Feature / Treasures of the pyramid

A new approach to treasury management in one foundation trust borrows from the old to provide modern accountability and valuable financial rewards. Robert Forster reports

The pyramids are the last remaining wonder of the ancient world. They have remained standing for more than 4,000 years and were designed as the ultimate safe haven to store pharoahs’ riches and to facilitate safe passage to the promised land.

Wrightington, Wigan and Leigh (WWL) is a long way from the banks of the Nile (3,600km to Cairo to be precise). But in 2009/10 a new approach to treasury management was established that borrows from the principles behind the pyramids’ strength and, we believe, will stand the test of time.

Consequently a model was developed to consider a treasury management investment policy while assessing the key balance of risk and return.

Like many trusts, for years WWL relied on the Office of the Paymaster General (OPG) – now the Government Banking Service (GBS) – as a safe haven for cash balances. It managed an investment policy to match. No risk. The funds were safe and in times of what now seem fantastic interest base rates of 5%, good returns were being earned with little effort.

But all return is relative. In October 2008, the banking crisis hit and interest rates began to plummet as global meltdown was anticipated. Returns from

OPG vanished suddenly. It also emerged that some public bodies were investing in failing organisations such as Icelandic banks, even after the crisis had begun, raising questions over the approach to risk and the application of risk policies.

WWL wanted to review its own treasury management policy and approach – the balance of risk and reward was key. The process proved hugely valuable (financially and otherwise) and resulted in the development of the WWL ‘pyramid of success’ model (left) for treasury management, based on three layers: foundation, implementation and reward.

Foundation

The foundation layer contains three components: framework, governance and assurance.

Framework The starting point is to understand the regulatory environment. Setting the compliance framework legitimises whatever solution an organisation develops and delivers; it must be consistent with the terms of authorisation and proceed in light of regulatory guidance.

Practical actions

• Review trust’s terms of authorisation
• Review safe harbour principles (see table above for types of allowable investment to generate return on surplus cash within acceptable risk profile).

Governance Embedding policy from the outset is the key to success. Foundation trusts use public money, so they are responsible for operating in a fully auditable fashion, only investing in ways sanctioned by the board. The sign-off of investments and of the policy and approach overall, and appropriate breadth of authorisation are essential. The WWL approach sets as a prerequisite that each investment is signed off at a senior level and responsibility is shared. A review of performance, activity and repository is provided to the board on a monthly basis ensuring there is full visibility at the highest level, including executives and non-executives.

Practical actions

• Specify authorisation levels for cash investments and counterparty set-ups
• Ensure full reporting disclosure of all investment repositories
• Provide full disclosure of investment performance of each investment.

Assurance The assurance over safety of cash, relates to rules and parameters set around the treasury management policy. Risk is a sliding scale and the acceptable risk for a trust is determined by the board.  The rules applied effectively translate the ‘allowable risk’ into the practical management of cash – establishing the safety net. WWL has set up key parameters to ensure only suitable organisations are used. WWL has a minimum short-term credit rating requirement of A-1 and long-term requirement of A+ (Standard and Poor’s).

The process also dictates that wider economic intelligence is factored in, so Reuters and BBC sources are checked for news relating to proposed or existing investments. There is also a de-minimis split in investment monies, with funds invested only in periods deemed suitable to offset the balance of time of deposit, access to funds and changes in the market.

Practical actions

• Establish the type of institutions allowable as partners
• Determine the method of assessment – which credit agencies to use
• Determine length of deposit
• Establish parameters of investment (value limits, time limits and concentration limits).

Implementation

There are two components within the implementation layer: policy and procedure.

Policy Any policy benefits from the three Cs – completeness, conciseness and clarity. This is particularly true in a technical area such as cash management where there has to be no ambiguity as to what is and is not allowed.

WWL redesigned its policy to cover all areas of governance, parameters, process and sign-off.  The key is keeping the regulations live and up to date. Since inception, the policy has had a mandatory annual review update. But there is an option for more frequent reviews should new developments and opportunities arise. Policy updates are approved by the finance committee.

Practical actions

• Develop a complete, concise and clear treasury management policy
• Ensure appropriate corporate review, understanding and acceptance of the policy.
• Regularly review and update policy.

Procedure It is important to establish the procedures to implement the treasury management policy, a side benefit being the development for staff in acquiring the finance skills needed to deliver the process.

The process established at WWL ensures a detailed daily review of cash flow, research on market performance and economic agency news, as well as contact with banks and brokers for the latest rates or authorised transactions as appropriate.

In terms of resource the WWL approach has proved efficient. The process involves:

• Cash flow analysis (daily forecast)
• Account review – to understand accounts where scope exists for placement
• New product analysis (broker discussions)
• Business intelligence update (Reuters, BBC, Bank of England websites)
• Credit rating review (when placing)
• Authorisation sign-off (when placing)
• Contact with bank to establish and complete deal (when placing).

The entire daily process takes 15 to 30 minutes of delegated financial controller time, depending on whether cash is being placed that day or not. Other ad hoc actions, such as establishing a counterparty or liaison with external parties, are also performed within existing resource requirements.

In short the process has required no additional resource and has built on the core requirements of the finance team. The process has developed skills and a granularity of approach that will be useful away from the treasury management regime. 

Cash forms the lifeblood of any organisation and the treasury management model requires detailed knowledge of the cash available, headroom and churn. This allows the organisation to invest with confidence, but it also demands a thorough understanding of the business. The procedure also helps cement the finance team as business advisers to the organisation, not just book-keepers.

Practical actions

• Embed a clear daily process with clear nominated duties
• Understand cash flow on a daily basis
• Understand the business
• Establish headroom requirements
• Develop staff, promoting treasury skills and knowledge of the wider economic climate.

Reward

The benefits of establishing a robust treasury management model go beyond financial rewards, giving improved accountability and promoting a greater understanding of the business. Perhaps the key benefit is providing clear evidence to reassure the board that the stewardship of the organisation’s cash is in good hands.

There have been tangible financial rewards as well. The model was allowed to mature over six months before the theory was put into practice and investment began in July 2009. Bank base rates had dropped to 0.5% by this time, where they have remained. But using the policy did reap rewards. This is best shown graphically (see graphs).

In summary by identifying the best rates in the marketplace with suitable establishments, since the policy’s launch in July last year, WWL has been able to consistently earn returns in excess of 250% of OPG rates (or 1.5 times more than OPG rates). OPG rates have been 0.25% below bank base rate. This generated an additional £15,000 a month for WWL.

The future is never certain. But WWL’s treasury management model is helping it develop the skills and take a flexible approach to predicting and reacting to whatever the marketplace brings.

WWL is planning to make its approach commercially available to other NHS finance directors and treasury managers through an interactive treasury management e-software package. It will include a generic treasury management policy and incorporate embedded parameters for control. It will provide links to cash flow for management and investment decisions. It will enable users to track and assess performance versus comparators and link to market intelligence.

WWL believes that using this tool, any finance department should be able to set up from inception a coherent treasury management policy within a month, and earn the rewards of the process immediately, subject to governance sign-off.

Investment possibilities

Allowable

Investments include, but are not limited to:

• Money market deposits
• Money market funds
• Government and local authority bonds and debt obligations
• Certificates of deposit
• Sterling commercial paper
• Risk profile based on short- and long-term ratings from Standard and Poor’s, Moody’s Investors Service and Fitch Ratings

Excluded

• Bonds
• Equities, commodities and other products based on them
• Derivative products such as futures or swaps
• Investments linked to other trade instruments
• Index-linked investments
• Private equity or venture capital investments
• Leveraged investments
• • Hedge funds and foreign currency-linked investments