106 | FINANCIAL STATEMENTS | Notes to the Consolidated Financial Statements
36. Financial risk management continued
OEIC and unit trust debtors ‘OEIC and unit trust debtors’ include trustee debtors and debtors due from investors in respect of the purchase of units. Typically, the Group recognises ‘OEIC and unit trust creditors’ of a similar magnitude at any point in time. In operating and managing OEICs, the Group seeks to match the purchase and sale of investments to align to the receipt or payment of funds from or to investors. However, if these obligations are not matched then there is a requirement for the Group to fund any shortfall from its corporate cash resources. The risk relating to unsettled transactions is considered small due to the short settlement period involved. In the event that investors default on sums due, then the Group is entitled to reimbursement of costs from the investor.
Cash and cash equivalents F&C adopts a low risk approach to treasury management and seeks to ensure that its capital is preserved and financial risks are managed appropriately.
The Group treasury operations are managed by the Finance function within parameters defined by the Board. The regulatory capital and treasury position of the Group are reported to the Board on a regular basis.
The Group’s cash and cash equivalent assets are exposed to a number of financial risks in the normal course of its business. The policy adopted is designed to manage risk and recognises that treasury management operations are specifically not treated as a profit centre. The key aspects of this policy and its implementation are detailed below:
• Funds on deposit will only be placed on a short-term basis (maximum term 90 days) to help maximise regulatory capital.
• Deposits may only be placed with counterparties approved by the F&C Credit Committee, and the Board has set a £25.0m limit for the maximum exposure to any single counterparty. The F&C Credit Committee’s primary focus is to assess the credit position of counterparties prior to placing any client assets with them and to monitor credit risk thereafter.
• Exposure to cash and cash equivalent balances held in foreign currency is managed to reduce the risk of movements in exchange rates, where possible, by the repatriation of surplus foreign currency into Sterling. This is achieved in practice via the regular settlement of the Group’s transfer pricing arrangements and through the payment of dividends from foreign subsidiaries, having regard to any restrictions in respect of their respective legal, regulatory and working capital requirements.
• Cash and deposit balances can be exposed to interest rate movements. The Group utilises the experience and skills of its professional dealing team to obtain the best interest rates, ensuring the expected maturity dates of deposits are aligned to the Group’s working capital requirements.
Any exception to the treasury policy requires the prior approval of the Board. Recognising the potential consequences of the recent global and European financial crises, management sought to operate throughout 2010 and 2011 with a maximum corporate exposure to any one financial institution of £15.0m. Prior approval was given for a limited number of exceptions.
Reinsurance assets The Group’s unit-linked pooled pension subsidiary is an insurance company and has some exposure to insurance contract liabilities, as outlined in note 30. These liabilities are fully reinsured as the Group seeks to have no net insurance exposure. The reinsurance assets represent the expected amounts recoverable to meet insurance liabilities as they fall due. The Group has exposure to both credit and liquidity risk on these assets.
Defined benefit pension deficit The Group’s defined benefit pension deficit represents the discounted value of future pension obligations in excess of plan assets, details of which are given in note 25.
The Group has exposure to movements in the market value of the plan assets, which include equities and LDI fixed interest pools. Approximately 25% of the assets held in respect of the UK scheme are held in LDI pools, with maturity profiles which match the expected maturity profile of pension obligations. The market values of the LDI pools are impacted by movements in interest rates.
The value of defined benefit pension obligations is quantified and discounted using corporate bond rates. Movements in these rates can have a significant impact on the pension liabilities and hence the quantum of the Group’s pension deficit.
Management of capital While F&C considers its capital to be its total equity, this is effectively managed via the net assets to which it relates. The Company’s Ordinary Shares are listed on the London Stock Exchange. The Board monitors significant movements in the composition of its shareholder base. Details of substantial interests in share capital are shown in the Report of the Directors on page 25. In the ordinary course of business the only movements in the absolute number of shares in issue would be through the issue of new or own shares to satisfy obligations under share- based payment arrangements or through the purchase of own shares to satisfy future share scheme obligations.
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