Executive Director foreword to the Annual Report for the year ended 31 March 2024
Business model
The business model of the firm remains the same as it has been in previous years.
Pathfinder Legal Services Limited (‘the company’) provides expert legal advice tailored to the public and not-for-profit sectors. The company aims to charge lower legal fees than other private sector options and to recruit high-quality lawyers by providing a rewarding work environment, in terms of quality of work, operational efficiencies, working benefits and remuneration.
Owned by two local authorities, the company aims to provide cost-effectiveness to its clients through increased specialisation, capacity, and economies of scale - enabling high productivity and greater employee skills.
The key challenge
As in previous years, local authority budgets continue to be very strained, with enormous pressure on local authorities and public sector bodies to make significant savings and to work within reduced budgets. In addition, the employment market continues to be hugely challenging, especially within the local government and the legal sectors - there remains a limited pool of talent which drives ever increasing costs. As a result, local authorities are seeking to derive better value for money from their legal advisors - in simple terms better legal services for the same or lower cost. The model developed by the company continues to draw on elements of a commercial “private practice” model in its performance management and business-like culture/processes, but retains key elements of an in-house legal team, such as client ownership and overall, although not operational, control. The ability to call on the company’s services on an “as-needed” basis provides comfort to public sector organisations who may sometimes need additional legal capacity but cannot justify further permanent or locum staff.
Management and governance
The company operates on a hybrid working pattern, with not less than two days in office attendance per week, one of which involves a weekly team meeting, and a successful mixture of in-person and virtual board, client, and management team meetings.
Two of the shareholders of the company, West Northamptonshire Council and North Northamptonshire Council left the company in the year. The exit was dealt with in a managed way with no adverse impact on the finances of the company.
The Executive Director of the business, Debbie Carter-Hughes, left the company at the end of 2023, replaced at the beginning of December 2023 by Andrew Shufflebotham.
Principal risks and uncertainties
Information technology - in October 2023, the company suffered a significant external IT issue which had an immediate and lasting impact on the ability of the fee earners to record their chargeable time properly and adequately. While the initial incident was dealt with quickly, the ongoing adverse effect on time recording, which lasted until a change of system was implemented in February 2024 (see below), caused a loss of income to the company of more than £500,000. A new, cloud based, case management system and finance software package was launched across the business in February 2024 and the company has been advised that this will avoid any repeat of a significant IT outage, as experienced in October 2023.
Employment Challenges - recruiting experienced local government lawyers in all service areas remains a challenge across the market. The ability for individuals to work remotely for other organisations has also limited the number of available applicants, with salaries and career progression being key factors for such candidates. The company, along with all local authority and private sector legal teams, continues to face issues with recruitment and retention of staff.
Revenue and costs: the company produces detailed budgets and cashflow forecasts. Management reviews actual numbers against the budget regularly.
Operational risks: the company maintains and regularly reviews a risk register.
Compliance with regulations and standards: the company reviews compliance with regulations regularly, investigating and taking corrective action as needed. The company is regulated by the Solicitors Regulation Authority and holds the Law Society Lexcel accreditation.
Client and supplier management: the company has procedures in place to manage relationships with key clients and suppliers.
People management: the company has extensive people management procedures, covering recruitment, retention, and development.
Liquidity risk: The company reviews cash balances daily and produces regular cash flow analyses.
Growth
The company continues to deal with large volumes of work and continues to see instructions on cases becoming more complex in nature. Instructions in the social care field in particular have continued to increase during the year. The number of staff the company employs has remained consistent, and the company has continued to invest in its staff in relation to training and development. The company has seen further instructions from new external clients and is looking to expand on that element of the business in the future, to continue to develop its client base further.
Financial results
2023/24 has seen revenue decrease slightly from £11,778,727 to £11,655,078 and a loss after tax of £446,296 compared to the previous year's profit of £205,713.
As stated above, the in-year loss was almost entirely caused by the loss of income resulting from the IT failure in October 2023, referred to above.
As the business remains busy, with no obvious drop off in work and with a settled employee population, the company expects to return to profit in 2024/25.
