Treasury Management Strategy


Minimum Revenue Provision Policy Statement and Annual Investment Strategy






1.1     Background.. 3

1.2     Reporting requirements. 3

1.3     Treasury Management Strategy for 2020/21.. 5

1.4     Training.. 6

1.5     Treasury management consultants. 6

2       THE CAPITAL PRUDENTIAL INDICATORS 2020/21 – 2022/23. 7

2.1     Capital expenditure.. 7

2.2     The Council’s borrowing need (the Capital Financing Requirement). 7

2.3     Minimum revenue provision (MRP) policy statement. 8

3       BORROWING.. 9

3.1     Current portfolio position.. 9

3.2     Treasury Indicators: limits to borrowing activity. 10

3.3     Prospects for interest rates. 11

3.4     Borrowing strategy. 13

3.5     Policy on borrowing in advance of need.. 14


4.1     Investment policy – management of risk. 16

4.2     Creditworthiness policy. 18

4.3     Country limits. 20

4.4     Investment strategy. 21

4.5     Investment performance / risk benchmarking.. 22

4.6    End of year investment report. 23

4.7     External fund managers. 23

5       APPENDICES. 24

5.1    Prudential and treasury indicators and MRP statement. 25

5.1.1 Capital expenditure.. 25

5.1.2 Affordability prudential indicators. 25

5.1.3 Ratio of financing costs to net revenue stream... 25

5.2    Interest rate forecasts 2019 – 2021.. 26

5.3    Economic background.. 27

5.6   Approved countries for investments. 34

5.7  Treasury management scheme of delegation.. 35

5.8  The treasury management role of the section 151 officer. 36


1.1       Background

The Council is required to operate a balanced budget, which broadly means that cash raised during the year will meet cash expenditure. Part of the treasury management operation is to ensure that this cash flow is adequately planned, with cash being available when it is needed.  Surplus monies are invested in low risk counterparties or instruments commensurate with the Council’s low risk appetite, providing adequate liquidity initially before considering investment return.


The second main function of the treasury management service is the funding of the Council’s capital plans.  These capital plans provide a guide to the borrowing need of the Council, essentially the longer-term cash flow planning, to ensure that the Council can meet its capital spending obligations. This management of longer-term cash may involve arranging long or short-term loans or using longer-term cash flow surpluses. On occasion, when it is prudent and economic, any debt previously drawn may be restructured to meet Council risk or cost objectives.


The contribution the treasury management function makes to the authority is critical, as the balance of debt and investment operations ensure liquidity or the ability to meet spending commitments as they fall due, either on day-to-day revenue or for larger capital projects.  The treasury operations will see a balance of the interest costs of debt and the investment income arising from cash deposits affecting the available budget.  Since cash balances generally result from reserves and balances, it is paramount to ensure adequate security of the sums invested, as a loss of principal will in effect result in a loss to the General Fund Balance.


Whilst any commercial initiatives or loans to third parties will impact on the treasury function, these activities are generally classed as non-treasury activities, (arising usually from capital expenditure) and are separate from the day to day treasury management activities.


CIPFA defines treasury management as:

“The management of the local authority’s borrowing, investments and cash flows, its banking, money market and capital market transactions; the effective control of the risks associated with those activities; and the pursuit of optimum performance consistent with those risks.”


1.2       Reporting requirements

1.2.1 Capital Strategy


The CIPFA 2017 Prudential and Treasury Management Codes require all local authorities to prepare a capital strategy report which will provide the following:

·         a high-level long term overview of how capital expenditure, capital financing and treasury management activity contribute to the provision of services

·         an overview of how the associated risk is managed

·         the implications for future financial sustainability


The aim of this capital strategy is to ensure that all elected members on the full council fully understand the overall long-term policy objectives and resulting capital strategy requirements, governance procedures and risk appetite.


This capital strategy is reported separately from the Treasury Management Strategy Statement; non-treasury investments will be reported through the former. This ensures the separation of the core treasury function under security, liquidity and yield principles, and the policy and commercialism investments usually driven by expenditure on an asset.  The capital strategy will show:

·         The corporate governance arrangements for these types of activities;

·         Any service objectives relating to the investments;

·         The expected income, costs and resulting contribution;

·         The debt related to the activity and the associated interest costs;

·         The payback period (MRP policy);

·         For non-loan type investments, the cost against the current market value;

·         The risks associated with each activity.


Where a physical asset is being bought, details of market research, advisers used, (and their monitoring), ongoing costs and investment requirements and any credit information will be disclosed, including the ability to sell the asset and realise the investment cash.


Where the Council has borrowed to fund any non-treasury investment, there should also be an explanation of why borrowing was required and why the MHCLG Investment Guidance and CIPFA Prudential Code have not been adhered to.


If any non-treasury investment sustains a loss during the final accounts and audit process, the strategy and revenue implications will be reported through the same procedure as the capital strategy.


To demonstrate the proportionality between the treasury operations and the non-treasury operation, high-level comparators are shown throughout this report.


A Revised Capital Strategy which relates to the Council’s priorities was agreed by Council on 25th September 2019.


1.2.2 Treasury Management reporting


The Council is currently required to receive and approve, as a minimum, three main treasury reports each year, which incorporate a variety of policies, estimates and actuals. 


a.   Prudential and treasury indicators and treasury strategy (this report) - The first, and most important report is forward looking and covers:

·       the capital plans, (including prudential indicators);

·       a minimum revenue provision (MRP) policy, (how residual capital expenditure is charged to revenue over time);

·       the treasury management strategy, (how the investments and borrowings are to be organised), including treasury indicators; and

·       an investment strategy, (the parameters on how investments are to be managed).


The following reports are not required to be approved by Council but are to be reported and scrutinised to the relevant Committee.  The Council has delegated this function to the Audit, Governance and Standards Committee.


b.   A mid-year treasury management report – This is primarily a progress report and will update members on the capital position, amending prudential indicators as necessary, and whether any policies require revision.


c.    An annual treasury report – This is a backward looking review document and provides details of a selection of actual prudential and treasury indicators and actual treasury operations compared to the estimates within the strategy.


A quarterly update on the Council’s treasury management position is also provided through budget monitoring reports presented to Policy & Resources Committee.

1.3       Treasury Management Strategy for 2020/21

The strategy for 2020/21 covers two main areas:


Capital issues

·       the capital expenditure plans and the associated prudential indicators;

·       the minimum revenue provision (MRP) policy.


Treasury management issues

·       the current treasury position;

·       treasury indicators which limit the treasury risk and activities of the Council;

·       prospects for interest rates;

·       the borrowing strategy;

·       policy on borrowing in advance of need;

·       debt rescheduling;

·       the investment strategy;

·       creditworthiness policy; and

·       the policy on use of external service providers.


These elements cover the requirements of the Local Government Act 2003, the CIPFA Prudential Code, MHCLG MRP Guidance, the CIPFA Treasury Management Code and  MHCLG Investment Guidance.

1.4       Training

The CIPFA Code requires the responsible officer to ensure that members with responsibility for treasury management receive adequate training in treasury management.  This especially applies to members responsible for scrutiny.  Training has been planned for Members prior to the Audit Governance and Standards Committee meeting on the 13th January 2020.  The Council’s Treasury Advisors, Link Asset Services, will be providing this training with reference to this Strategy.


