Explaining the GDC's financial reserves
As the regulator of the whole dental team, our primary role is to maintain patient safety and public confidence. We have a legal obligation to assure standards of dental education, set professional standards, maintain the register of dental professionals and investigate concerns.
We must be financially viable to ensure we can fulfil these statutory duties. This means that we need to have enough money on hand not just to support our regular activities but also to cover unexpected financial pressures, either to meet unplanned expenditure, or to cover unexpected shortfalls in income.
To do this, we have a policy for how we use financial reserves. We want to explain what this means, how we use it and help stakeholders to understand the impact it has on them.
This is a long read, with sections covering our approach to general reserves, free reserves, financial risks, how we report reserves, our reserves target, how we monitor and manage the level of reserves, how other organisations might use reserves and, finally, why being financially resilient is essential for patient safety, especially when there is economic uncertainty.
General reserves represent what we know and do not know about future costs
In our annual report and accounts we report on different types of reserves: pension and general reserves.
In line with other organisations, we have a legal obligation to meet our pension liabilities and The Pensions Regulator ensures that we meet this. To do so, we must ringfence our pension reserves in line with our accounting policy and international accounting standards that we need to comply with.
General reserves are made up of fixed and free reserves and represent funds we need to cover any planned expenditure as well as unplanned expenditure which we include as costed risks.
Fixed reserves are held to cover any planned expenditure and financial commitments – they are ‘known knowns’. This includes prepaid expenditure, money owed to creditors and the annual costs of the use of assets such as office equipment or IT that we purchased in previous years, through depreciation charges.
Free reserves are held to ensure we can deal with financial shock and uncertainty and continue to meet our statutory obligations. The level of free reserves is set by Council as the period of time for which we can continue to operate in the event of financial shock, after we’ve taken financial risks and opportunities into account.
Free reserves are time and financial risk expressed as money
Although free reserves are reported as a financial figure in our accounts, they represent the funds needed to run the organisation for a period of time and remain a going concern if income were to reduce or expenditure increase, adjusted for the financial risk of unexpected events.
When uncertainty is high, the likelihood of us needing to draw down from the free reserves increases. If we do this, it reduces the amount of time we can operate for if our income unexpectedly stops or reduces. Uncertainty can be caused by different factors, such as volatile economic conditions, potential changes to our responsibilities due to legislative changes or changes to things that affect our income such as the number of dental professionals on our registers.
Financial risks are accounted for in the budget and the reserves
When we are setting our expenditure plans for the next three years ahead, our budget planning cycle runs for several months, with repeated rounds of scrutiny and consideration of income and costs, with the risks of each being carefully considered and challenged. Risks are therefore built into the budget planning.
Alongside the budget planning discussions and with equal rigour and attention, we identify other risks in terms of the events that might happen and the maximum financial exposure we would face if they did.
Examples of risks that would expose us to financial pressures include changes to the number of professionals joining the register, inflationary pressure, economic uncertainty and changes to legislation.
For each risk, we forecast the impact and likelihood, use insight and relevant sources of information to test our assumptions and scrutinise and adjust the cost of each risk as more information becomes available or the situation changes. The outcome is our forecast of the cost, should each risk materialise. This is particularly challenging when there is economic volatility and uncertainty.
We also identify financial opportunities, where an event would result in less cost than we had planned for. An example of a financial opportunity might be a legislative change that means we can gain more income or reduce our workforce. Similar to the approach with risk, we assess the impact and likelihood of each event to calculate the value of each opportunity.
To calculate the overall costed risk provision, we take the value of the opportunity risks away from the value of the financial risks.
Throughout the planning cycle, at regular intervals, we bring together the budget planning and the costed risk provision for scrutiny by committees and Council. At the point when we do this and when we finalise the budget at the end of the planning cycle, we forecast the general reserves we expect to have at the end of the planning period, i.e. 31 December in three years’ time.
We then reduce these by the fixed reserves we need for that period and we express the remainder as the sum which covers the period of time for which we could continue to operate.
At this point, we adjust these free reserves by financial risk (the costed risk provision) and express these adjusted free reserves as the number of months of operating expenditure. The budget is adjusted to meet Council’s target of free reserves.
We report reserves in our accounts at a time when our income is high
Our operating income is mostly raised from fees paid by dental professionals. We report our financial year end at the end of the calendar year, when the annual renewal of dentists on our register has closed on 31 December, and our income is at a peak.
Apart from quarterly ARF payments by instalments, our income then mostly ceases until August when dental care professionals renew their registration. But between January and August and again between September and December, we spend money on operating costs to run the organisation and we continue to reserve money for financial risks.
It's useful to understand how reserves are expressed in our accounts.