On behalf of the board
The directors present their annual report and financial statements for the year ended 31 March 2024.
The directors who held office during the year and up to the date of signature of the financial statements were as follows:
The company's principal financial instruments include debt and loans from participating interests, the main purpose of which is to raise finance for the company's operations. The company has various other financial assets and liabilities such as trade receivables and trade payables arising directly from its operations.
The company manages its cash and borrowing requirements in order to maximise interest income and minimise interest expense, whilst ensuring the company has sufficient liquid resources to meet the operating needs of the business.
Investments of cash surpluses, borrowings and derivative instruments are made through banks and companies which must fulfil credit rating criteria approved by the Board.
All customers who wish to trade on credit terms are subject to credit verification procedures. Trade debtors are monitored on an ongoing basis and provision is made for doubtful debts where necessary.
Our overarching objective is to deliver more financial and other benefits to shareholders and clients through exploitation of increased economies of scale and any other mechanism that we find to release benefits for our owners and our clients.
The auditor, Ensors Accountants LLP, is deemed to be reappointed under section 487(2) of the Companies Act 2006.
This report has been prepared in accordance with the provisions applicable to companies entitled to the small companies exemption.
Company law requires the directors 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 law). 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 of the company and of the profit or loss of the company for that period.
In preparing these financial statements, the directors are required to:
select suitable accounting policies and then apply them consistently;
make judgements and accounting estimates that are reasonable and prudent; and
prepare the financial statements on the going concern basis unless it is inappropriate to presume that the company will continue in business.
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 enable them to ensure that the financial statements comply with the Companies Act 2006. 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.
We have audited the financial statements of Pathfinder Legal Services Limited (the 'company') for the year ended 31 March 2024 which comprise the profit and loss account, the statement of comprehensive income, the balance sheet, the statement of changes in equity, the statement of cash flows and notes to the financial statements, including significant accounting policies. The financial reporting framework that has been applied in their preparation is applicable law and United Kingdom Accounting Standards, including Financial Reporting Standard 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland (United Kingdom Generally Accepted Accounting Practice).
Basis for opinion
Conclusions relating to going concern
In auditing the financial statements, we have concluded that the directors' use of the going concern basis of accounting in the preparation of the financial statements is appropriate.
Based on the work we have performed, we have not identified any material uncertainties relating to events or conditions that, individually or collectively, may cast significant doubt on the company's ability to continue as a going concern for a period of at least twelve months from when the financial statements are authorised for issue.
Our responsibilities and the responsibilities of the directors with respect to going concern are described in the relevant sections of this report.
Other information
Opinions on other matters prescribed by the Companies Act 2006
In our opinion, based on the work undertaken in the course of our audit:
the information given in the strategic report and the directors' report for the financial year for which the financial statements are prepared is consistent with the financial statements; and
the strategic report and the directors' report have been prepared in accordance with applicable legal requirements.
The extent to which our procedures are capable of detecting irregularities, including fraud, is detailed below.
Our audit was designed to include tests of detail together with an assessment of the control environment to enable us to obtain reasonable assurance about whether the financial statements are free from material misstatement due to fraud.
In planning and designing our audit procedures we assessed the risks of material misstatement due to fraud. Our assessment concluded that the areas of highest risk are non-compliance with laws and regulations and management override of controls.
We obtained an understanding of the legal and regulatory frameworks that the company operates in through discussions with management, and from our commercial knowledge and experience of the sector in which the company operates. This enabled us to identify the key laws and regulations applicable to the company. We focussed on specific laws and regulations which we considered may have a direct impact on the financial statements including the Companies Act 2006, taxation legislation, data protection, anti-bribery and employment laws.
All team members were informed of the relevant laws and regulations and potential fraud risks at the planning stage and reminded to remain alert to any indications of fraud or non-compliance.
In addressing the risk of fraud through management override of controls we have tested the appropriateness of journal entries and other adjustments, assessing whether the judgements made in making accounting estimates are indicative of potential bias and evaluating the rationale of any significant transactions that appear unusual or outside the normal course of business.
Material misstatements that arise due to fraud can be harder to detect then those that arise from error as they are likely in involve deliberate concealment or collusion.
