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Report to: Board of Directors

Date of meeting: 28 September 2017

Section: Consent Agenda

Report title: Annual Review of Treasury Management Policy

Report written by: Michelle Tolan/Chris Owen

Job title: Head of Treasury Services/Treasury Development Manager

Lead officer: Sarah Connery, Director of Finance & Information

Board action required: For decision

For assurance (Yes or No): Yes

Purpose of the Report

To approve the revised Treasury Management Policy following scrutiny by the Finance and Performance Committee.

Key Issues, Options and Risks

Proposed Changes The Trust’s Treasury Management Policy has been reviewed by the treasury team and changes which are highlighted in red within the updated policy, have been made throughout for the following:

Planning and Investment Committee is now Finance and Performance Committee

Monitor is now NHS Improvement

Risk Assessment Framework has been updated to the Single Oversight Framework

Financial Stability Risk Rating has been changed to the Use of Resources Rating

Pages 11 and 14 reference a change in quarterly reporting of pure Treasury Key Performance Indicators (KPI’s), to the incorporation of cash and capital commentary, and risk analysis in the Board monthly finance reports and quarterly finance performance reports for Finance and Performance Committee.

The updated policy is included as Appendix 1.

Operational Use of the policy Operationally this policy has not been actively referenced to this year. The Trust’s cash balance remains lower than previous years at £12.5m (as referenced in the table below.) Closing Cash Balance at 31st March (£000’s)

2010 2011 2012 2013 2014 2015 2016 2017 15,242 17,507 17,725 19,904 16,671 17,448 10,373 12,517

This reduced level of cash is anticipated to continue with forecast cash balances of c£10m by March 2018. Should the Trust not receive income in respect to mental health growth funding (c£2m) or cash receipts from planned asset sales the value may reduce further

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limiting the potential gains from investing. Trust investment activity during 2017/18. Currently the Trust continues to invest £5m on a rolling monthly basis. This ensures adequate cash levels are available in order to meet any unforeseen operating expenses. Continued low interest rates have restricted cash deposits to being placed with Government Bank Services, rather than external commercial banks. The Bank of England bank rate remains at 0.25% after dropping from 0.5% on 4th August 2016. Realistically, external investment outside of government is unlikely to be undertaken by the Trust until interest rates rise significantly (to at least 3.5%), and this would be dependent on the amount of available Trust cash. Report summary Potential future interest rate changes will be proactively reviewed, especially in the context of Britain’s negotiations to exit the European Union. The potential ramifications of Brexit and the effect on this policy may be seen in the coming years as its finer details are worked through by government. The policy will continue to be reviewed annually or sooner as required to facilitate maximising returns.

Executive Analysis

The treasury department continues to maintain a focus on the cash position of the Trust and review opportunities to maximise the potential investment returns. However, current low interest rates coupled with the methodology that the Public Dividend Capital (PDC) is calculated upon (use of average daily balances rather than opening and closing) mean that LPFT continues to maintain cash balances within the Government Banking Service (GBS) current account boundary. The Finance and Performance Committee has scrutinised the reviewed policy and recommends its approval in providing a framework where the Trust can maximise its investment opportunities when such economic conditions arise.

Recommendation (action required, by whom, by when)

To approve the updated Treasury Management Policy.

Regulation, legislation and compliance

CQC Impact on key lines of enquiry:

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Financial Implications: Any under-achievement against the planned financial targets may have an adverse effect on NHS Improvement’s Single Oversight Framework.

Equality Analysis: N/A

Compliance Impact:

The financial position impacts on the Use of Resources Rating

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Risk Appetite

Risk assessment Completed below (delete as appropriate)

Risk Level ˃ Avoid Minimal Cautious Open Seek Mature

Key Elements ˅

Financial / VFM:

G

Compliance/Regulatory:

G

Innovation/Quality:

G

Reputation:

G

APPETITE NONE LOW MODERATE HIGH SIGNIFICANT

Explanation of variance from general (G) risk appetite

Low risk appetite in relation to investment of public funds and potentially damage to reputation

The level of risk against each element should be indicated. Where more than one option is available the level of risk of each option against each element should be indicated by numbering each option and showing numbers in the boxes.

