Pension Fund Sub-committee: 16 September 2026

Orkney Islands Council Pension Fund

Audit Report to those charged with Governance

Report by Director of Enterprise and Resources.

1. Overview

1.1

This report presents the Audit Report to those charged with governance, together with Orkney Islands Council’s Letter of Representation to KPMG in connection with their audit of the Pension Fund, for scrutiny and approval.

1.2

KPMG, as the Council’s external auditors, have concluded their audit of the Orkney Islands Council Pension Fund’s Annual Report and Accounts for the year ended 31 March 2026.

1.3

KPMG has provided an unqualified certificate on the Pension Fund’s Annual Report and Accounts for the year ended 31 March 2026.

1.4

The draft audit certificate states that the financial statements have been properly prepared in accordance with applicable law, accounting standards and other reporting requirements.

1.5

During the course of the audit, no material weaknesses in the accounting and internal control systems relating to the Pension Fund were identified.

2. Recommendations

2.1

It is recommended that members of the Sub-committee:

1. Scrutinise the Audit Report for the year ended 31 March 2026, prepared by KPMG for members of the Pension Fund Sub-committee and the Controller of Audit, in respect of the Orkney Islands Council Pension Fund, attached as Appendix 1 to this report.

2. Approve Orkney Islands Council’s Letter of Representation to KPMG in connection with their audit of the financial statements of Orkney Islands Council Pension Fund for the year ended 31 March 2026, attached as Appendix 2 to this report.

For Further Information please contact:

Shonagh Merriman, Service Manager (Corporate Finance), extension 2105, Email shonagh.merriman@orkney.gov.uk.

Implications of Report

1. Financial

The audit fee for the audit of the Pension Fund’s annual report and accounts was £28,000 which is £1,400 more than the fee for the 2024/25 audit.

2. Legal

The Local Government Pension Scheme is a funded defined benefit scheme, established under the Superannuation Act 1972, with pensioners receiving index-linked pensions. It is administered by Orkney Islands Council in accordance with The Local Government Pension Scheme (Scotland) Regulations 2018 (as amended) and is contracted out of the State Second Pension. The Pension Fund is subject to a triennial valuation by an independent, qualified Actuary, whose report indicates the required future employer’s contributions.

Local authorities have a duty under section 12 of the Local Government in Scotland Act 2003 to observe proper accounting practices.

The Local Government Pension Scheme Amendment (Scotland) Regulation 2010 (SSI 2010/234) require a pension fund annual report and separate audit.

3. Corporate Governance

In terms of the Scheme of Administration, review of the Annual Audit Report on the Orkney Islands Council Pension Fund to elected members, including the audit certificate, from External Audit, is a delegated function of the Pension Fund Sub-committee.

The report at Appendix 1 is provided by KPMG on the basis that it is only for the information of the Pension Fund Sub-committee of the Pension Fund; that it will not be quoted or referred to, in whole or in part, without their prior written consent; and that they accept no responsibility to any third party in relation to it.

4. Human Resources

N/A

5. Equalities

An Equality Impact Assessment is not required for financial reporting.

6. Island Communities Impact

An Island Communities Impact Assessment is not required for financial reporting.

7. Links to Council Plan

The proposals in this report support and contribute to improved outcomes for communities as outlined in the following Council Plan strategic priorities:

• ☐ Growing our economy.
• ☐ Strengthening our communities.
• ☐ Developing our Infrastructure.
• ☐ Transforming our Council.

8. Links to Local Outcomes Improvement Plan

The proposals in this report support and contribute to improved outcomes for communities as outlined in the following Local Outcomes Improvement Plan priorities:

• ☐ Cost of Living.
• ☐ Sustainable Development.
• ☐ Local Equality.
• ☐ Improving Population Health.

9. Environmental and Climate Risk

N/A.

10. Risk

An annual audit provides reassurance that the Annual Pension Fund accounts have been prepared in accordance with International Financial Reporting Standards, and reduces the risk of material misstatement.

11. Procurement

Any contractual arrangements require to comply with the Financial Regulations and Contract Standing Orders.

12. Health and Safety

N/A.

13. Property and Assets

N/A.

14. Information Technology

N/A.

15. Cost of Living

N/A

List of Background Papers

Orkney Islands Council Pension Fund Annual Audit Plan 2025/2026

Appendices

• Appendix 1 - KPMG Annual Report to Members and the Controller of Audit of the Orkney Islands Council Pension Fund Annual Report and Accounts (ISA 260 Report).
• Appendix 2 – Orkney Islands Council’s Letter of Representation to KPMG in connection with their audit of the financial statements of Orkney Islands Council Pension Fund for the year ended 31 March 2026.

IMAGE: The page displays the Orkney Islands Council crest and the heading “Item: 1”, followed by the title “Pension Fund Sub-committee: 16 September 2026”, “Orkney Islands Council Pension Fund”, “Audit Report to those charged with Governance”, and “Report by Director of Enterprise and Resources”. It contains the Overview and Recommendations sections of the report.

Orkney Islands Council Pension Fund

Audit Report for the year ended 31 March 2026

Prepared on 3 September 2026

For presentation at the Orkney Islands Council Pension Fund Sub-committee Meeting on 16 September 2026

Appendix 1

IMAGE: The cover page identifies the document as the “Orkney Islands Council Pension Fund Audit Report for the year ended 31 March 2026”, prepared on 3 September 2026 for presentation at the Pension Fund Sub-committee meeting on 16 September 2026. It includes KPMG and Orkney Islands Council branding.

Introduction

To the Pension Fund Sub-committee of Orkney Islands Council Pension Fund

We are pleased to have the opportunity to meet with you on 16 September 2026 to discuss the results of our audit of the annual accounts of Orkney Islands Council Pension Fund, as at and for the year ended 31 March 2026.

