ANNUAL REPORT AND FINANCIAL STATEMENTS 2012 | 103


35. Financial risk management continued


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 positions 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 and limit any liquidity risk.


• Deposits may only be placed with counterparties approved by the Group Credit and Counterparty Approval Committee, and the Board has set a £25.0m limit for the maximum exposure to any single counterparty. The Committee’s primary focus is to assess the credit position of counterparties prior to placing any 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.


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 24.


The Group has exposure to movements in the market value of the plan assets, which are held across a number of asset classes. 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. Details of the asset and liability risk management framework in respect of the Group’s primary defined benefit pension plan are given on page 85.


Management of capital 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 23. In the ordinary course of business the only movements in the absolute number of shares in issue would be through the issue of shares to satisfy obligations under share-based payment arrangements.


The Directors give careful consideration to the appropriate funding structure for financing all acquisitions, which historically have included both equity and debt-funded transactions. During 2012 some 10.7 million new shares were issued in respect of TRC Commutation arrangements.


Dividends are only declared by the Board after due consideration of a number of key items, including the financial results and the outlook of the financial position of the Company and of the Group. Specifically, as part of the 2011 Strategic Review, the Board has sought to improve dividend cover and to repurchase debt from cash generation. Cognisant of these matters, the Board declared a total dividend of 3.0 pence per share for 2012.


The overall objective of liquidity risk management is to ensure that there is sufficient liquidity over the short and medium-term to meet the needs of the business. This includes liquidity to cover, among other things, capital expenditure, servicing debt and equity capital as well as working capital to fund the Group’s day-to-day operational requirements.


Working capital Working capital is monitored on a daily basis to ensure that settlement terms of all forthcoming liabilities can be met. This activity includes timely collection of debtors and monitoring of cash on deposit, having regard to regulatory capital requirements, as outlined below. The Group’s Finance function includes a Treasury team which manages the cash flow requirements of the Group while seeking to maximise the amount of cash on deposit.


At 31 December 2012 the Group had a £20m revolving credit facility and bank overdraft facilities available to it which provided some protection against any short-term cash-flow deficiencies. The undrawn committed facilities available at the reporting date are shown in note 21, as are details of the Group’s interest-bearing loans and borrowings.


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