A further description of our responsibilities is available on the Financial Reporting Council’s website at: https://www.frc.org.uk/auditorsresponsibilities. This description forms part of our auditor's report.
Use of our report
This report is made solely to the company’s members, as a body, in accordance with Chapter 3 of Part 16 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.
The profit and loss account has been prepared on the basis that all operations are continuing operations.
Pathfinder Legal Services Limited is a private company limited by shares incorporated in England and Wales. The registered office is Floor 3, Pathfinder House, St Marys Street, Huntingdon, PE29 3TN. The company registration number is 09067468.
The financial statements are prepared in sterling, which is the functional currency of the company. Monetary amounts in these financial statements are rounded to the nearest £.
The gain or loss arising on the disposal of an asset is determined as the difference between the sale proceeds and the carrying value of the asset, and is credited or charged to profit or loss.
Basic financial assets, which include debtors and cash and bank balances, are initially measured at transaction price including transaction costs and are subsequently carried at amortised cost using the effective interest method unless the arrangement constitutes a financing transaction, where the transaction is measured at the present value of the future receipts discounted at a market rate of interest. Financial assets classified as receivable within one year are not amortised.
Financial liabilities and equity instruments are classified according to the substance of the contractual arrangements entered into. An equity instrument is any contract that evidences a residual interest in the assets of the company after deducting all of its liabilities.
Basic financial liabilities, including creditors, bank loans, loans from participating interests and preference shares that are classified as debt, are initially recognised at transaction price unless the arrangement constitutes a financing transaction, where the debt instrument is measured at the present value of the future payments discounted at a market rate of interest. Financial liabilities classified as payable within one year are not amortised.
Debt instruments are subsequently carried at amortised cost, using the effective interest rate method.
Trade creditors are obligations to pay for goods or services that have been acquired in the ordinary course of business from suppliers. Amounts payable are classified as current liabilities if payment is due within one year or less. If not, they are presented as non-current liabilities. Trade creditors are recognised initially at transaction price and subsequently measured at amortised cost using the effective interest method.
Equity instruments issued by the company are recorded at the proceeds received, net of transaction costs. Dividends payable on equity instruments are recognised as liabilities once they are no longer at the discretion of the company.
In the application of the company’s accounting policies, the directors are required to make judgements, estimates and assumptions about the carrying amount of assets and liabilities that are not readily apparent from other sources. The estimates and associated assumptions are based on historical experience and other factors that are considered to be relevant. Actual results may differ from these estimates.
The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised where the revision affects only that period, or in the period of the revision and future periods where the revision affects both current and future periods.
Bad debt provision
The company makes an estimate of the recoverable value of trade and other debtors. When assessing impairment of trade and other debtors, management considers factors including the current credit rating of the debtor, the aging profile of debtors, whether covered by insurance and historical experience.
Depreciation
The company estimates the rates of depreciation used to write down the different classes of assets the company owns. This is based on prior experience of asset lives while taking into account any additional circumstances. Once fully depreciated over its useful life the asset should be stated at its residual value or £nil if there is no residual value.
Revenue and accrued income
Revenue is recognised at the point of billing or for matters that have not yet been billed, where there is a right to consideration. Where there is a right to consideration, income is accrued at the carrying value of time recorded less deductions for recovery rate and bad debt provision.
Final salary pension scheme indemnity
The company benefits from indemnities against any pension scheme deficits arising from their participation in various local government pension schemes which are of a final salary nature. These indemnities are provided by various local authorities and arise either from the terms of the company’s admission agreement into the pension scheme or from specific indemnities provided by the local authorities to the company. The nature of these arrangements are such that the company is exposed to a credit risk in the event that any particular local authority is unable to honour the indemnity provided. Due to the nature of the guarantors the directors do not consider that this risk is significant.
All of the company's turnover arises within the United Kingdom.
The average monthly number of persons (including directors) employed by the company during the year was:
Their aggregate remuneration comprised:
As total directors' remuneration was less than £200,000 in the current year, no disclosure is provided for that year.