We are providing this report in advance of our meeting to enable you to consider our findings and hence enhance the quality of our discussions. This report should be read in conjunction with our audit plan and strategy report, presented on 20 May 2026. We will be pleased to elaborate on the matters covered in this report when we meet.

Subject to the Pension Board’s approval, we expect to be in a position to sign our audit opinion on accounts by 30 September 2026, provided that the outstanding matters noted on page 5 of this report are satisfactorily resolved.

There have been no significant changes to our audit plan and strategy except the materiality numbers. Materiality in the audit plan was based on total assets as per the 31 March 2025 audited accounts; however, it was updated using total assets from the draft accounts as at 31 March 2026.

We expect to issue an unmodified Auditor’s Report.

We draw your attention to the important notice on page 4 of this report, which explains:

• The purpose of this report.
• Limitations on work performed.
• Restrictions on distribution of this report.

Yours sincerely,

Julie Radcliffe

Materiality

IMAGE: The KPMG introduction page presents the audit timing and materiality information. It states that there were no significant changes to the audit plan apart from materiality, expects an unmodified Auditor’s Report, and lists materiality of £5.3m at planning and £5.7m finally, performance materiality of £4.5m and £4.8m, and reporting thresholds of £266k and £285k.

How we deliver audit quality

Audit quality is at the core of everything we do at KPMG, and we believe that it is not just about reaching the right opinion, but how we reach that opinion. We consider risks to the quality of our audit in our engagement risk assessment and planning discussions.

We define ‘audit quality’ as being the outcome when:

• Audits are executed consistently, in line with the requirements and intent of applicable professional standards within a strong system of quality management; and
• All our related activities are undertaken in an environment of the utmost level of objectivity, independence, ethics and integrity.

Contents Page

• Introduction 2-3
• Important notice 4
• Our audit findings 5
• Significant risks and Other audit risks 6
• Audit risks and our audit approach 7
• Wider Scope 13
• Appendices 34

IMAGE: The contents page lists Introduction, Important notice, Our audit findings, Significant risks and Other audit risks, Audit risks and our audit approach, Wider Scope, and Appendices, with page references 2–3, 4, 5, 6, 7, 13, and 34.

Important notice

Purpose of this report

This Report has been prepared in connection with our audit of the annual accounts of Orkney Islands Council Pension Fund, prepared in accordance with [International Financial Reporting Standards (‘IFRSs’) as adapted Code of Practice on Local Authority Accounting in the United Kingdom 2025/26, as at and for the year ended 31 March 2026.

Audit Scotland (AS) has issued a document entitled Code of Audit Practice (the Code). This summarises where the responsibilities of auditors begin and end and what is expected from the Board.

External auditors do not act as a substitute for the Board’s own responsibility for putting in place proper arrangements to ensure that public business is conducted in accordance with the law and proper standards, and that public money is safeguarded and properly accounted for, and used economically, efficiently and effectively.

This Report has been prepared for the Pension Fund Sub-committee of Orkney Islands Council Pension Fund, a sub-group of those charged with governance, in order to communicate matters that are significant to the responsibility of those charged with oversight of the financial reporting process as required by ISAs (UK), and other matters coming to our attention during our audit work that we consider might be of interest, and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone (beyond that which we may have as auditors) for this Report, or for the opinions we have formed in respect of this Report.

This report summarises the key issues identified during our audit but does not repeat matters we have previously communicated to you by written communication.

Limitations on work performed

This Report is separate from our audit report and does not provide an additional opinion on the Pension Fund’s annual accounts, nor does it add to or extend or alter our duties and responsibilities as auditors.

We have not designed or performed procedures outside those required of us as auditors for the purpose of identifying or communicating any of the matters covered by this Report.

The matters reported are based on the knowledge gained as a result of being your auditors. We have not verified the accuracy or completeness of any such information other than in connection with and to the extent required for the purposes of our audit.

Status of our audit

Our audit is substantially complete; however, matters communicated in this Report may change pending signature of our audit report. We will provide an oral update on the status. Page 5 ‘Our Audit Findings’ outlines the outstanding matters in relation to the audit. Our conclusions will be discussed with you before our audit report is signed.

Restrictions on distribution

The report is provided on the basis that it is only for the information of the Pension Fund Sub-committee of the Pension Fund; that it will not be quoted or referred to, in whole or in part, without our prior written consent; and that we accept no responsibility to any third party in relation to it.

IMAGE: The page presents the Important notice in three sections: Audit Scotland’s Code of Audit Practice and the Board’s responsibilities; the purpose of KPMG’s report; limitations on the audit work performed; the status of the substantially complete audit; and restrictions on distribution.

Our audit findings

Significant audit risks

Uncorrected Audit Misstatements

Misstatements in respect of Disclosures

Key accounting estimate

Outstanding matters

• Completion of internal review and file documentation.
• Completion of our post balance sheet events review up to the date of sign off.
• Receipt of signed letter of representation and approved and signed financial statements.

Number of Control deficiencies

We note that there are no further current year control observations.

Regulatory breaches

Clearly inconsequential

We noted that employer contributions from The Pickaquoy Centre for July 2026 were received three days after the due date, this is mainly due to staff absence and lack of cover arrangements. As the payment delay was minimal, no reporting obligation arose and there was no impact on scheme members. We consider this breach to be inconsequential in relation to the audit work.

IMAGE: The audit findings page reports no issues relating to management override of controls, no uncorrected audit misstatements, and no disclosure misstatements. It records no significant control deficiencies, one other control deficiency, and two prior-year control deficiencies remediated. It also lists three outstanding matters and describes a three-day delay in receiving Pickaquoy Centre employer contributions as clearly inconsequential.