The content of this report is the property of Lincolnshire Partnership NHS Foundation Trust Document Control – Version 4 – November 2016

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TREASURY MANAGEMENT POLICY

Version 1.0 (September 2017)

APPENDIX 1

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Contents 1. Introduction 2. Purpose 3. Body of Policy 4 Duties 5. Treasury Report 6. Definitions 7. Equality Impact Assessment 8. Review and Revision Arrangements including Version Control

9. Policy Control including Archiving Arrangements 10. Monitoring Compliance with and Effectiveness of Policies and Procedures 11. References 12. Associated Documentation

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1. Introduction

1.1 NHS Foundation Trusts (NHSFTs) are given discretion to invest cash for the purposes of, or connection with, their functions. While this freedom offers greater opportunity to improve patient care, it should be managed carefully to avoid financial and/or reputation risks.

1.2 NHSFTs are public benefit corporations, with the principal role of providing health services and goods. As such, boards of NHSFTs need to ensure that surplus operating cash is invested in accordance with their duty to safeguard and properly account for the use of public money.

1.3 NHSFTs are required to exercise their functions effectively, efficiently, and economically, and the Terms of Authorisation specify that a “Trust shall at all times remain a going concern as defined by relevant accounting standards in force from time to time.” Imprudent or inappropriate treasury management could therefore place an NHSFT in breach of its Terms of Authorisation, which may justify intervention by NHS Improvement if the breach is significant.

1.4 It is therefore necessary to formally set out treasury management activities and establish an approach to treasury risk management, by setting out all Trust objectives, operating parameters, and policies.

1.5 Treasury Management is the process of managing cash flow, banking, money market transactions, the effective control of risks associated with those activities, and the pursuit of optimum performance consistent with those risks.

1.6 This Treasury Management Policy is designed to be a risk management framework, and reference manual for those responsible for treasury operations. These policies should be regularly checked and refreshed to reflect changes which may affect the content of this document.

2. Purpose

2.1 The overall objectives of an NHS Foundation Trust’s treasury operations should be to;

To ensure compliance with all banking covenants

To ensure the availability of competitively priced funding when required

Identify and manage the financial risks, including interest rate and foreign currency risks if appropriate, arising from operational activities

To ensure the most competitive return on surplus cash balances, within an acceptable risk profile

To ensure cost efficient banking services

To minimise borrowing costs and maximise returns on cash surpluses within acceptable risk parameters (i.e. NHS Improvement Single Oversight Framework) by maintaining efficient cash management systems throughout the Trust

To manage the interest rate exposure of the Trust in accordance with defined policy by use of NHS Improvement permitted instruments in the derivatives market. Derivatives are usually not permitted, unless for hedging purposes

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To manage exposure relating to foreign exchange risk

To develop and maintain strong relationships with a number of key banks

2.2 The Trust’s treasury management activities seek to achieve the following key

objectives:

Surplus cash: To achieve the most competitive rate of return, whilst adhering to deposit guidelines stipulated by the Finance and Performance Committee and NHS Improvement guidelines over ‘Safe Harbour’ Investments (see Appendix 3)

Funding: The Trust will ensure the availability of competitive rates of funding from alternative sources, to meet the Trust’s requirements. The Trust should ensure it has adequate, though not excessive cash resources, borrowing arrangements, and overdraft facilities that are necessary in the achievement of Trust’s service objectives.

Interest Rate Management: Managing exposure to fluctuations in interest rates with a view to containing interest costs, or securing interest revenues.

Bank Relationships: Develop and maintain strong, long term relationships with a core group of quality banks which can provide current and future funding requirements.

Working Capital: As part of the Trust Long Term Financial Model (LTFM), forecasts are devised regarding planned working capital balances. Treasury management activities should monitor actual performance against plan, highlighting issues and corrective actions where required.

Compliance: Under the NHS Improvement Single Oversight Framework, there is an increased focus on cash management, and therefore treasury activities. Two of the components of the Use of Resources Rating (UoRR) focus upon treasury management issues.

Strategy: Trust treasury activities should link to and support the strategic objectives of the Trust as a whole. Effective management and monitoring of the Trust treasury functions will provide the basis for strategic decisions to be taken. For example, defining the cash availability quantum for investment in Trust estate programmes.

3. Body of the Policy

3.1 Treasury Controls

Financial instruments can be used by NHSFTs, and can significantly reduce financial risk when used wisely. Equally, they can, when used unwisely and in extreme cases, lead to financial distress. Treasury activities should be undertaken in a controlled and accurately reported manner; therefore the provisions in this policy are designed to ensure this.

The key components of the overall treasury operating environment include the following:

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The roles and responsibilities for the Board of Directors, Director of Finance and Information and Treasury Department should be clearly defined, regarding treasury activities. These are detailed in Section 4.