The actual (credit)/charge for the year can be reconciled to the expected (credit)/charge for the year based on the profit or loss and the standard rate of tax as follows:
The company has benefitted from loan facilities with West Northamptonshire Council, North Northamptonshire Council, Cambridgeshire County Council and Central Bedfordshire Council at 3.75% pa.
The total available facility is £1,050,000, the full amount of which has been drawn down.
Since the year end, West Northamptonshire Council and North Northamptonshire Council have served written notice for repayment of their loan facilities which total £475,000, half of which is due within one year.
The following are the major deferred tax liabilities and assets recognised by the company and movements thereon:
The deferred tax asset set out above is expected to reverse within 12 months and relates to short term timing differences and fixed asset timing differences.
The holders of ordinary shares are entitled to receive dividends as declared from time to time and are entitled to one vote per share at meetings of the Company.
Represents the nominal value of the redeemed shares in the current and prior years.
At the reporting end date the company had outstanding commitments for future minimum lease payments under non-cancellable operating leases, which fall due as follows:
The remuneration of key management personnel is as follows.
The related parties involved include the councils who jointly operate Pathfinder Legal Services Limited; Cambridgeshire County Council, North Northamptonshire Council, West Northamptonshire Council and Central Bedfordshire Council.
North Northamptonshire Council and West Northamptonshire Council have exited as shareholders during the year. Only transactions up to the exit date have been disclosed as related party transactions.
The transactions were as follows:
During the year, the total sales amounted to £11,264,062 (2023: £11,321,540) At the year end, the total debtors amounted to £979,493 (2023: £749,312).
During the year, the total purchases amounted to £995,147 (2023: £606,466) which included rent of £189,839 (2023: £205,259). At the year end, total creditors amounted to £617,933 (2023: £371,680).
During the year, the company incurred recharges from its shareholders totalling £173,062 (2023: £261,872). The recharges from the individual shareholders amounted to £136,097 from Cambridgeshire County Council and £36,965 from West Northamptonshire Council.
The Company has unsecured loan facilities from its owners: Cambridgeshire County Council provide £325,000 and Central Bedfordshire Council provide £250,000.
Retirement Benefit Schemes
Pathfinder Legal Services Limited staff are entitled to join the Local Government Pension Scheme (LGPS) which is a defined benefit plan.
Former employees of Northamptonshire County Council are members of the Northamptonshire LGPS. Former employees of the Central Bedfordshire Council are members of the Bedfordshire LGPS. Former employees of Cambridgeshire County Council are members of the Cambridgeshire County Council LGPS. All new employees of the firm are joined to the pension pot connected to their base office.
Any Net Pension Liability is guaranteed by the respective Local Authorities and not the company.
Details of the funds and their treatments in these financial statements are as follows:
Cambridgeshire Pension Fund
The major assumptions used by the actuary to calculate scheme liabilities under FRS 102 Section 28 “Employee Benefits” are best estimates chosen from a range of possible actuarial assumptions which, due to the timescales covered, may not necessarily be borne out in practice. The key assumptions (expressed as weighted averages) at the year end were as follows:
| 2024 | 2023
|
Discount rate | 4.85% | 4.75% |
Salary increase rate | 3.25% | 3.45% |
Pension increase rate | 2.75% | 2.95% |
The last full actuarial valuation was performed on 31 March 2024.
In valuing the liabilities of the pension fund at 31 March 2024, mortality assumptions have been made as indicated below.