First, the figure shown in the accounts is the forecasted amount of free reserves that we expect to have at the end of the planning period, so at 31 December in three years’ time. The figure is not the amount of free reserves available on 31 December of the year that the accounts relate to.
Second, the term ‘free reserves’ can be misleading as the funds are not free to be used. They are set aside to meet the costed financial risks and opportunities that we identified as being likely to occur over the next three years.
Third, it's essential that we have sufficient reserves when our cash balances are at their lowest. This is because, in order to be a going concern, we still need the free reserves available to fall on if our income were to then suddenly reduce or cease.
Our target for financial reserves ensures that we remain a going concern
Council set a target for financial reserves in our reserves policy, as the period of time that we’d be able to operate for to cover our operational costs plus any unexpected financial events, adjusted for costed financial risk. The GDC’s policy is to have not less than three and no more than six months of operating spend in reserves, and the target for reserves is set at four and a half months of operating expenditure.
Some organisations face risks and uncertainties as part of their operations and will use reserves to keep a part of their income to cover unknown losses or future liabilities to ensure they are able to continue to operate in the future. This is often referred to as remaining a ‘going concern’.
Our external auditors need to satisfy themselves that, in an accounting sense, we are a going concern and the level of our free reserves contributes to this. Separately, the National Audit Office (NAO) and Parliament need to be assured that the GDC can continue to deliver its statutory duties, and financial resilience contributes to this.
Organisations set their own reserves policy based on what’s appropriate for their circumstances. Some organisations have found that setting their reserves too low puts them at risk of being unable to keep operating if unexpected financial events occur or having to manage a disorderly winding-down period. Alternatively, if an organisation is seen to have a substantial amount of reserves, it can attract criticism that they are holding onto money that could be used elsewhere.
For the GDC, setting the reserves too low increases the likelihood that, if an unexpected financial event occurs, the ARF has to be increased over a short time period, which increases uncertainty for registrants. If the GDC’s reserves are too high, they rightfully attract challenge, which is why we are transparent about our reserves and how we use them.
We monitor and manage the level of reserves
Once the reserves policy has been set, we monitor our current financial position compared with the required level of reserves. We actively monitor the level of reserves so that we know if reserves go up or down unexpectedly and can identify what causes this.
If monitoring shows that reserves during the year are below or above the target, we consider whether this is a short-term situation or a sign of a long-term issue. We always use a 3-year position for our monitoring, as we set our priorities and costed corporate plan on a three-year cycle.
We may need to take action to replenish the reserves if they fall too low. We also take action to return excess reserves to registrants by offsetting them against future ARF levels. We did this in 2020 and again in 2023, when our monitoring showed that we would be above the target for free reserves. Rather than holding onto this sum, we used it to offset against changes to the ARF.
In recent years we’ve introduced a number of changes to improve how we manage reserves. We set the fees policy, one of the aims of which was to support stability and certainty over the annual fee for registrants. We take opportunities to reduce our own costs too, such as challenging business travel, better use of hybrid meetings, and looking to use collective buying power of other public bodies for things such as software licences. When we set the budget, this includes multiple rounds of scrutiny and challenge by the GDC’s Finance and Performance Committee, Executive Team and Council.
The financial situation within and around any organisation changes over time. We review our reserves policy annually to make sure that it still meets our needs.
Different organisations use reserves in different ways
Different types of organisations might hold reserves and manage them through a reserves policy. The reason they hold reserves and how they choose to manage them will depend on their individual circumstances and each organisation has to consider what’s appropriate for them.
Charitable organisations sometimes use reserves to ensure they can continue to function in the event that their income is greatly reduced. The Charity Commission provides guidance for charitable organisations to set and use a reserves policy.
Not for profit organisations might hold reserves to provide a cushion against unexpected events, losses of income, short term cash flow needs and large unbudgeted expenses.
Many healthcare regulators, like the GDC, hold reserves to ensure that regulatory activities can continue if there’s a period with an unexpected reduction in income or increased economic uncertainty. However, each healthcare operator has a unique set of circumstances that will affect their reserves policy, such as charitable status or the receipt of grant funding. Therefore, there is no 'one size that fits all' when it comes to agreeing and using reserves.
We maintain patient safety by being resilient when there is financial uncertainty
We manage our income and expenditure every month and quarter and we’ve become better at doing this in recent years. This means that we can be more certain about the free and fixed reserves we need, to cover our operating costs for a period of time, and access funds if there are unexpected financial events.
In recent years we have had to plan for a range of significant financial risks outside our control, such as Brexit, the pandemic, regulatory reform. In every year, we’ve been able to show our external auditors that we are a going concern because we can access free reserves.