Staff regularly attend training courses, seminars and conferences provided by the Council’s Treasury Consultants and CIPFA. Relevant staff are also encouraged to study professional qualifications delivered by CIPFA, the Association of Corporate Treasurers and other appropriate organisations.


Staff training needs are assessed regularly both as part of the appraisal process and when the responsibilities of individual members of staff change.

1.5       Treasury management consultants

The Council uses Link Asset Services, Treasury solutions as its external treasury management advisors.


The Council recognises that responsibility for treasury management decisions remains with the organisation at all times and will ensure that undue reliance is not placed upon the services of our external service providers. All decisions will be undertaken with regards to all available information, including, but not solely, our treasury advisers.


It also recognises that there is value in employing external providers of treasury management services in order to acquire access to specialist skills and resources. The Council will ensure that the terms of their appointment and the methods by which their value will be assessed are properly agreed and documented, and subjected to regular review.





The Council’s capital expenditure plans are the key driver of treasury management activity. The output of the capital expenditure plans is reflected in the prudential indicators, which are designed to assist members’ overview and confirm capital expenditure plans.

2.1       Capital expenditure

This prudential indicator is a summary of the Council’s capital expenditure plans, both those agreed previously, and those forming part of this budget cycle.  Members are asked to approve the capital expenditure forecasts:



The table below summarises the above capital expenditure plans and how these plans are being financed by capital or revenue resources. Any shortfall of resources results in a funding borrowing need. 2018/19 Actual was funded through internal borrowing.


2.2       The Council’s borrowing need (the Capital Financing Requirement)

The second prudential indicator is the Council’s Capital Financing Requirement (CFR).  The CFR is simply the total historic outstanding capital expenditure which has not yet been paid for from either revenue or capital resources. It is essentially a measure of the Council’s indebtedness and so its underlying borrowing need.  Any capital expenditure above, which has not immediately been paid for through a revenue or capital resource, will increase the CFR. 

The CFR does not increase indefinitely, as the minimum revenue provision (MRP) is a statutory annual revenue charge which broadly reduces the indebtedness in line with each assets life, and so charges the economic consumption of capital assets as they are used.

The CFR includes any other long-term liabilities (e.g. PFI schemes, finance leases). Whilst these increase the CFR, and therefore the Council’s borrowing requirement, these types of scheme include a borrowing facility by the PFI, PPP lease provider and so the Council is not required to separately borrow for these schemes. The Council currently has £3.5m relating to Serco Pasia within the CFR.

The Council is asked to approve the CFR projections below:

A key aspect of the regulatory and professional guidance is that elected members are aware of the size and scope of any commercial activity in relation to the authority’s overall financial position.  The capital expenditure figures shown in 2.1 and the details above demonstrate the scope of this activity and, by approving these figures, consider the scale proportionate to the Authority’s remaining activity.

2.3       Minimum revenue provision (MRP) policy statement

The Council is required to pay off an element of the accumulated General Fund capital spend each year (the CFR) through a revenue charge (the minimum revenue provision - MRP), although it is also allowed to undertake additional voluntary payments if required (voluntary revenue provision - VRP). 

MHCLG regulations have been issued which require the full Council to approve an MRP Statement in advance of each year. A variety of options are provided to councils, so long as there is a prudent provision.  The Council is recommended to approve the following MRP Statement.

No borrowing was undertaken for capital expenditure incurred before 1 April 2008 or which in the future will be Supported Capital Expenditure.


From 1 April 2008 for all unsupported borrowing (including PFI and

finance leases) the MRP policy will be:


•        Asset life method – MRP will be based on the estimated life of

the assets, in accordance with the regulations (this option must be applied for any expenditure capitalised under a Capitalisation Direction).


These options provide for a reduction in the borrowing need over

approximately the asset’s life.


Repayments included in annual PFI or finance leases are applied as MRP.


The capital expenditure plans set out in Section 2 provide details of the service activity of the Council. The treasury management function ensures that the Council’s cash is organised in accordance with the relevant professional codes, so that sufficient cash is available to meet this service activity and the Council’s capital strategy. This will involve both the organisation of the cash flow and, where capital plans require, the organisation of appropriate borrowing facilities. The strategy covers the relevant treasury / prudential indicators, the current and projected debt positions and the annual investment strategy.


3.1       Current portfolio position

The overall treasury management portfolio as at 31 March 2019 and for the position as at 31st December 2019 is shown below.


The Council’s forward projections for borrowing are summarised below. The table shows the actual external debt, against the underlying capital borrowing need, (the Capital Financing Requirement - CFR), highlighting any over or under borrowing.


Within the range of prudential indicators there are a number of key indicators to ensure that the Council operates its activities within well-defined limits.  One of these is that the Council needs to ensure that its gross debt does not, except in the short term, exceed the total of the CFR in the preceding year plus the estimates of any additional CFR for 2020/21 and the following two financial years.  This allows some flexibility for limited early borrowing for future years, but ensures that borrowing is not undertaken for revenue or speculative purposes.      

The Director of Finance and Business Improvement reports that the Council complied with this prudential indicator in the current year and does not envisage difficulties for the future.  This view takes into account current commitments, existing plans, and the proposals in this budget report. 


3.2       Treasury Indicators: limits to borrowing activity

The operational boundary. This is the limit beyond which external debt is not normally expected to exceed.  In most cases, this would be a similar figure to the CFR, but may be lower or higher depending on the levels of actual debt and the ability to fund under-borrowing by other cash resources.


The authorised limit for external debt. This is a key prudential indicator and represents a control on the maximum level of borrowing. This represents a legal limit beyond which external debt is prohibited, and this limit needs to be set or revised by the full Council.  It reflects the level of external debt which, while not desired, could be afforded in the short term, but is not sustainable in the longer term. 

1.   This is the statutory limit determined under section 3 (1) of the Local Government Act 2003. The Government retains an option to control either the total of all councils’ plans, or those of a specific council, although this power has not yet been exercised.

2.  The Council is asked to approve the following authorised limit:



3.3       Prospects for interest rates

The Council has appointed Link Asset Services as its treasury advisor and part of their service is to assist the Council to formulate a view on interest rates. The following table gives their central view.



The above forecasts have been based on an assumption that there is some sort of muddle through to an agreed deal on Brexit, including agreement on the terms of trade between the UK and EU, at some point in time. Given the current level of uncertainties around the result of the general election due on 12 December and then subsequent developments, this is a major assumption and so forecasts may need to be materially reassessed in the light of events over the coming weeks or months.


It has been little surprise that the Monetary Policy Committee (MPC) has left Bank Rate unchanged at 0.75% so far in 2019 due to the ongoing uncertainty over Brexit and more recently, due to the impending general election.  In its meeting on 7 November, the MPC became more dovish due to increased concerns over the outlook for the domestic economy if Brexit uncertainties were to become more entrenched, and for weak global economic growth: if those uncertainties were to materialise, then it is likely the MPC would cut Bank Rate. However, if they were both to dissipate, then rates would need to rise at a “gradual pace and to a limited extent”. Brexit uncertainty has had a dampening effect on UK GDP growth in 2019, especially around mid-year. If there were an eventual Brexit with no agreement on the terms of trade between the UK and EU, then it is likely that there will be a cut or cuts in Bank Rate to help support economic growth.


