Post-school funding body landscape simplification: outline business aase

5. Financial Case

5.1 Introduction

The purpose of the Financial Case is to set out the estimated costs associated with the three shortlisted options, as described earlier in the Socio-Economic case.

This section provides an overview of the transition and operational costs, and the impact on public expenditure. Affordability is assessed in terms of comparing the forecast operational costs of business as usual to future options.

Delivering this scale of structural reform will incur transition costs. These costs have been estimated within the financial case, however, these costs are not yet included in future budget projections. This OBC does not represent a bid for future budgets but is the evidence base for making a choice between options based on both affordability and the non-monetisable benefits that are expected to result from implementation of options. Further commentary on affordability is made within the financial case.

5.2 Assumptions and Estimates

Extensive work has been undertaken by the Scottish Government Project Team leading this work through stakeholder engagement, and via consideration of detailed technical submissions from all affected public bodies, to better understand the financial costs of each option. Whilst this has provided the Project Team with a solid understanding of baseline information, it has not been possible to undertake detailed modelling of future target operating models for each option for the OBC. This means that a considerable number of assumptions and estimates are built into the current financial modelling for the OBC.

A narrative explanation of the assumptions that have been applied has been provided throughout the financial case.

As a proxy for future “to be” structures, the basis for the cost assumptions presented have been derived by considering the “as-is” as a baseline and consolidation of these costs into new structures for each option. A number of comparable reform programmes from Scotland and across the UK were considered to provide reasonable estimate costs of change in areas such as workforce, IT services and estates costs in advance of detailed planning having taken place on the basis of a preferred option. Public body annual accounts were used to determine consistent cost elements in conjunction with information provided from public bodies.

While the financial case focuses on the financial costs associated with implementing each option^[42], it is important to consider the direct financial benefits alongside this information. For the purposes of this Financial Case, an assumption has been made that no changes will be made to running of the system under Options 2 and 3.

This is because detailed design work based on a future target operating model aligned to a preferred option has not yet taken place. The expectation is that efficiencies and possibly cost savings through shared systems and services and potential consolidation of some corporate functions will be identified as detailed design work towards a new target operating model across all public bodies is commenced. Therefore, any estimates presented below that relate to the operation of the system under Options 2 and 3 do not provide a complete reflection of the potential future system and only provide the costs, not a quantification of future benefits which may offset any transitional or increased operational costs.

5.2.1 Pensions

A number of options are available for the provision and ongoing management of pensions of staff impacted by potential structural changes. Pension considerations are only relevant for those currently employed in SDS who may be in scope of transfer to SFC. This is because SDS staff are members of the Local Government Pension Scheme (Scotland) (“LGPS”) whereas SFC and SAAS are both members of the Civil Service Pension Scheme (“CSPS”). It is anticipated that affected staff will be offered the opportunity to transfer from the LGPS to the CSPS. Significant work and engagement would be required with SDS, staff, trade unions, pension fund administrators and actuaries to provide staff with specific pension options based on their individual circumstances.

Given that Ministers have yet to make a decision on the final scope of structural change, it is not possible to determine indicative costs of pension changes at this time. Actuarial advice is required to calculate the implications for individual affected. The cost of transferring pension provision from one provider to another comprises both the actuarial cost and the payment of any “shortfall payment”. The shortfall payment in this case would be the difference between the aggregate transfer value of accrued benefits from the LGPS and the amount required by the CSPS to honour the terms of the transfer.

At the OBC stage, analysis has been completed on numbers of individuals potentially in scope to transfer and their grade and FTE status. The OBC has not analysed staffing information to the level of length of service and pension benefits accrued to date. Typically, staff are given a three-month period in which to decide. Experience of other transfers shows that take up rates can vary widely; commonly in the range between 20% and 80% uptake, but higher and lower uptake is not unknown. This information would be required in order to engage actuarial advice to determine future pension liabilities. The advice itself is costly and should only be commissioned when there is agreement that action is going to be taken.

