’.
Career average revalued earnings (CARE) with a 1/80th accrual rate.
Report of the Board
NHS Pension Scheme The NHS Pension Scheme is a statutory multi-employer scheme, with benefits fully guaranteed by the government. Contributions from both members and employers are paid to the exchequer, which meets the cost of the scheme benefits. The exchequer also pays for the costs of increasing benefits each year by the rate of inflation. This extra cost is not met by contributions from scheme members or employers.
Strategic Report Including the Operating and Financial Review
Notes to the financial statements
East Thames Annual Report and Financial Statements 2014/15
Notes to the financial statements 35. Pension disclosure (continued) The financial assumptions underlying the valuation as at 30 September 2011 were as follows: Valuation discount rates:
Percentage per annum
Pre-retirement
7.0
Non pensioner post retirement
4.2
Pensioner post retirement
4.2
Pensionable earnings growth
2.5 per annum for three years, then 4.4
Price inflation (RPI)
2.9
Pension increases: Pre 88 GMP
0.0
Post 88 GMP
2.0
Excess Over GMP
2.4
Expenses for death-in-service insurance, administration and Pension Protection Fund (PPF) levy are included in the contribution rate. The valuation was carried out using the following demographic assumptions: -- Mortality pre-retirement – 41% SAPS S1 male/female all
pensioners (amounts), year of birth, CMI 2009 projections with long-term improvement rates of 1.5% p.a. for males and 1.25% p.a. for females; --
Mortality post retirement – 97% SAPS S1 male/female all pensioners (amounts), year of birth, CMI 2009 projections with
Benefit Structure
long-term improvement rates of 1.5% p.a. for males and 1.25% p.a. for females. The long-term joint contribution rates required from April 2013 from employers and members to meet the cost of future benefit accrual were assessed at: Long-term joint contribution rate (% of pensionable salaries)
Final salary with a 1/60th accrual rate
19.4
Final salary with a 1/70th accrual rate
16.9
Career average revalued earnings (CARE) with a 1/60th accrual rate
18.1
Final salary with a 1/80th accrual rate
14.8
Career average revalued earnings (CARE) with a 1/80th accrual rate
14.0
Career average revalued earnings (CARE) with a 1/120th accrual rate
9.7
If an actuarial valuation reveals a shortfall of assets compared to liabilities the Trustee must prepare a recovery plan setting out the steps to be taken to make up the shortfall.
100 - 101
Following consideration of the results of the actuarial valuation it was agreed that the shortfall of £1,035 million would be dealt with by the payment of deficit contributions as shown in the table on the next page:
East Thames Annual Report and Financial Statements 2014/15
A cash amount(*) equivalent to 7.5% of members’ earnings per annum (payable monthly and increasing by 4.7% per annum each 1 April)
From 1 October 2020 to 30 September 2023
A cash amount(*) equivalent to 3.1% of members’ earnings per annum (payable monthly and increasing by 4.7% per annum each 1 April)
From 1 April 2013 to 30 September 2026
£30,640,000 per annum (payable monthly and increasing by 3% per annum each 1 April; first increase on 1 April 2014)
(*) The contributions of 7.5% will be expressed in nominal pound terms (for each employer), increasing each year in line with the earnings growth assumption used in the 30 September 2008 valuation (i.e. 4.7% per annum).
These deficit contributions are in addition to the long-term joint contribution rates as set out above. The next formal valuation of the Scheme will begin later this year and will give an update on the financial position as at 30 September 2015. The results of this valuation will be available in Spring 2016. Employers that participate in the Scheme on a non-contributory basis pay a joint contribution rate (i.e. a combined employer and employee rate).
A small number of employers are required to contribute at a different rate to reflect the amortisation of a surplus
A copy of the recovery plan, setting out the level of deficit contributions payable and the period for which they will be payable, must be sent to The Pensions Regulator. The Regulator has the power under Part 3 of the Pensions Act 2004 to issue scheme funding directions where it believes that the actuarial valuation assumptions and/ or recovery plan are inappropriate. For example the Regulator could require that the Trustee strengthens the actuarial assumptions (which would increase the Scheme liabilities and hence impact on the recovery plan) or impose a schedule of contributions on the Scheme (which would effectively amend the terms of the recovery plan).
The leaving employer’s share of the buy-out debt is the proportion of the Scheme’s liability attributable to employment with the leaving employer compared to the total amount of the Scheme’s liabilities (relating to employment with all the currently participating employers). The leaving employer’s debt therefore includes a share of any ‘orphan’ liabilities in respect of previously participating employers. The amount of the debt therefore depends on many factors including total Scheme liabilities, Scheme investment performance, the liabilities in respect of current and former employees of the employer, financial conditions at the time of the cessation event and the insurance buyout market. The amounts of debt can therefore be volatile over time.