Bond yields / PWLB rates.  There has been much speculation recently that we are currently in a bond market bubble.  However, given the context that there are heightened expectations that the US could be heading for a recession, and a general background of a downturn in world economic growth, together with inflation generally at low levels in most countries and expected to remain subdued, conditions are ripe for low bond yields.  While inflation targeting by the major central banks has been successful over the last thirty years in lowering inflation expectations, the real equilibrium rate for central rates has fallen considerably due to the high level of borrowing by consumers: this means that central banks do not need to raise rates as much now to have a major impact on consumer spending, inflation, etc. This has pulled down the overall level of interest rates and bond yields in financial markets over the last thirty years.  We have therefore seen over the last year, many bond yields up to ten years in the Eurozone actually turn negative. In addition, there has, at times, been an inversion of bond yields in the US whereby ten-year yields have fallen below shorter-term yields. In the past, this has been a precursor of a recession.  The other side of this coin is that bond prices are elevated, as investors would be expected to be moving out of riskier assets i.e. shares, in anticipation of a downturn in corporate earnings and so selling out of equities.  However, stock markets are also currently at high levels as some investors have focused on chasing returns in the context of dismal ultra-low interest rates on cash deposits. 


During the first half of 2019-20 to 30 September, gilt yields plunged and caused a near halving of longer term PWLB rates to completely unprecedented historic low levels. (See paragraph 3.7 for comments on the increase in the PWLB rates margin over gilt yields of 100bps introduced on 9.10.19.)  There is though, an expectation that financial markets have gone too far in their fears about the degree of the downturn in US and world growth.  If, as expected, the US only suffers a mild downturn in growth, bond markets in the US are likely to sell off and that would be expected to put upward pressure on bond yields, not only in the US, but also in the UK due to a correlation between US treasuries and UK gilts; at various times this correlation has been strong but at other times weak. However, forecasting the timing of this and how strong the correlation is likely to be is very difficult to forecast with any degree of confidence. Changes in UK Bank Rate will also impact on gilt yields.


One potential danger that may be lurking in investor minds is that Japan has become mired in a twenty-year bog of failing to get economic growth and inflation up off the floor, despite a combination of massive monetary and fiscal stimulus by both the central bank and government. Investors could be fretting that this condition might become contagious to other western economies.


Another danger is that unconventional monetary policy post 2008, (ultra-low interest rates plus quantitative easing), may end up doing more harm than good through prolonged use. Low interest rates have encouraged a debt-fuelled boom that now makes it harder for central banks to raise interest rates. Negative interest rates could damage the profitability of commercial banks and so impair their ability to lend and / or push them into riskier lending. Banks could also end up holding large amounts of their government’s bonds and so create a potential doom loop. (A doom loop would occur where the credit rating of the debt of a nation was downgraded which would cause bond prices to fall, causing losses on debt portfolios held by banks and insurers, so reducing their capital and forcing them to sell bonds – which, in turn, would cause further falls in their prices etc.). In addition, the financial viability of pension funds could be damaged by low yields on holdings of bonds.

The overall longer run future trend is for gilt yields, and consequently PWLB rates, to rise, albeit gently.  From time to time, gilt yields, and therefore PWLB rates, can be subject to exceptional levels of volatility due to geo-political, sovereign debt crisis, emerging market developments and sharp changes in investor sentiment. Such volatility could occur at any time during the forecast period.

In addition, PWLB rates are subject to ad hoc decisions by H.M. Treasury to change the margin over gilt yields charged in PWLB rates: such changes could be up or down. It is not clear that if gilt yields were to rise back up again by over 100bps within the next year or so, whether H M Treasury would remove the extra 100 bps margin implemented on 9.10.19.

Economic and interest rate forecasting remains difficult with so many influences weighing on UK gilt yields and PWLB rates. The above forecasts, (and MPC decisions), will be liable to further amendment depending on how economic data and developments in financial markets transpire over the next year. Geopolitical developments, especially in the EU, could also have a major impact. Forecasts for average investment earnings beyond the three-year time horizon will be heavily dependent on economic and political developments.


Investment and borrowing rates


·         Investment returns are likely to remain low during 2020/21 with little increase in the following two years. However, if major progress was made with an agreed Brexit, then there is upside potential for earnings.

·         Borrowing interest rates were on a major falling trend during the first half of 2019-20 but then jumped up by 100 bps on 9.10.19.   The policy of avoiding new borrowing by running down spare cash balances has served local authorities well over the last few years.  However, the unexpected increase of 100 bps in PWLB rates requires a major rethink of local authority treasury management strategy and risk management.  Now that the gap between longer term borrowing rates and investment rates has materially widened, and in the long term Bank Rate is not expected to rise above 2.5%, it is unlikely that this authority will do any longer term borrowing for the next three years, or until such time as the extra 100 bps margin is removed.

·         While this authority will not be able to avoid borrowing to finance new capital expenditure, to replace maturing debt and the rundown of reserves, , there will be a cost of carry, (the difference between higher borrowing costs and lower investment returns), to any new short or medium-term borrowing that causes a temporary increase in cash balances as this position will, most likely, incur a revenue cost.

3.4              Borrowing strategy

The Council is currently maintaining an under-borrowed position.  This means that the capital borrowing need (the Capital Financing Requirement), has not been fully funded with loan debt as cash supporting the Council’s reserves, balances and cash flow has been used as a temporary measure. This strategy is prudent as investment returns are low and counterparty risk is still an issue that needs to be considered.

Against this background and the risks within the economic forecast, caution will be adopted with the 2020/21 treasury operations. The Director of Finance and Business Improvement will monitor interest rates in financial markets and adopt a pragmatic approach to changing circumstances:


·         if it was felt that there was a significant risk of a sharp FALL in borrowing rates, (e.g. due to a marked increase of risks around relapse into recession or of risks of deflation), then borrowing will be postponed.[JO1] 


·         if it was felt that there was a significant risk of a much sharper RISE in borrowing rates than that currently forecast, perhaps arising from an acceleration in the rate of increase in central rates in the USA and UK, an increase in world economic activity, or a sudden increase in inflation risks, then the portfolio position will be re-appraised. Most likely, fixed rate funding will be drawn whilst interest rates are lower than they are projected to be in the next few years.


Any decisions will be reported to the Audit Governance and Standards Committee body at the next available opportunity.

3.5       Policy on borrowing in advance of need

The Council will not borrow more than or in advance of its needs purely in order to profit from the investment of the extra sums borrowed. Any decision to borrow in advance will be within forward approved Capital Financing Requirement estimates and will be considered carefully to ensure that value for money can be demonstrated, and that the Council can ensure the security of such funds.


Risks associated with any borrowing in advance activity will be subject to prior appraisal and subsequent reporting through the mid-year or annual reporting mechanism.