5.2.2 Pensions: actuarial advice

The cost of actuarial advice is the fee payable to either the Government Actuary’s Department or, in this case to the Strathclyde Pension Fund Actuary. The low cost is estimated to be £40k based on similar work taken forward recently within the Scottish Government. The high cost is estimated to be £75k assuming a high number of staff choose to transfer their pension. The actual number of staff choosing to transfer is hard to predict (see discussion of pension transfer costs below). It will only be confirmed once a detailed offer has been made to the affected staff and the three-month for them to consider and decide on their preferred option period has elapsed.

5.2.3 Pension: shortfall payment

There are significant challenges in trying to estimate the shortfall payment. They can only be accurately assessed by seeking, and paying for, actuarial advice in respect of the specific cohort of affected staff^[43]. Analysis to date is based on numbers of individuals potentially in scope to transfer, their grade and FTE status. There is more work to be done before there is a list of named staff for transfer. Actuarial advice is normally only be commissioned when there is agreement to the transfer of a specific cohort of staff.

There are a range of factors which can affect the calculation of the shortfall payment including: take-up by affected staff, which can range from 20% to 80%, and each member of staff will make a decision based on their own personal circumstances; and the ages, salaries, previous reckonable service and prior pensions schemes of affected staff. Costs will tend to be much higher for older, longer serving employees. Therefore, there is no such a thing as a “comparable” case, and historical examples should not be regarded as representative or typical. (A further complexity is the McCloud Remedy which involves backdated adjustments to pension benefits meaning that some of the past examples may be subject to revision.) The final approach to staff transfers, and the terms on which they are offered, may be affected by the shortfall payment calculation in this case. Shortfall payment costs are so uncertain that they are not factored into any other calculations in this OBC. Actuarial costs have therefore been factored into the financial case as a transition cost, but no further costs for transferring staff pensions have been included at this point.

Once a decision is made, significant work and engagement will be required with SDS, staff, trade unions, pension fund administrators and actuaries to provide indicative costs before working towards providing staff with clear pension options.

5.2.4 National Insurance

Within the most recent UK Government Budget, it was announced that employer National Insurance contributions would be increased. Increased National insurance costs introduced by the UKG are not accounted for in as dialogue continues with the UK on an appropriate settlement to cover these costs across the Scottish public sector. Additionally, as the data was submitted by public bodies prior to the budget being announced and given there is uncertainty about how the rise will be implemented, it has not been factored into this financial case. The employer national insurance contribution will impact the staff costs by approximately a 1.2 per cent increase, and in turn the overall cost, across all three options. This would represent such a small increase in all the proposed options that the sensitivity analysis will account for this increase the staffing costs.

5.2.5 Staffing

The Scottish Government currently has a commitment to no compulsory redundancies across the public sector to March 2025. This commitment is reflected in all current pay agreements across affected public bodies. For the purposes of this OBC it has been assumed that no compulsory redundancies will be offered to staff and therefore any costs that may be incurred from such circumstances are not factored in.

Within that there is an acknowledgement that movement of functions from SDS to SFC in either Option 2 or Option 3 may result in excess capacity within some roles that partly support delivery of national training programmes. Aligned to wider policy position, the expectation is that all possible steps will be taken to avoid compulsory redundancy situations arising, including a number of measures already in place as a result of the current enhanced spend controls like recruitment restrictions, voluntary severance schemes and the exploration of opportunities for staff to take up alternative posts, either within their own organisation or elsewhere in the public sector.

Developing and implementing changes due to reform will happen over several years. Significant further work is required to scope out the workforce implications of that change. There will be detailed consultation and discussion with staff and recognised trade unions as options develop.

5.3 Methodology

The assessment of costs is centred on a nine-year appraisal period from 2025/26 to 2033/34. Costs are largely baselined from 2024/25 data. The working assumption is that any changes would be operational within 2026/27, with initial costs being incurred from 2025/26.

The financial case presents a best estimate of the costs based upon the available evidence of the current system. Further due diligence will need to be carried out, once Ministers have decided on their preferred option, to consider the full picture of actual costs. This detailed development work will be undertaken in partnership through implementation plans co-created with affected public bodies.

Total forecasted costs for each option are provided over the nine-year appraisal period. These are presented in nominal (cash) terms. The total costs are broken down by staff costs, non-staff costs and transition costs. Full descriptions of the make-up of each line are provided. Total estimated costs are then compared with commentary provided on the affordability of each option.