Financial Statements
Employers that have closed the defined benefit section of the Scheme to new entrants are required to pay an additional employer contribution loading of 2.5% to reflect the higher costs of a closed arrangement.
New employers that do not transfer any past service liabilities to the Scheme pay contributions at the ongoing future service contribution rate. This rate is reviewed at each valuation and new employers joining the Scheme between valuations up until 1 April 2010 do not contribute towards the deficit until two valuations have been completed after their date of joining. New employers joining the Scheme after 1 April 2010 will be liable for past service deficit contributions from the valuation following joining. Contribution rates are changed on 1 April that falls 18 months after the valuation date.
As a result of pension scheme legislation there is a potential debt on the employer that could be levied by the Trustee of the Scheme. The debt is due in the event of the employer ceasing to participate in the Scheme or the Scheme winding up. The debt for the Scheme as a whole is calculated by comparing the liabilities for the Scheme (calculated on a buy-out basis i.e. the cost of securing benefits by purchasing annuity policies from an insurer, plus an allowance for expenses) with the assets of the Scheme. If the liabilities exceed assets there is a buy-out debt.
Independent auditor’s report
The contributions of 3.1% will be calculated by proportioning the nominal pound payment at the time of the change. Earnings at 30 September 2008 (for each employer) will be used as the reference point for calculating these contributions.
or deficit on the transfer of assets and past service liabilities from another pension scheme into SHPS.
Report of the Board
From 1 April 2013 to 30 September 2020
Strategic Report Including the Operating and Financial Review
Notes to the financial statements
East Thames Annual Report and Financial Statements 2014/15
Notes to the financial statements 35. Pension disclosure (continued) East Thames Group Limited has been notified by The Pensions Trust of the estimated employer debt on withdrawal from the Social Housing Pension Scheme, based on the financial position of the Scheme as at 30 September 2014. At this date the estimated employer debt for East Thames Group Limited was £52.1 million and £79.4 million for the Group in total. Growth Plan East Thames Group Limited participates in The Pensions Trust’s Growth Plan (the Plan). The Plan is funded and is not contracted-out of the State scheme. The Plan is a multiemployer pension plan. Contributions paid into the Plan up to and including September 2001 were converted to defined amounts of pension payable from normal retirement date. From October 2001 contributions were invested in personal funds which have a capital guarantee and which are converted to pension on retirement, either within the Plan or by the purchase of an annuity. The rules of the Plan allow for the declaration of bonuses and/or investment credits if this is within the financial capacity of the Plan assessed on a prudent basis. Bonuses/ investment credits are not guaranteed and are declared at the discretion of the Plan’s Trustee.
The Trustee commissions an actuarial valuation of the Plan every three years. The purpose of the actuarial valuation is to determine the funding position of the Plan by comparing the assets with the past service liabilities as at the valuation date. Asset values are calculated by reference to market levels. Accrued past service liabilities are valued by discounting expected future benefit payments using a discount rate calculated by reference to the expected future investment returns. The rules of the Plan give the Trustee the power to require employers to pay additional contributions in order to ensure that the statutory funding objective under the Pensions Act 2004 is met. The statutory funding objective is that a pension scheme should have sufficient assets to meet its past service liabilities, known as Technical Provisions. If the actuarial valuation reveals a deficit, the Trustee will agree a recovery plan to eliminate the deficit over a specified period of time either by way of additional contributions from employers, investment returns or a combination of these. The rules of the Plan state that the proportion of obligatory contributions to be borne by the member and the member’s employer shall be determined by agreement between them. Such agreement shall require the employer to pay part of such
contributions and may provide that the employer shall pay the whole of them. East Thames Group Ltd does not pay contributions to the Growth Plan. Members paid contributions at the rate of their choice. It is not possible in the normal course of events to identify on a reasonable and consistent basis the share of underlying assets and liabilities belonging to individual participating employers. The Plan is a multi-employer scheme, where the assets are co-mingled for investment purposes, and benefits are paid out of the Plan’s total assets. Accordingly, due to the nature of the Plan, the accounting charge for the period under FRS17 represents the employer contribution payable. The valuation results at 30 September 2011 were completed in 2012 and have been formalised. The valuation of the Plan was performed by a professionally qualified Actuary using the Projected Unit Method. The market value of the Plan’s assets at the valuation date was £780 million and the Plan’s Technical Provisions (i.e. past service liabilities) were £928 million. The valuation therefore revealed a shortfall of assets compared with the value of liabilities of £148 million, equivalent to a funding level of 84%. The financial assumptions underlying the valuation as at 30 September 2011 were as follows: Percentage per annum