3.6    New financial institutions as a source of borrowing and / or types of borrowing

Following the decision by the PWLB on 9 October 2019 to increase their margin over gilt yields by 100 bps to 180 basis points on loans lent to local authorities, consideration will also need to be given to sourcing funding at cheaper rates from the following:


·         Local authorities (primarily shorter dated maturities)

·         Financial institutions (primarily insurance companies and pension funds but also some banks, out of spot or forward dates)

·         Municipal Bonds Agency (no issuance at present but there is potential)


The degree which any of these options proves cheaper than PWLB Certainty Rate is still evolving at the time of writing but our advisors will keep us informed.


3.7       Approved Sources of Long and Short term Borrowing

On Balance Sheet                                                   Fixed        Variable                      


Municipal bond agency                                                                 

Local authorities                                                                           


Pension funds                                                                               

Insurance companies                                                                    


Market (long-term)                                                                       

Market (temporary)                                                                       

Market (LOBOs)                                                                            

Stock issues                                                                                 


Local temporary                                                                            

Local Bonds                                                                 

Local authority bills                                                     


Negotiable Bonds                                                                          


Internal (capital receipts & revenue balances)                               

Commercial Paper                                                        

Medium Term Notes                                                                        

Finance leases                                                                              






4.1       Investment policy – management of risk

The MHCLG and CIPFA have extended the meaning of ‘investments’ to include both financial and non-financial investments.  This report deals solely with financial investments, (as managed by the treasury management team).  Non-financial investments, essentially the purchase of income yielding assets, are covered in the Capital Strategy, (a separate report).


The Council’s investment policy has regard to the following: -

·         MHCLG’s Guidance on Local Government Investments (“the Guidance”)

·         CIPFA Treasury Management in Public Services Code of Practice and Cross Sectoral Guidance Notes 2017 (“the Code”)

·         CIPFA Treasury Management Guidance Notes 2018 

The Council’s investment priorities will be security first, portfolio liquidity second and then yield, (return).


The above guidance from the MHCLG and CIPFA place a high priority on the management of risk. This authority has adopted a prudent approach to managing risk and defines its risk appetite by the following means: -


1.   Minimum acceptable credit criteria are applied in order to generate a list of highly creditworthy counterparties.  This also enables diversification and thus avoidance of concentration risk. The key ratings used to monitor counterparties are the short term and long-term ratings. 


2.   Other information: ratings will not be the sole determinant of the quality of an institution; it is important to continually assess and monitor the financial sector on both a micro and macro basis and in relation to the economic and political environments in which institutions operate. The assessment will also take account of information that reflects the opinion of the markets. To achieve this consideration the Council will engage with its advisors to maintain a monitor on market pricing such as “credit default swaps” and overlay that information on top of the credit ratings.


3.   Other information sources used will include the financial press, share price and other such information pertaining to the financial sector in order to establish the most robust scrutiny process on the suitability of potential investment counterparties.


4.   This authority has defined the list of types of investment instruments that the treasury management team are authorised to use. There are two lists in appendix 5.4 under the categories of ‘specified’ and ‘non-specified’ investments.


·         Specified investments are those with a high level of credit quality and subject to a maturity limit of one year.

·         Non-specified investments are those with less high credit quality, may be for periods in excess of one year, and/or are more complex instruments which require greater consideration by members and officers before being authorised for use. Once an investment is classed as non-specified, it remains non-specified all the way through to maturity i.e. an 18 month deposit would still be non-specified even if it has only 11 months left until maturity.


5.     Non-specified investments limit. The Council has determined that it will limit the maximum total exposure to non-specified investments as being X% of the total investment portfolio, (see paragraph 4.3).


6.     Lending limits, (amounts and maturity), for each counterparty will be set through applying the matrix table in paragraph 4.2.


7.     Transaction limits are set for each type of investment in 4.2.


8.     This authority will set a limit for the amount of its investments which are invested for longer than 365 days, (see paragraph 4.4). 


9.     Investments will only be placed with counterparties from countries with a specified minimum sovereign rating, (see paragraph 4.3).


10. This authority has engaged external consultants, (see paragraph 1.5), to provide expert advice on how to optimise an appropriate balance of security, liquidity and yield, given the risk appetite of this authority in the context of the expected level of cash balances and need for liquidity throughout the year.


11. All investments will be denominated in sterling.


12. As a result of the change in accounting standards for 2019/20 under IFRS 9, this authority will consider the implications of investment instruments which could result in an adverse movement in the value of the amount invested and resultant charges at the end of the year to the General Fund. (In November 2018, the Ministry of Housing, Communities and Local Government, [MHCLG], concluded a consultation for a temporary override to allow English local authorities time to adjust their portfolio of all pooled investments by announcing a statutory override to delay implementation of IFRS 9 for five years commencing from 1.4.18).  The Council does not have any of these investments at this time.


However, this authority will also pursue value for money in treasury management and will monitor the yield from investment income against appropriate benchmarks for investment performance, (see paragraph 4.5). Regular monitoring of investment performance will be carried out during the year.



Changes in risk management policy from last year.


The above criteria is unchanged from last year.

4.2       Creditworthiness policy

This Council applies the creditworthiness service provided by Link Asset Services. This service employs a sophisticated modelling approach utilising credit ratings from the three main credit rating agencies - Fitch, Moody’s and Standard & Poor’s.  The credit ratings of counterparties are supplemented with the following overlays:

  • “watches” and “outlooks” from credit rating agencies;
  • CDS spreads that may give early warning of likely changes in credit ratings;
  • sovereign ratings to select counterparties from only the most creditworthy countries.


This modelling approach combines credit ratings, and any assigned Watches and Outlooks in a weighted scoring system which is then combined with an overlay of CDS spreads. The end product of this is a series of colour coded bands which indicate the relative creditworthiness of counterparties. These colour codes are used by the Council to determine the suggested duration for investments.  The Council will, therefore, use counterparties within the following durational bands:


  • Yellow       5 years *

·         Dark pink  5 years for Ultra-Short Dated Bond Funds with a credit score of 1.25

·         Light pink  5 years for Ultra-Short Dated Bond Funds with a credit score of 1.5

  • Purple       2 years
  • Blue          1 year (only applies to nationalised or semi nationalised UK Banks)
  • Orange      1 year
  • Red           6 months
  • Green        100 days 
  • No colour   not to be used


The Link Asset Services’ creditworthiness service uses a wider array of information other than just primary ratings. Furthermore, by using a risk weighted scoring system, it does not give undue preponderance to just one agency’s ratings.


Typically, the minimum credit ratings criteria the Council use will be a short term rating (Fitch or equivalents) of F1 and a long term rating of A-. There may be occasions when the counterparty ratings from one rating agency are marginally lower than these ratings but may still be used.  In these instances, consideration will be given to the whole range of ratings available, or other topical market information, to support their use.


All credit ratings will be monitored daily. The Council is alerted to changes to ratings of all three agencies through its use of the Link Asset Services’ creditworthiness service.

·         if a downgrade results in the counterparty / investment scheme no longer meeting the Council’s minimum criteria, its further use as a new investment will be withdrawn immediately.

