ANNUAL REPORT AND FINANCIAL STATEMENTS 2011 | 105


36. Financial risk management continued


Unit-linked assets and liabilities A significant element of the value of the Group’s financial assets relates to the Group’s unit-linked pooled pension entity, F&C Managed Pension Funds Limited (F&C MPF). As outlined in note 18(a)(i)(1), Financial Instruments, the risks and rewards associated with these assets, which are held by F&C MPF, fall to be borne by, or to the benefit of, the underlying policyholders. As a result, the investment contract liabilities included in the Statement of Financial Position are equal and opposite in value to the assets which are held on behalf of unit-linked policyholders. The Group has no direct exposure to fluctuations in the value of the assets arising from changes in market prices or credit default, although the revenue stream earned from managing these assets varies in line with the movement in assets held on behalf of clients.


The financial risk management disclosures specifically exclude policyholders’ unit-linked assets and liabilities relating to F&C MPF as there is no direct exposure to the Group from the associated financial instruments.


Financial investments Recognising that the Group’s revenue stream has significant financial exposure to fluctuations in assets managed on behalf of clients, a key principle of the Group Treasury Policy set by the Board is to restrict investment of the Group’s assets to low risk deposits or money market instruments where the risk of capital loss is low, thereby seeking to protect the Group’s capital. Advance Board approval is required for any investment or financial instrument which does not follow this general principle.


The Board recognises that the Group has significant exposure to Euro-denominated cash flows, but at this point in time has not chosen not to enter into any medium-term forward exchange contracts. During 2010 the Group recognised £0.9m of a realised gain in respect of a historic medium-term forward currency contract. This gain represented the partial reversal of a £1.3m unrealised loss recognised in prior periods. As at 31 December 2011 and 31 December 2010, the Group held short-term contracts, to a gross value of less than £1.0m, which were specifically matched to foreign currency assets at year end.


Financial investments classified as available for sale, as detailed in note 14, primarily reflect the value of the Group’s private equity investments. These represent carried interest entitlement which arises from the Group’s historical ownership of private equity businesses. The Board does not seek to manage any of the financial risks associated with these investments and recognises that uncertainty exists as to the quantum and timing of future distributions which may arise from these investments.


Other financial investments, classified as fair value through profit or loss, as detailed in note 18(a)(i)(2), primarily comprise assets held in connection with current or historic employee remuneration arrangements. The Group has no net financial exposure to Purchased Equity Plan, Bonus investments and TRC Employee Benefits assets as the risks and rewards of all movements in the value of these financial assets fall to the beneficiary and are offset by equal and opposite movements in the Group’s associated employee benefit liabilities, which accrue over the vesting period. The ‘NIC hedge’ economically hedges the Group’s exposure to movements in future national insurance contributions obligations in respect of legacy employee share plans.


Stock of units and shares The Group operates and manages a number of OEICs whose funds, into which retail and institutional investors can invest, have a wide range of investment objectives. The Group holds a stock of units and shares in these OEIC funds in order to facilitate the creation and redemption of units by investors. The Group’s risk management policy limits the aggregate value of the units held by the Group to £1.25m, thereby capping the maximum financial risk exposure associated with these assets.


Trade debtors and accrued income Trade debtors and accrued income represent amounts recognised within net revenue in the Income Statement, but which have not been settled in cash. The nature of F&C’s business is such that asset management fees accrue based on daily, month-end or quarter-end asset values which, once known, are billed to clients and are due to be settled in line with individual contractual terms. As a result, the aggregate value of debtors and accrued income can represent up to four months of revenue at any point in time. In addition, as a significant portion of the performance fees which can be earned by the Group accrue in respect of the calendar year and can only be billed subsequently, the quantum of accrued income recognised in the Statement of Financial Position at the reporting date is generally higher than at other points during the year and is sensitive to the magnitude of performance fees earned.


Before the Group takes on new clients, it undertakes the required “Know Your Client” procedures. As the Group manages assets on behalf of clients and management fees are typically charged to and paid from the underlying funds managed by the Group, there is a relatively low risk of default on management fees. The Group does not hold any credit insurance. Due to the scale of some of F&C’s larger clients, the Group is exposed to a concentration of credit risk from large clients or groups of connected clients, arising from timing difference between the recognition of income and the receipt of management fees outlined above. Very few clients have an external credit rating.


Where management fees are denominated in a currency other than Sterling, the Group is exposed to currency risk. As noted earlier, the Group no longer hedges any significant element of its exposure to monetary assets denominated in foreign currency.


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