The assumptions relating to longevity underlying the pension liabilities at the balance sheet date are based on standard actuarial mortality tables and include an allowance for future improvements in longevity. The assumptions are equivalent to expecting a 65 year old to live for a number of years as follows:
Current pensioner aged 65: 21.6 years (male), 25.3 years (female)
Future retiree upon reaching 65: 22.1 years (male), 25.8 years (female)
Amounts recognised in the profit and loss account | 2024 £’000 | 2023 £’000
|
Current service cost | (524) | (1,044) |
Net interest on defined benefit liability | (373) | (393) |
Net interest on local authority guarantee | 373 | 393 |
| (524) | (1,044) |
Amounts taken to other comprehensive income | 2024 £’000 | 2023 £’000
|
Return on scheme assets excluding interest income | 628 | (534) |
Actuarial changes related to pension scheme | 688 | 6,058 |
Actuarial changes related to local authority guarantee | (1,316) | (5,524) |
Actuarial loss / (gain) | - | - |
The amounts included in the balance sheet arising from the company’s obligations in respect of this defined benefit pension plan are as follows:
| 2024 £’000 | 2023 £’000
|
Present value of defined benefit obligations | (8,094) | (7,562) |
Fair value of plan assets | 11,073 | 9,314 |
Restriction on scheme assets | (2,979) | (1,752) |
Fair value of local authority guarantee | - | - |
| - | - |
The fair value of the pension assets at 31 March 2024 is in excess of the present value of the defined benefit scheme obligations at that date. This gives rise to a surplus of £2,979,000. The surplus is recognised in the financial statements only the extent that the company can recover that surplus, either through a reduction in future contributions or a refund to the company.
Movement in the present value of defined benefit obligations
| 2024 £’000 | 2023 £’000
|
Liability at 1 April | (7,562) | (13,751) |
Current service cost | (524) | (1,044) |
Interest expense | (373) | (393) |
Changes in financial assumptions | 444 | 7,725 |
Contributions by member | (187) | (157) |
Benefits paid | 108 | 58 |
Liability at 31 March | (8,094) | (7,562) |
The defined benefit obligations arise from plans which are wholly or partly funded.
Movement in the fair value of plan assets | 2024 £’000 | 2023 £’000
|
Fair value of assets at 1 April | 9,314 | 9,926 |
Interest income | 458 | 281 |
Return on plan assets (excluding amounts included in net interest) | 628 | (1,482) |
Contributions by employer | 594 | 490 |
Contributions by members | 187 | 157 |
Benefits paid | (108) | (58) |
At 31 March | 11,073 | 9,314 |
Northamptonshire Pension Fund
The major assumptions used by the actuary to calculate scheme liabilities under FRS 102 Section 28 “Employee Benefits” are best estimates chosen from a range of possible actuarial assumptions which, due to the timescales covered, may not necessarily be borne out in practice. The key assumptions (expressed as weighted averages) at the year end were as follows:
| 2024 | 2023
|
Discount rate | 5.10% | 4.75% |
Salary increase rate | 3.40% | 3.45% |
Pension increase rate | 2.90% | 2.95% |
The last full actuarial valuation was performed on 31 March 2024.
In valuing the liabilities of the pension fund at 31 March 2024, mortality assumptions have been made as indicated below.
The assumptions relating to longevity underlying the pension liabilities at the balance sheet date are based on standard actuarial mortality tables and include an allowance for future improvements in longevity. The assumptions are equivalent to expecting a 65 year old to live for a number of years as follows:
Current pensioner aged 65: 21.3 years (male), 25.0 years (female)
Future retiree upon reaching 65: 22.4 years (male), 25.8 years (female)
Amounts recognised in the profit and loss account | 2024 £’000 | 2023 £’000
|
Current service cost | (84) | (797) |
Net interest on defined benefit liability | (51) | (211) |
Net interest on local authority guarantee | 51 | 211 |
| (84) | (797) |
Amounts taken to other comprehensive income | 2024 £’000 | 2023 £’000
|
Return on scheme assets excluding interest income | 17 | (471) |
Actuarial changes related to pension scheme | 485 | 3,847 |
Actuarial changes related to local authority guarantee | (502) | (3,376) |
Actuarial loss / (gain) | - | - |
The amounts included in the balance sheet arising from the company’s obligations in respect of this defined benefit pension plan are as follows:
| 2024 £’000 | 2023 £’000
|
Present value of defined benefit obligations | - | (4,338) |
Fair value of plan assets | - | 6,377 |
Restriction on scheme assets | - | (2,039) |
|
|
|
| - | - |
Movement in the present value of defined benefit obligations
| 2024 £’000 | 2023 £’000
|
Liability at 1 April | (4,338) | (7,211) |
Current service cost | (84) | (797) |
Interest expense | (51) | (211) |
Changes in financial assumptions | 485 | 3,995 |
Contributions by member | (31) | (123) |
Benefits paid | 2 | 9 |
Liability extinguished after leaving scheme | 4,017 | - |
Liability at 31 March | - | (4,338) |
The defined benefit obligations arise from plans which are wholly or partly funded.