·         in addition to the use of credit ratings the Council will be advised of information in movements in Credit Default Swap spreads against the iTraxx European Financials benchmark and other market data on a daily basis via its Passport website, provided exclusively to it by Link Asset Services. Extreme market movements may result in downgrade of an institution or removal from the Council’s lending list.

Sole reliance will not be placed on the use of this external service.  In addition this Council will also use market data and market information, as well as information on any external support for banks to help support its decision making process.




Colour (and long term rating where applicable)



Transaction limit



Banks *









2 yrs





1 yr

Banks – part nationalised




1 yr





6 mths





100 days


No colour

Not to be used



Other institutions limit






UK sovereign rating



6 months

Local authorities





Housing associations

Colour bands



As per colour band












Fund rating**






Money Market Funds CNAV





Money Market Funds LVNAV





Money Market Funds VNAV





Ultra-Short Dated Bond Funds with a credit score of 1.25

 Dark pink / AAA




Ultra-Short Dated Bond Funds with a credit score of 1.50

Light pink / AAA





UK banks – ring fencing

The largest UK banks, (those with more than £25bn of retail / Small and Medium-sized Enterprise (SME) deposits), are required, by UK law, to separate core retail banking services from their investment and international banking activities by 1st January 2019. This is known as “ring-fencing”. Whilst smaller banks with less than £25bn in deposits are exempt, they can choose to opt up. Several banks are very close to the threshold already and so may come into scope in the future regardless.


Ring-fencing is a regulatory initiative created in response to the global financial crisis. It mandates the separation of retail and SME deposits from investment banking, in order to improve the resilience and resolvability of banks by changing their structure. In general, simpler activities offered from within a ring-fenced bank, (RFB), will be focused on lower risk, day-to-day core transactions, whilst more complex and “riskier” activities are required to be housed in a separate entity, a non-ring-fenced bank, (NRFB). This is intended to ensure that an entity’s core activities are not adversely affected by the acts or omissions of other members of its group.


While the structure of the banks included within this process may have changed, the fundamentals of credit assessment have not. The Council will continue to assess the new-formed entities in the same way that it does others and those with sufficiently high ratings, (and any other metrics considered), will be considered for investment purposes.

4.3       Country limits

Due care will be taken to consider the exposure of the Council’s total investment portfolio to non-specified investments, countries, groups and sectors. 

a)   Non-specified investment limit. The Council has determined that it will limit the maximum total exposure to non-specified investments as being 10% of the total investment portfolio when investments balances are higher, however during periods when balances are run down (e.g. year end) the limt may be higher for a small period of time. 

b)   Country limit. The Council has determined that it will only use approved counterparties from the UK and from countries with a minimum sovereign credit rating of AA from Fitch. The list of countries that qualify using this credit criteria as at the date of this report are shown in Appendix 5.6.  This list will be added to, or deducted from, by officers should ratings change in accordance with this policy.

c)   Other limits. In addition:

·         no more than 25% will be placed with any non-UK country at any time;

·         limits in place above will apply to a group of companies;

·         sector limits will be monitored regularly for appropriateness.

4.4    Investment strategy

In-house funds. Investments will be made with reference to the core balance and cash flow requirements and the outlook for short-term interest rates (i.e. rates for investments up to 12 months). Greater returns are usually obtainable by investing for longer periods. While most cash balances are required in order to manage the ups and downs of cash flow, where cash sums can be identified that could be invested for longer periods, the value to be obtained from longer term investments will be carefully assessed.

  • If it is thought that Bank Rate is likely to rise significantly within the time horizon being considered, then consideration will be given to keeping most investments as being short term or variable.
  • Conversely, if it is thought that Bank Rate is likely to fall within that time period, consideration will be given to locking in higher rates currently obtainable, for longer periods.


Investment returns expectations.

On the assumption that the UK and EU agree a Brexit deal including the terms of trade by the end of 2020 or soon after, then Bank Rate is forecast to increase only slowly over the next few years to reach 1.00% by quarter 1 2023.  Bank Rate forecasts for financial year ends (March) are:


  • Q1 2021  1.00%
  • Q1 2022  1.00%
  • Q1 2023  1.25% 


The suggested budgeted investment earnings rates for returns on investments placed for periods up to about three months during each financial year are as follows:














Later years



  • The overall balance of risks to economic growth in the UK is probably to the downside due to the weight of all the uncertainties over Brexit, as well as a softening global economic picture.
  • The balance of risks to increases in Bank Rate and shorter term PWLB rates are broadly similarly to the downside.
  • In the event that a Brexit deal is agreed with the EU and approved by Parliament, the balance of risks to economic growth and to increases in Bank Rate is likely to change to the upside.


Investment treasury indicator and limit - total principal funds invested for greater than 365 days. These limits are set with regard to the Council’s liquidity requirements and to reduce the need for early sale of an investment, and are based on the availability of funds after each year-end.


The Council is asked to approve the following treasury indicator and limit:



Upper limit for principal sums invested for longer than 365 days








Investments in excess of 1 year maturing in each year





For its cash flow generated balances, the Council will seek to utilise its business reserve instant access and notice accounts, money market funds and short-dated deposits, (overnight to 100 days), in order to benefit from the compounding of interest. 


4.5    Investment performance / risk benchmarking

This Council will use an investment benchmark to assess the investment performance of its investment portfolio against a rate of 3 month LIBOR plus 10bps.


4.6    End of year investment report

At the end of the financial year, the Council will report on its investment activity as part of its Annual Treasury Report.



4.7    External fund managers

£8.2m of the Council’s funds is externally managed within Money Market Funds with following institutions:


·         Goldman Sachs Asset Management International

·         Aberdeen Standard Investments

·         Federated Investors (UK) LLP


The Council’s external fund managers will comply with the Annual Investment Strategy.  The agreements between the Council and the fund managers additionally stipulate guidelines on duration and other limits in order to contain and control risk.


The Council fully appreciates the importance of monitoring the activity and resultant performance of its appointed external fund manager. In order to aid this assessment, the Council is provided with a suite of regular reporting from its manager.


In addition to formal reports, the Council also meets with representatives of the fund manager on a semi-annual basis. These meetings allow for additional scrutiny of the manager’s activity as well as discussions on the outlook for the fund as well as wider markets.


1.           Prudential and treasury indicators and MRP statement

2.           Interest rate forecasts

3.           Economic background

4.           Approved countries for investments

5.           Treasury management scheme of delegation

6.           The treasury management role of the section 151 officer











The Council’s capital expenditure plans are the key driver of treasury management activity. The output of the capital expenditure plans is reflected in the prudential indicators, which are designed to assist members’ overview and confirm capital expenditure plans.

5.1.1  Capital expenditure

5.1.2  Affordability prudential indicators

The previous sections cover the overall capital and control of borrowing prudential indicators, but within this framework prudential indicators are required to assess the affordability of the capital investment plans.   These provide an indication of the impact of the capital investment plans on the Council’s overall finances.  The Council is asked to approve the following indicators:

5.1.3  Ratio of financing costs to net revenue stream

This indicator identifies the trend in the cost of capital, (borrowing and other long term obligation costs net of investment income), against the net revenue stream.