The three public bodies submitted returns to the project team between August and September 2024. Templates were not provided to public bodies and each public body provided the information requested in the format and using the assumptions that best reflected their existing operational planning assumptions.

Given the range of estimates and assumptions that have had to be made based on the availability of sufficiently detailed information, cost ranges have been provided for all options with lows and highs provided for each cost category. Similarly, additional sensitivity analysis has been undertaken on those cost estimates with most uncertainty. All cost estimates have been rounded to the nearest £1,000. Staff costings are based on full time equivalent for the purpose of the costings.

5.4 Option 1: Business as usual (BAU)

Option 1 represents the current running costs of the entirety of the post-school education and skills funding body landscape as administered through the three public bodies (SFC, SAAS and SDS). For SDS, the baseline is not the total running cost of the entire organisation, it is only inclusive of National Training Programmes functions and associated FTE corporate and systems costs. For both SFC and SAAS, the baseline includes all staff and non-staff running costs. These costs therefore equate to the entire running costs, at the national level, for funding all types of publicly funded post-school provision and the entire running costs for all types of student support. As this option will not result in any change, there are no transition costs associated with this option.

Table 31 below shows the estimated costs of maintaining the system in its current structures for the forecast period. No significant policy changes have been assumed. Only transformation work already planned or in progress, included by the public bodies in their baseline returns, has been factored in.

Note: Numbers in tables may not add up to totals due to rounding

Staff costs include all staff related costs for those included in scope within SDS, SFC and SAAS. For SFC and SAAS this includes whole organisation staffing costs. For SDS this only includes staff working solely on, or largely on, development, delivery and funding of national training programmes, including apprenticeships. Staff costs for all public bodies include all ‘on-costs’ including salary, national insurance contributions and employer pension contributions. Due to staffing information being provided in terms of minimum and maximum salary per grade, a low and high staffing figure has been provided.

Non-staff costs include IT systems, estates and a range of other corporate costs. Non-staff costs also include SAAS’s capital expenditure, and the substantial reduction in cost in FY27/28 is due to the culmination of their digital transformation project. SAAS is the only public body that declared capital expenditure. For SFC and SAAS the non-staff cost represents the whole organisation non-staff costs. For SDS a pro-rata estimate has been applied based on the number of FTE estimated to be within scope of transfer.

5.5 Option 2: Consolidate all provision funding within one public body (SFC) and all student support funding within one public body (SAAS)

Option 2 incorporates the transfer of responsibilities between the public bodies and introduces the transition costs required in order to realise these structural changes.

5.5.1 Operating costs – Option 2

Table 32 shows the estimated staff and non-staff operating costs of realising this option over the 9-year appraisal period.

Note: Numbers in tables may not add up to totals due to rounding

Costs for Option 2 are based on between 148.4 and 174.6 FTE staff transferring from SDS to SFC to fund development and delivery of national training programmes, including apprenticeships. Numbers of staff in scope of transfer are based on initial SDS modelling and would be subject to significant further work, including engagement with HR, recognised trade unions and affected staff, subject to a decision on the preferred way forward being made by Scottish Ministers. It is likely that the numbers in scope could be higher or lower than this range. It is assumed that headcount will continue to be managed down over the forecast period as per assumptions made within Transform 27. It is assumed that some harmonisation of terms and conditions would need to be worked through, and initial cost estimates have been applied based on current terms and conditions supplied by public bodies.

No staff have been scoped to transfer from SFC to SAAS to support delivery of further education student support. This reflects the fact that the team leading on this within SFC is small and that it is assumed that there will be no immediate policy changes to the distribution of funds to colleges and therefore, that SAAS will be able to incorporate this work within existing resource. It is also assumed that existing SFC staff working on this area would be redeployed to other functions within SFC.

Regarding non-staff costs, it has been assumed within this option that proportions of non-staff costs within SDS related to national training programmes would be transferred to SFC. This is based on an assumption that IT systems required to deliver apprenticeships, such as FIPS: Funding Information and Processing System, would have to be migrated from SDS to SFC. The fact that commissioning, contracting models and the systems required to support delivery of apprenticeships may change in future is recognised in the economic and commercial cases. Detailed design work on the ideal “to be” future state will be taken forward in partnership with public bodies once Ministers have reached a decision on their preferred option.

