The Pharmaceutical Journal
Vol 278 No 7453 p624-625
26 May 2007

Society summary

Substantial rise in retention fee may be inevitable

A substantial increase in the Royal Pharmaceutical Society retention fee is inevitable unless the Society can persuade the Government to help fund the increasing cost of regulation, the Society's annual general meeting was told on 16 May.

During his annual report for 2006, the President, Hemant Patel, warned that the regulatory changes introduced by the Pharmacists and Pharmacy Technicians Order 2007 would all come at a substantial financial cost. He said: “The burden on the Society to implement these regulations continues to grow and inevitably our costs have also grown. “We have tried, over the past two years, to avoid increasing the financial burden on pharmacists by limiting the rise in retention fees and arguing for a more equitable share of costs to be funded through the premises fees. Disappointingly, our arguments have not been heeded by the Department of Health. If we are to grasp the opportunities presented by the exciting but challenging future that lies ahead, we must have the funds available to allow us to do so.

“I am afraid, therefore, that unless we are able to persuade the government to help fund the increasing cost of regulation, substantial increases in the retention fee are inevitable.”

Warnings of future financial problems also came during the course of presentations by the Treasurer, John Jolley, and the Director of Finance and Resources, Bernard Kelly.

Presenting the financial reports for 2006, the Treasurer said that the Society’s income and expenditure account for 2006 showed an operating surplus of £112,000 on the year after interest receivable and payable on loans was taken in to account, there being no corporation or overseas tax due for the year.

Income for the year amounted to £33.328m (up 0.9 per cent on 2005), with membership and premises fee income accounting for 41 per cent and publications for 52 per cent. Expenditure amounted to £33.553m, an increase of £0.276m (up 0.8 per cent).

A pension contribution of £1.959m was made to reduce the FRS 17 pension deficit of £4.882m. However after recalculating using the 2006 assumptions, the deficit was only reduced to £4.376m. [Financial Reporting Standards 17 requires any company or organisation offering a defined pension scheme to report the current status of the pension fund in the accounts and balance sheet.]

The accumulated funds at 31 December 2006 before the pension deficit was applied amounted to £8.379m. But after incorporating the current year deficit of £4.376m the retained reserves fell to £4.003m.

He added: “In accordance with current regulations we will be carrying out a full actuarial valuation as at 31 December 2006. We await the outcome with considerable interest as any further reduction in the Society’s reserves will be a matter of concern and will necessitate immediate action.

“The Society’s balance sheet remains relatively strong with higher levels of investments in fixed assets together with reasonable cash balances at the year-end.

“The Council places a high regard on its fiduciary responsibility to ensure that the highest professional standards of financial management are applied to the Society’s finances at all time. Financial management is not just about how we do things day by day but about protecting the future and the legacy we leave to those who come after us.”

The Treasurer said that the Society faced a number of difficult decisions in the coming year. Implementing the provisions of the Pharmacists and Pharmacy Technicians Order 2007 would require significant additional cost if the Society was to meet its new regulatory responsibilities. Establishing the General Pharmaceutical Council would necessitate additional start-up costs for the new organisation. And, most importantly, the costs associated with establishing a separate professional leadership organisation would be considerable and the Society would have to be innovative when considering the affordability of its activities in the future.

He continued: “Funding will require critical examination, as we cannot expect the membership to pick up the bill for everything. Government support will be essential if we are to build a viable organisation to provide for the future needs of the profession in the time scale proposed. But I believe we must resist Government pressure in dictating the structure of such a new professional organisation as we will achieve a much stronger union by reaching consensus between the various specialisations across pharmacy.”

Addressing specific issues in the financial statements for 2006, Mr Bernard Kelly said that in 2004 the Council had adopted a financial strategy with the aim of achieving long-term financial sustainability for the Society. The three main planks to this strategy were to reduce reliance on the financial contribution from RPS Publishing, to fund regulatory and professional activity from the premises fees and retention fees and to build the Society’s reserves from the publishing contribution. The aim had been to achieve these objectives over time but, although some movement had been made towards them, progress had been limited for the following reasons:

• After the Society had budgeted to reduce its reliance on publishing, the actual contribution from RPS Publishing had declined as the result of a severe downturn in the demand for classified advertising and the need to invest in the digital future of its core products

• The rise in the level of retention fees had been limited because the Council had sought to curb the financial burden on members

• The cost of regulatory activity had risen considerably each year

• The Society had had no success in its attempt to persuade the Department of Health that a more equitable share of the regulatory costs should be borne by premises fees

• The pension fund deficit has increased and the Society’s contributions to the fund had risen considerably

Mr Kelly said that the Council has recently reconfirmed the financial strategy and the Society continued to hold the objectives firmly in mind. In the light of the uncertainties over the future role of the Society, pursuing these strategies was more important than ever. But, in the absence of any new sources of funding, the Society’s reliance on its traditional sources of income would inevitably increase substantially. The Society would, of course, also look to reduce or hold back expenditure in all areas and it was currently considering how it might restructure itself to reduce expenditure and to reflect the implications of the recent White Paper.

Mr Kelly said that the Society’s financial position was not desperate but it was far from the comfortable position he would like the Society to be in and it was a considerable distance away from target.

A major factor affecting the Society’s financial health was, of course, the pension fund. Like most organisations in the UK, the Society had a deficit in the scheme, which had been closed to new entrants in January 2003. Since 2005 accounting standards had required that the deficit on the scheme should be reflected in the Society’s balance sheet. That was entirely logical because the deficit was a responsibility from which the Society could not walk away.

Since the actuarial valuation in 2003, the Society had been making additional contributions into the scheme to reduce the past service deficit. And towards the end of 2006 the Council decided to make an exceptional contribution of a little under £2m. Unfortunately, changes in assumptions such as life expectancy had increased the scheme’s liabilities by an amount almost equivalent to the additional contribution.

The impact of the additional contribution on the balance sheet was to reduce the cash balances by the same amount as the reduction in the deficit. If the contribution had not been made, the deficit would have been higher but then so would have been the cash balances and the net asset position would be unchanged from that reported.

Mr Kelly pointed out the prescriptive methodology used for FRS17 valuation was notoriously volatile because it used assumptions based on the financial markets at a particular date. But key assumptions, such as the return on long-term bonds and the value and rates of return on equities, fluctuated on a daily basis. Therefore the valuation when carried out at the end of 2007 could be substantially different from that at the end of 2006. However, he had no expectation of it worsening substantially.

The rest of the Society’s balance sheet remained fairly strong, Mr Kelly said. The Society had increased its investment in property through the refurbishment of the headquarters building and the purchase of a new building in Cardiff to house the Welsh Office.

Debtors were higher as a result of the publication of Martindale late in 2006 while creditors were higher because more pharmacists had taken advantage of the internet to pay their 2007 retention fee before the due date of 1 January.

The Society’s cash balances — at £4.9m after the additional pension contribution — remained relatively healthy, Mr Kelly said, but he would be seriously concerned if any further deterioration were to occur.

Answering a question, the Society’s financial controller, Graham Duncan, said that the income generated by the Society in 2006 from the regulation of technicians was £421,000 and expenditure on their regulation was £350,000.