The estimates of financing costs include current commitments and the proposals in this budget report.


5.1.4 Maturity structure of borrowing

Maturity structure of borrowing. These gross limits are set to reduce the Council’s exposure to large fixed rate sums falling due for refinancing, and are required for upper and lower limits. 

The Council is asked to approve the following treasury indicators and limits:


5.1.5. Control of interest rate exposure

Please see paragraphs 3.3, 3.4 and 4.4.


Please see 3.3 of this report.









UK.  Brexit. 2019 has been a year of upheaval on the political front as Theresa May resigned as Prime Minister to be replaced by Boris Johnson on a platform of the UK leaving the EU on 31 October 2019, with or without a deal.  However, MPs blocked leaving on that date and the EU agreed an extension to 31 January 2020. In late October, MPs approved an outline of a Brexit deal to enable the UK to leave the EU on 31 January; however, even if a Conservative Government gains an overall majority in the general election on 12 December, there will still be much uncertainty as the detail of a trade deal will need to be negotiated by the current end of the transition period in December 2020.


While the Bank of England went through the routine of producing another quarterly Inflation Report, (now renamed the Monetary Policy Report), on 7 November, it is very questionable how much all the writing and numbers are worth when faced with the uncertainties of where the UK will be after the general election.  The Bank made a change in their Brexit assumptions to now include a deal being eventually passed.  Possibly the biggest message that is worth taking note of from the Monetary Policy Report, was an increase in concerns among MPC members around weak global economic growth and the potential for Brexit uncertainties to become entrenched and so delay UK economic recovery.  Consequently, the MPC voted 7-2 to maintain Bank Rate at 0.75% but two members were sufficiently concerned to vote for an immediate Bank Rate cut to 0.5%. The MPC warned that if global growth does not pick up or Brexit uncertainties intensify, then a rate cut was now more likely. Conversely, if risks do recede, then a more rapid recovery of growth will require gradual and limited rate rises. The speed of recovery will depend on the extent to which uncertainty dissipates over the final terms for trade between the UK and EU and by how much global growth rates pick up. The Bank revised its inflation forecasts down  – to 1.25% in 2019, 1.5% in 2020, and 2.0% in 2021; hence the MPC views  inflation as causing little concern in the near future.


If economic growth were to weaken considerably,, the MPC has relatively little room to make a big impact with Bank Rate still only at 0.75%.  It would therefore, probably suggest that it would be up to the Chancellor to provide help to support growth by way of a fiscal boost by e.g. tax cuts, increases in the annual expenditure budgets of government departments and services and expenditure on infrastructure projects, to boost the economy. The Government has already made moves in this direction and both of the largest parties have made significant promises in their election manifestos to increase government spending. The Chancellor has also amended the fiscal rules in November to allow for an increase in government expenditure.  In addition, it has to be borne in mind that even if the post-election Parliament agrees the deal on 31 January 2020, the current transition period for negotiating the details of the terms of a trade deal with the EU only runs until 31 December 2020. This could prove to be an unrealistically short timetable for such major negotiations which leaves open two possibilities; one the need for an extension of negotiations, probably two years, or a no deal Brexit in December 2020.


As for inflation itself, CPI has been hovering around the Bank of England’s target of 2% during 2019, but fell again in October to 1.5%. It is likely to remain close to or under 2% over the next two years and so it does not pose any immediate concern to the MPC at the current time. However, if there was a no deal Brexit, inflation could rise towards 4%, primarily because of imported inflation on the back of a weakening pound.


With regard to the labour market, growth in numbers employed has been quite resilient through 2019 until the three months to September where it fell by 58,000.  However, this was about half of what had been expected. The unemployment rate fell back again to a 44 year low of 3.8% on the Independent Labour Organisation measure in September, despite the fall in numbers employed, due to numbers leaving the work force.  Wage inflation has been edging down  from a high point of 3.9% in July to 3.8% in August and now 3.6% in September, (3 month average regular pay, excluding bonuses).  This meant that in real terms, (i.e. wage rates higher than CPI inflation), earnings grew by about 1.9%. As the UK economy is very much services sector driven, an increase in household spending power is likely to feed through into providing some support to the overall rate of economic growth in the coming months. The other message from the fall in wage growth is that employers are beginning to find it easier to hire suitable staff, indicating that supply pressure in the labour market is easing.


In the political arena, a general election could result in a potential loosening of monetary policy and therefore medium to longer dated gilt yields could rise on the expectation of a weak pound and concerns around inflation picking up although, conversely, a weak international backdrop could provide further support for low yielding government bonds and gilts.


USA.  President Trump’s massive easing of fiscal policy in 2018 fuelled a temporary boost in consumption in that year which generated an upturn in the rate of growth to a robust 2.9% y/y.  Growth in 2019 has been falling after a strong start in quarter 1 at 3.1%, (annualised rate), to 2.0% in quarter 2 and then 1.9% in quarter 3; it is expected to fall further. The strong growth in employment numbers during 2018 has weakened during   2019, indicating that the economy is cooling, while inflationary pressures are also weakening; CPI inflation fell from 2.3% to 2.0% in September.


The Fed finished its series of increases in rates to 2.25 – 2.50% in December 2018.  In July 2019, it cut rates by 0.25% as a ‘midterm adjustment’ but flagged up that this was not intended  to be seen as the start of a series of cuts to ward off a downturn in growth. It also ended its programme of quantitative tightening in August, (reducing its holdings of treasuries etc).  It then cut rates by 0.25% again in September and by another 0.25% in its October meeting to 1.50 – 1.75%.. At its September meeting it also said it was going to start buying Treasuries again, although this was not to be seen as a resumption of quantitative easing but rather an exercise to relieve liquidity pressures in the repo market. Despite those protestations, this still means that the Fed is again expanding its balance sheet holdings of government debt. In the first month, it will buy $60bn , whereas it had been reducing its balance sheet by $50bn per month during 2019. As it will be buying only short-term (under 12 months) Treasury bills, it is technically correct that this is not quantitative easing (which is purchase of long term debt).


Investor confidence has been badly rattled by the progressive ramping up of increases in tariffs President Trump has made on Chinese imports and China has responded with increases in tariffs on American imports.  This trade war is seen as depressing US, Chinese and world growth.  In the EU, it is also particularly impacting Germany as exports of goods and services are equivalent to 46% of total GDP. It will also impact developing countries dependent on exporting commodities to China.

However, in early November, a phase one deal was agreed between the US and China to roll back some of the tariffs which gives some hope of resolving this dispute.


EUROZONE.  Growth has been slowing from +1.8 % during 2018 to around half of that in 2019.  Growth was +0.4% q/q (+1.2% y/y) in quarter 1, +0.2% q/q (+1.2% y/y) in quarter 2 and then +0.2% q/q, +1.1% in quarter 3; there appears to be little upside potential in the near future. German GDP growth has been struggling to stay in positive territory in 2019 and fell by -0.1% in quarter 2; industrial production was down 4% y/y in June with car production down 10% y/y.  Germany would be particularly vulnerable to a no deal Brexit depressing exports further and if President Trump imposes tariffs on EU produced cars. 