Regarding estates, two scenarios have been included for the low and high range. For the low range no additional accommodation has been assumed for SFC and the increased headcount would have to be managed via a hybrid working strategy. The high range includes additional accommodation costs for SFC as a result of the increased headcount. Additional accommodation costs have been assumed based on recent comparable examples of shared public sector accommodation.

5.5.2 Transition Costs – Option 2

Transition costs are associated with the transfer of functions from one organisation to another. These are typically short-term or one-off costs related to planning, branding and marketing, advisory services, changes to IT systems, new equipment etc. It is expected transition costs will incur in 2025/26 and 2026/27. The detailed estimated transition costs for Option 2 are summarised in Table 33 below.

Note: Numbers in tables may not add up to totals due to rounding

It is assumed that a programme team would be established within the Scottish Government to manage the delivery of this option. This would include a range of specialists related to HR, finance, procurement, digital, data and systems. Secondments/loans from all affected public bodies have also been factored into a transitional team. The low to high range estimates for transitional project staffing are due to differing levels of resource and expertise being assumed. Costs for specialist skills have been estimated based on equivalent expertise within the education reform programme and from staff costs provided by public bodies.

Communications, branding and marketing costs have been estimated based on similar forecasts of recent comparable examples. High ranges would allow for a light touch rebranding exercise for SFC dependent on decisions made by Ministers and on the advice of the cross-public body implementation team on the future name, structure and communications approach of the future body.

As noted previously, it has not been possible to estimate full pension costs for the staff transfers at this stage in the Project. An assumption has been made that actuarial advice will need to be sought during the transition period. It is also assumed that other external legal advice may need to be sought during the transition period, including for any tax implications of making these changes. Additionally, some consultancy support has also been factored in to assist in areas such as governance and cultural change. These professional services cost estimated are based on similar work taken forward recently within the Scottish Government.

As noted above some initial estimates have been included for harmonisation of terms and conditions based on existing terms and conditions within the public bodies. It is important to note that the cost of pay harmonisation is currently based on an estimation - the actual cost incurred will be crystallised after negotiations and further engagement with trade union representatives. This estimate has been included as transition costs until 2026/27 and then incorporated into core cost forecasts thereafter.

Initial IT hardware and systems costs have been provided based on the current costs to SCOTS Connect customers. The costs are estimates and subject to change depending on what services are procured via iTECs. The initial estimate of IT equipment provided a low estimate of laptop and telephony equipment, whilst the high incorporated the cost of the installation of a new network.

5.5.3 Additionality – Option 2

Table 34 below shows the additional costs associated with Option 2 relative to Option 1 (BAU).

Note: Numbers in tables may not add up to totals due to rounding

The additional costs associated with Option 2 relative to Option 1 are related to transition costs as well as year on year increases in running costs as set out in the above sections. The transition costs are expected to be in the region of £2.6 million to £4.7 million over the assumed two-year transition period. The increases in the staff related running costs are expected to be up to £381,000 per year and between £117,000 and £423,000 per year for non-staff related running costs. These increases in the running costs relate to pay harmonisation and potential duplication of certain functionalities. This is due to the assumption made in the financial modelling that no changes will be made to the running of the system. However, it is worth noting that while running costs may increase in the short-term, longer term efficiencies and potential savings are expected to be realised as a direct result of this Project as well as through enabling activity in the wider reform space, as set out in the Strategic Case (see section 2.6).

5.6 Option 3: Consolidate all provision funding and all student support funding within one public body (SFC)

Option 3 incorporates the transfer of all funding responsibilities from SDS and SAAS to SFC and also shows the transition costs required in order to realise these changes.

5.6.1 Operating costs – Option 3

Table 35 shows the estimated staff and non-staff operating costs of realising this option over the 9-year appraisal period.