Movement in the fair value of plan assets | 2024 £’000 | 2023 £’000
|
Fair value of assets at 1 April | 6,377 | 6,195 |
Interest income | 74 | 178 |
Return on plan assets (excluding amounts included in net interest) | 17 | (534) |
Contributions by employer | 100 | 424 |
Contributions by members | 31 | 123 |
Benefits paid | (2) | (9) |
Asset extinguished after leaving scheme | (6,597) |
|
Asset at 31 March | - | 6,377 |
Central Bedfordshire Pension Fund
The major assumptions used by the actuary to calculate scheme liabilities under FRS 102 Section 28 “Employee Benefits” are best estimates chosen from a range of possible actuarial assumptions which, due to the timescales covered, may not necessarily be borne out in practice. The key assumptions (expressed as weighted averages) at the year end were as follows:
| 2024 | 2023
|
Discount rate | 4.95% | 4.80% |
Salary increase rate | 3.85% | 3.90% |
Pension increase rate | 2.85% | 2.90% |
The last full actuarial valuation was performed on 31 March 2024.
In valuing the liabilities of the pension fund at 31 March 2024, mortality assumptions have been made as indicated below.
The assumptions relating to longevity underlying the pension liabilities at the balance sheet date are based on standard actuarial mortality tables and include an allowance for future improvements in longevity. The assumptions are equivalent to expecting a 65 year old to live for a number of years as follows:
Current pensioner aged 65: 21.1 years (male), 23.9 years (female)
Future retiree upon reaching 65: 22.2 years (male), 25.5 years (female)
Amounts recognised in the profit and loss account | 2024 £’000 | 2023 £’000
|
Current service cost | (269) | (747) |
Net interest on defined benefit liability | (29) | (179) |
Net interest on local authority guarantee | 29 | 179 |
| (269) | (747) |
Amounts taken to other comprehensive income | 2024 £’000 | 2023 £’000
|
Return on scheme assets excluding interest income | 476 | (158) |
Actuarial changes related to pension scheme | 221 | 4,147 |
Actuarial changes related to local authority guarantee | (697) | (3,989) |
Actuarial loss / (gain) | - | - |
The amounts included in the balance sheet arising from the company’s obligations in respect of this defined benefit pension plan are as follows:
| 2024 £’000 | 2023 £’000
|
Present value of defined benefit obligations | (4,699) | (4,445) |
Fair value of plan assets | 5,930 | 4,899 |
Restriction on scheme assets | (1,231) | (454) |
Fair value of local authority guarantee | - | - |
| - | - |
The fair value of the pension assets at 31 March 2024 is in excess of the present value of the defined benefit scheme obligations at that date. This gives rise to a surplus of £1,231,000. The surplus is recognised in the financial statements only the extent that the company can recover that surplus, either through a reduction in future contributions or a refund to the company.
Movement in the present value of defined benefit obligations
| 2024 £’000 | 2023 £’000
|
Liability at 1 April | (4,445) | (6,781) |
Current service cost | (269) | (747) |
Interest expense | (214) | (179) |
Changes in financial assumptions | 252 | 3,490 |
Contributions by member | (123) | (114) |
Benefits paid | 100 | (114) |
Liability at 31 March | (4,699) | (4,445) |
The defined benefit obligations arise from plans which are wholly or partly funded.
Movement in the fair value of plan assets | 2024 £’000 | 2023 £’000
|
Fair value of assets at 1 April | 4,899 | 4,174 |
Interest income | 243 | 116 |
Return on plan assets (excluding amounts included in net interest) | 476 | 60 |
Administration expenses | (6) | (3) |
Contributions by employer | 295 | 324 |
Contributions by members | 123 | 114 |
Benefits paid | (100) | 114 |
At 31 March | 5,930 | 4,899 |