The European Central Bank (ECB) ended its programme of quantitative easing purchases of debt in December 2018, which then meant that the central banks in the US, UK and EU had all ended the phase of post financial crisis expansion of liquidity supporting world financial markets by quantitative easing purchases of debt.  However, the downturn in EZ growth in the second half of 2018 and into 2019, together with inflation falling well under the upper limit of its target range of 0 to 2%, (but it aims to keep it near to 2%), has prompted the ECB to take new measures to stimulate growth.  At its March meeting it said that it expected to leave interest rates at their present levels “at least through the end of 2019”, but that was of little help to boosting growth in the near term. Consequently, it announced a third round of TLTROs; this provides banks with cheap borrowing every three months from September 2019 until March 2021 that means that, although they will have only a two-year maturity, the Bank was making funds available until 2023, two years later than under its previous policy. As with the last round, the new TLTROs will include an incentive to encourage bank lending, and they will be capped at 30% of a bank’s eligible loans. However, since then, the downturn in EZ and world growth has gathered momentum; at its meeting on 12 September, it cut its deposit rate further into negative territory, from -0.4% to -0.5%, and announced a resumption of quantitative easing purchases of debt for an unlimited period; (at its October meeting it said this would start in November at €20bn per month -  a relatively small amount compared to the previous buying programme).   It also increased the maturity of the third round of TLTROs from two to three years. However, it is doubtful whether this loosening of monetary policy will have much impact on growth and, unsurprisingly, the ECB stated that governments will need to help stimulate growth by ‘growth friendly’ fiscal policy.


On the political front, Austria, Spain and Italy have been in the throes of forming coalition governments with some unlikely combinations of parties i.e. this raises questions around their likely endurance. The latest results of German state elections has put further pressure on the frail German CDU/SDP coalition government and on the current leadership of the CDU. The results of the Spanish general election in November have not helped the prospects of forming a stable coalition.


CHINA. Economic growth has been weakening over successive years, despite repeated rounds of central bank stimulus; medium term risks are increasing. Major progress still needs to be made to eliminate excess industrial capacity and the stock of unsold property, and to address the level of non-performing loans in the banking and shadow banking systems. In addition, there still needs to be a greater switch from investment in industrial capacity, property construction and infrastructure to consumer goods production.


JAPAN - has been struggling to stimulate consistent significant GDP growth and to get inflation up to its target of 2%, despite huge monetary and fiscal stimulus. It is also making little progress on fundamental reform of the economy.


WORLD GROWTH.  Until recent years, world growth has been boosted by increasing globalisation i.e. countries specialising in producing goods and commodities in which they have an economic advantage and which they then trade with the rest of the world.  This has boosted worldwide productivity and growth, and, by lowering costs, has also depressed inflation. However, the rise of China as an economic superpower over the last thirty years, which now accounts for nearly 20% of total world GDP, has unbalanced the world economy. The Chinese government has targeted achieving major world positions in specific key sectors and products, especially high tech areas and production of rare earth minerals used in high tech products.  It is achieving this by massive financial support (i.e. subsidies) to state owned firms, government directions to other firms, technology theft, restrictions on market access by foreign firms and informal targets for the domestic market share of Chinese producers in the selected sectors. This is regarded as being unfair competition that is putting western firms at an unfair disadvantage or even putting some out of business. It is also regarded with suspicion on the political front as China is an authoritarian country that is not averse to using economic and military power for political advantage. The current trade war between the US and China therefore needs to be seen against that backdrop.  It is, therefore, likely that we are heading into a period where there will be a reversal of world globalisation and a decoupling of western countries from dependence on China to supply products.  This is likely to produce a backdrop in the coming years of weak global growth and so weak inflation.  Central banks are, therefore, likely to come under more pressure to support growth by looser monetary policy measures and this will militate against central banks increasing interest rates.


The trade war between the US and China is a major concern to financial markets due to the synchronised general weakening of growth in the major economies of the world, compounded by fears that there could even be a recession looming up in the US, though this is probably overblown. These concerns resulted in government bond yields in the developed world falling significantly during 2019. If there were a major worldwide downturn in growth, central banks in most of the major economies will have limited ammunition available, in terms of monetary policy measures, when rates are already very low in most countries, (apart from the US).  There are also concerns about how much distortion of financial markets has already occurred with the current levels of quantitative easing purchases of debt by central banks and the use of negative central bank rates in some countries. The latest PMI survey statistics of economic health for the US, UK, EU and China have all been predicting a downturn in growth; this confirms investor sentiment that the outlook for growth during the year ahead is weak.




The interest rate forecasts provided by Link Asset Services in paragraph 3.3 are predicated on an assumption of an agreement being reached on Brexit between the UK and the EU.  On this basis, while GDP growth is likely to be subdued in 2019 due to all the uncertainties around Brexit depressing consumer and business confidence, an agreement is likely to lead to a boost to the rate of growth in subsequent years  which could, in turn, increase inflationary pressures in the economy and so cause the Bank of England to resume a series of gentle increases in Bank Rate.  Just how fast, and how far, those increases will occur and rise to, will be data dependent. The forecasts in this report assume a modest recovery in the rate and timing of stronger growth and in the corresponding response by the Bank in raising rates.

·         In the event of an orderly non-agreement exit, it is likely that the Bank of England would take action to cut Bank Rate from 0.75% in order to help economic growth deal with the adverse effects of this situation. This is also likely to cause short to medium term gilt yields to fall.

·         If there was a disorderly Brexit, then any cut in Bank Rate would be likely to last for a longer period and also depress short and medium gilt yields correspondingly. Quantitative easing could also be restarted by the Bank of England. It is also possible that the government could act to protect economic growth by implementing fiscal stimulus.

However, there would appear to be a majority consensus in the Commons against any form of non-agreement exit so the chance of this occurring has diminished.


The balance of risks to the UK

·         The overall balance of risks to economic growth in the UK is probably to the downside due to the weight of all the uncertainties over Brexit, as well as a softening global economic picture.

·         The balance of risks to increases in Bank Rate and shorter term PWLB rates are broadly similarly to the downside.

·         In the event that a Brexit deal was agreed with the EU and approved by Parliament, the balance of risks to economic growth and to increases in Bank Rate is likely to change to the upside.


One risk that is both an upside and downside risk, is that all central banks are now working in very different economic conditions than before the 2008 financial crash as  there has been a major increase in consumer and other debt due to the exceptionally low levels of borrowing rates that have prevailed since 2008. This means that the neutral rate of interest in an economy, (i.e. the rate that is neither expansionary nor deflationary), is difficult to determine definitively in this new environment, although central banks have made statements that they expect it to be much lower than before 2008. Central banks could therefore either over or under do increases in central interest rates.