Rate of return pre-retirement
4.9
Rate of return post retirement: active/deferred
4.2
Rate of return post retirement: pensioners
4.2
Bonuses on accrued benefits
0
Inflation: Retail Prices Index (RPI)
2.9
Inflation: Consumer Prices Index (CPI)
2.4
102 - 103
East Thames Annual Report and Financial Statements 2014/15
If an actuarial valuation reveals a shortfall of assets compared to liabilities, the Trustee must prepare a recovery plan setting out the steps to be taken to make up the shortfall. The Pensions Regulator has the power under Part 3 of the Pensions Act 2004 to issue scheme funding directions where it believes that the actuarial valuation assumptions and/or recovery plan are inappropriate. For example, the Regulator could require that the Trustee strengthens the actuarial assumptions (which would increase the Plan liabilities and hence impact on the
Following a change in legislation in September 2005, there is a potential debt on the employer that could be levied by the Trustee of the Plan. The Pensions Act 2011 has more recently altered the definition of Series 3 of the Growth Plan so that a liability arises to employers from membership of any Series except Series 4. The debt is due in the event of the employer ceasing to participate in the Plan or the Plan winding up. The debt for the Plan as a whole is calculated by comparing the liabilities for the Plan (calculated on a buy-out basis i.e. the cost of securing benefits by purchasing annuity policies from an insurer, plus an allowance for expenses) with the assets of the Plan. If the liabilities exceed assets there is a buy-out debt. The leaving employer’s share of the buy-out debt is the proportion of the Plan’s liability attributable to employment with the leaving employer compared to the total amount of the Plan’s liabilities (relating to employment with all the currently participating employers). The leaving employer’s debt therefore includes a share of any ‘orphan’ liabilities in respect of previously participating employers. The
amount of the debt therefore depends on many factors including total Plan liabilities, Plan investment performance, the liabilities in respect of current and former employees of the employer, financial conditions at the time of the cessation event and the insurance buyout market. The amounts of debt can therefore be volatile over time. When an employer withdraws from a multi-employer defined benefit pension scheme which is in deficit, the employer is required by law to pay its share of the deficit, calculated on a statutory basis (known as the buy-out basis). Due to a change in the definition of money purchase contained in the Pensions Act 2011 the calculation basis that applies to the Growth Plan will be amended to include Series 3 liabilities in the calculation of an employer’s debt on withdrawal. The Growth Plan is a “last man standing” multi-employer scheme. This means that if a withdrawing employer is unable to pay its debt on withdrawal the liability is shared amongst the remaining employers. The participating employers are therefore, jointly and severally liable for the deficit in the Growth Plan. East Thames Group Ltd has been notified by The Pensions Trust of the estimated employer debt on withdrawal from the Plan based on the financial position of the Plan as at 30 September 2014. As of this date the estimated employer debt for East Thames Group Ltd was £111,262 and £126,607 for the Group in total.
Independent auditor’s report
The Scheme Actuary has prepared a funding position update as at 30 September 2013. The market value of the Plan’s assets at that date was £772 million and the Plan’s Technical Provisions (i.e. past service liabilities) was £927 million. The update, therefore, revealed a shortfall of assets compared with the value of liabilities of £155 million, equivalent to a funding level of 83%.
recovery plan) or impose a schedule of contributions on the Plan (which would effectively amend the terms of the recovery plan). A copy of the recovery plan in respect of the September 2011 valuation was forwarded to The Pensions Regulator on 2 October 2012, as is required by legislation.
Report of the Board
In determining the investment return assumptions the Trustee considered advice from the Scheme Actuary relating to the probability of achieving particular levels of investment return. The Trustee has incorporated an element of prudence into the pre and post retirement investment return assumptions; such that there is a 60% expectation that the return will be in excess of that assumed and a 40% chance that the return will be lower than that assumed over the next 10 years.
Strategic Report Including the Operating and Financial Review
Notes to the financial statements
Financial Statements
East Thames Annual Report and Financial Statements 2014/15
East Thames 29-35 West Ham Lane Stratford, London E15 4PH Tel: 0300 303 3333 Email: info@east-thames.co.uk www.east-thames.co.uk 104 - PB