Note: Numbers in tables may not add up to totals due to rounding

Within Option 3 staff costs are based on all SDS NTP and SAAS staff transferring on October 1, 2026, and the baseline assumptions remain relevant. The financial figures are estimated by calculating the transfer of staff from SDS to SFC (as in Option 2) with the addition of the staff and systems from SAAS transferring to SFC. As such, the data from Option 2 is built into the forecast for Option 3. Therefore, under Option 3, the forecast for SDS remains the same as in Option 2 for both the low and high staff forecast and the non-staff forecast.

Regarding student support provision, Option 3 is based on all SAAS staff transferring to SFC to manage further and higher education student support with the exception of small core team that would be retained within Scottish Government to manage the Student Loan Book^[44].

Similarly to Option 2 it has been assumed that proportions of non-staff costs within SDS related to national training programmes would transfer, in addition to all non-staff running costs within SAAS transferring to SFC. This is based on an assumption that IT systems required to deliver both apprenticeships and student support would be migrated to the SFC. As outlined in the commercial case, these assumptions have been made on the basis that detailed design work on a future target operating model has not yet taken place and will only commence once a decision has been reached on the preferred way forward.

5.6.2 Transition Costs – Option 3

Transition costs for Option 3 are higher than for Option 2 in 2026/27 given the additional number of staff within scope to transfer from SAAS. The increased costs are from harmonisation of terms and conditions and IT equipment for additional staff transferring from SAAS. All other transition costs for Option 3 are based on the same assumptions as outlined within Option 2.

Note: Numbers in tables may not add up to totals due to rounding

5.6.3 Additionality – Option 3

Table 37 below shows the additional costs associated with Option 3 relative to Option 1 (BAU).

Note: Numbers in tables may not add up to totals due to rounding

As with Option 2 the additional costs associated with Option 3 relative to Option 1 are related to transition costs as well as year on year increases in running costs as set out in the above sections. The transition costs are expected to be in the region of £4.1 million to £7.3 million over the assumed two-year transition period. The staff related running costs are expected to be around £750,000 per year higher and non-staff related running costs around £0.3 million to £0.9 million per year.

5.7 Summary of the options

Table 38 below summarises the total estimated costs for each option over the 9-year appraisal period.

Note: Numbers in tables may not add up to totals due to rounding

Table 39 below summarises the total additional costs for Options 2 and 3 relative to Option 1 over the 9-year appraisal period.

Note: Numbers in tables may not add up to totals due to rounding

5.8 Sensitivities

As outlined in the Socio-Economic Case, three sensitivity tests were conducted to account for uncertainties in estimating the transition costs as well as staff costs over the 9-year appraisal period for Options 2 and 3^[45]. The first scenario assumes a 10% year-on-year increase in the “high” staff costs for those in scope to transfer from 2026/27 onwards. The second scenario assumes a 100% increase in the “high” transition costs over 2025/26 and 2026/27. Finally, the third scenario combines scenarios 1 and 2.

Table 40 shows how the total additional costs for Options 2 over the 9-year appraisal period change relative to Option 1 in all the three scenarios. “Low” estimates remain unchanged.

Note: Numbers in tables may not add up to totals due to rounding

Table 41 shows how the total additional costs for Option 3 over the 9-year appraisal period change relative to Option 1 in all the three scenarios. “Low” estimates remain unchanged.

Note: Numbers in tables may not add up to totals due to rounding

5.9 Overall affordability

In summary, the three options have been assessed on a consistent basis to help provide an accurate picture of affordability of the two options for structural reform compared to business as usual. Given there is no clarity yet on the budget for 2025/26, 2026/27 and beyond, it is not possible to say if all options are feasible and could be progressed within current budget constraints. Even though a commitment has been made to bring forward the necessary legislation to give effect to the changes considered in this Outline Business Case, the consultation on the legislation made clear that implementation would, most likely, be for a future administration to consider as part of its budget process.

While it has not been possible to quantify the potential level of savings that could be released as a result of reform at this time, this work will continue to be modelled as detailed design work towards a new target operating model across all public bodies progresses. In the absence of the modelling of potential savings, Option 1 (BAU) is the lowest cost option to implement. However, given the challenging budgetary context and the need to adapt the system to become more flexible and fleet of foot, it is unlikely that a ‘do nothing’ scenario would be affordable in the long term and therefore demonstrable efficiencies would be required in all scenarios.