Downside risks to current forecasts for UK gilt yields and PWLB rates currently include:

  • Brexit – if it were to cause significant economic disruption and a major downturn in the rate of growth.
  • Bank of England takes action too quickly, or too far, over the next three years to raise Bank Rate and causes UK economic growth, and increases in inflation, to be weaker than we currently anticipate.
  • A resurgence of the Eurozone sovereign debt crisis. In 2018, Italy was a major concern due to having a populist coalition government which made a lot of anti-austerity and anti-EU noise.  However, in September 2019 there was a major change in the coalition governing Italy which has brought to power a much more EU friendly government; this has eased the pressure on Italian bonds. Only time will tell whether this new coalition based on an unlikely alliance of two very different parties will endure.
  • Weak capitalisation of some European banks, particularly Italian banks.
  • German minority government. In the German general election of September 2017, Angela Merkel’s CDU party was left in a vulnerable minority position dependent on the fractious support of the SPD party, as a result of the rise in popularity of the anti-immigration AfD party. The CDU has done badly in recent state elections but the SPD has done particularly badly and this has raised a major question mark over continuing to support the CDU. Angela Merkel has stepped down from being the CDU party leader but she intends to remain as Chancellor until 2021.
  • Other minority EU governments. Austria, Sweden, Spain, Portugal, Netherlands and Belgium also have vulnerable minority governments dependent on coalitions which could prove fragile.
  • Austria, the Czech Republic, Poland and Hungary now form a strongly anti-immigration bloc within the EU.  There has also been rising anti-immigration sentiment in Germany and France.
  • In October 2019, the IMF issued a report on the World Economic Outlook which flagged up a synchronised slowdown in world growth.  However, it also flagged up that there was potential for a rerun of the 2008 financial crisis, but his time centred on the huge debt binge accumulated by corporations during the decade of low interest rates.  This now means that there are corporates who would be unable to cover basic interest costs on some $19trn of corporate debt in major western economies, if world growth was to dip further than just a minor cooling.  This debt is mainly held by the shadow banking sector i.e. pension funds, insurers, hedge funds, asset managers etc., who, when there is $15trn of corporate and government debt now yielding negative interest rates, have been searching for higher returns in riskier assets. Much of this debt is only marginally above investment grade so any rating downgrade could force some holders into a fire sale, which would then depress prices further and so set off a spiral down. The IMF’s answer is to suggest imposing higher capital charges on lending to corporates and for central banks to regulate the investment operations of the shadow banking sector. In October 2019, the deputy Governor of the Bank of England also flagged up the dangers of banks and the shadow banking sector lending to corporates, especially highly leveraged corporates, which had risen back up to near pre-2008 levels.   
  • Geopolitical risks, for example in North Korea, but also in Europe and the Middle East, which could lead to increasing safe haven flows.


Upside risks to current forecasts for UK gilt yields and PWLB rates

  • Brexit – if agreement was reached all round that removed all threats of economic and political disruption between the EU and the UK.
  • The Bank of England is too slow in its pace and strength of increases in Bank Rate and, therefore, allows inflationary pressures to build up too strongly within the UK economy, which then necessitates a later rapid series of increases in Bank Rate faster than we currently expect.
  • UK inflation, whether domestically generated or imported, returning to sustained significantly higher levels causing an increase in the inflation premium inherent to gilt yields.



Use of external fund managers – It is the Council’s policy to use external fund managers for part of its investment portfolio.  The fund managers will use both specified and non-specified investment categories, and are contractually committed to keep to the Council’s investment strategy.  The fund managers the Council currently engages with are for Money Market Funds and Enhanced Cash Funds.


The Council fully appreciates the importance of monitoring the activity and resultant performance of its appointed external fund manager. In order to aid this assessment, the Council is provided with a suite of regular reporting from its manager. This includes:


In addition to formal reports, the Council also meets with representatives of the fund manager on a XXX [quarterly, semi-annual, annual] basis. These meetings allow for additional scrutiny of the manager’s activity as well as discussions on the outlook for the fund as well as wider markets.


This list is based on those countries which have sovereign ratings of AA- or higher, (we show the lowest rating from Fitch, Moody’s and S&P) and also, (except - at the time of writing - for Hong Kong, Norway and Luxembourg), have banks operating in sterling markets which have credit ratings of green or above in the Link Asset Services credit worthiness service.


Based on lowest available rating



·          Australia

·          Canada

·          Denmark

·          Germany

·          Luxembourg

·          Netherlands

·          Norway

·          Singapore

·          Sweden

·          Switzerland



·          Finland

·          U.S.A.



·          Abu Dhabi (UAE)

·          Hong Kong

·          France

·          U.K.



·          Belgium

·          Qatar










(i) Full Council

  • receiving and reviewing reports on treasury management policies, practices and activities;
  • approval of annual strategy.


(ii) Audit Governance & Standards Committee/ Policy & Resources Committee /Full Council

  • approval of/amendments to the organisation’s adopted clauses, treasury management policy statement and treasury management practices;
  • budget consideration and approval;
  • approval of the division of responsibilities;
  • receiving and reviewing regular monitoring reports and acting on recommendations;
  • approving the selection of external service providers and agreeing terms of appointment.


(iii) Audit Governance & Standards Committee

  • reviewing the treasury management policy and procedures and making recommendations to the responsible body.



The S151 (responsible) officer recommending clauses, treasury management policy/practices for approval, reviewing the same regularly, and monitoring compliance;

  • submitting regular treasury management policy reports;
  • submitting budgets and budget variations;
  • receiving and reviewing management information reports;
  • reviewing the performance of the treasury management function;
  • ensuring the adequacy of treasury management resources and skills, and the effective division of responsibilities within the treasury management function;
  • ensuring the adequacy of internal audit, and liaising with external audit;
  • recommending the appointment of external service providers.
  • preparation of a capital strategy to include capital expenditure, capital financing, non-financial investments and treasury management, with a long term timeframe
  • ensuring that the capital strategy is prudent, sustainable, affordable and prudent in the long term and provides value for money
  • ensuring that due diligence has been carried out on all treasury and non-financial investments and is in accordance with the risk appetite of the authority
  • ensure that the authority has appropriate legal powers to undertake expenditure on non-financial assets and their financing
  • ensuring the proportionality of all investments so that the authority does not undertake a level of investing which exposes the authority to an excessive level of risk compared to its financial resources
  • ensuring that an adequate governance process is in place for the approval, monitoring and ongoing risk management of all non-financial investments and long term liabilities
  • provision to members of a schedule of all non-treasury investments including material investments in subsidiaries, joint ventures, loans and financial guarantees
  • ensuring that members are adequately informed and understand the risk exposures taken on by an authority
  • ensuring that the authority has adequate expertise, either in house or externally provided, to carry out the above
  • creation of Treasury Management Practices which specifically deal with how non treasury investments will be carried out and managed, to include the following: -

o   Risk management (TMP1 and schedules), including investment and risk management criteria for any material non-treasury investment portfolios;


o   Performance measurement and management (TMP2 and schedules), including methodology and criteria for assessing the performance and success of non-treasury investments;        


o   Decision making, governance and organisation (TMP5 and schedules), including a statement of the governance requirements for decision making in relation to non-treasury investments; and arrangements to ensure that appropriate professional due diligence is carried out to support decision making;


o   Reporting and management information (TMP6 and schedules), including where and how often monitoring reports are taken;


o   Training and qualifications (TMP10 and schedules), including how the relevant knowledge and skills in relation to non-treasury investments will be arranged.














 [JO1]Not sure this will be an option as surplus cash is being used up