Treasury activities should be accurately reported in a timely manner (see Section 5).

Delegation of duties between those who deal, those who initiate payment and those who account for treasury activities; and will be based on the authorised limits.

There are strict limitations on the types of derivatives and the circumstances in which they may be used by Treasury. NHS Improvement’s guidance “Managing Operating Cash in NHS Foundation Trusts” states that NHS Foundation Trusts should not invest any operating surplus outside of “Safe Harbour” investments. Where NHSFTs do so, it should only be for the management of operational risk (e.g. foreign exchange or interest rate risk), and never for speculative purposes.

3.2 Attitude to Risk in Key Treasury Activities

3.2.1 Funding

A risk-averse approach to funding will be maintained by the Trust. This means that reasonable cash buffers should be in place to meet general fluctuations.

The key funding objective is to ensure the availability of flexible and competitively priced funding from alternative sources to meet the Trust’s current and future requirements.

Debt should not be raised unless there is a specific expenditure need to match this.

3.2.2 Investments

The Director of Finance and Information has delegated responsibility to invest surplus cash for balances up to 180 days without consulting the Board of Directors but a full review of the effects of the investment on the trust’s monthly financial risk ratings is required as a result of the restrictions around calculating the trusts liquidity detailed below.

As a result of NHS Improvement restrictions around the calculation of the trusts liquidity ratio, every investment over 90 days should be fully assessed in regards to the impact on the trusts liquidity and overall UoRR.

Investments that have a maturity date greater than 180 days require authorisation from the Board of Directors.

3.2.3 Cash Deposit Limits based on Credit Rating

Any cash surpluses should remain relatively liquid, including the investments resulting from these. The Trust will not make an investment with a maturity exceeding 6 months (180 days) unless authorised by the Board of Directors or in unusual circumstances the Director of Finance and Information.

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When authorised by the Director of Finance and Information, this will be reported to the next Board of Directors meeting. This authority will not be delegated by the Director of Finance and Information.

Cash deposits are only placed with identified relationship banks that comply with deposit limits agreed by the Finance and Performance Committee and based on Moody’s ratings. The limits are as follows:

o The National Loans Fund operated by HM Treasury has a limit of £10m

o Permitted institutions with a short term rating of P1 have a limit of £4m

o Permitted institutions with a short term rating of P2 have a limit of £1m

o Permitted institutions with a short term rating of P3 have a limit of £500k

If the short term rating of a permitted institution is P1 and their long term rating is AA1 or above, a maximum deposit limit of £5m is permitted. Taking a risk averse approach, P3 short term rated institutions will only be used for investment when an exceptionally good rate is offered (e.g. 1% above Public Dividend Capital rate plus the Government Banking Service (GBS) rate, and invested for periods no longer than 1 month). The limits within this policy may be amended if approved by the Board of Directors.

3.2.4 Preferred Concentration Limit

No single treasury management fixed term investment should account for over 45% of the sum of total cash or £5m, whichever is the lower. This exclusion excludes instant access investments which attracts minimal risk as funds can be instantly returned.

Whilst ensuring that daily working capital balances are sufficiently managed and reviewed in order to meet daily cash requirements, investments placed within instant access investment accounts are not limited by financial value. This will enable the trust to maximise investment returns. It should be noted that the National Loan Fund is term based (usually 28 or 35 days term).

3.2.5 Foreign Exchange Management

The Trust does not have a material exposure to foreign exchange transactions and therefore will spot buy or exchange when necessary having obtained three competitive rate quotations. If exposure to foreign currencies becomes material, this policy will be reviewed.

3.2.6 Interest Rate Management

Should the Trust enter into any long-term borrowings, Trust treasury will maintain an interest rate structure which reduces the impact of rapidly increasing interest rates on the financial position. The Trust’s policy will be to hedge interest rate exposure using interest rate swaps.

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3.2.7 Bank Relationships

Trust strategy is to establish and develop long term relationships with quality financial institutions. This approach builds confidence, commitment, and understanding between the parties.

This strategy of close working represents a risk-averse approach. Although the attainment of low cost financing and highest return on investment is a key treasury objective, key relationships may be of great importance in cycles of financial deterioration.

Strong relationships with financial institutions are vital in enhancing the range and availability of services.

Effective cash management ensures that cost efficiency is achieved in terms of banking requirements.

The following section details the Trust’s objectives in these areas of treasury.

Financial institution relationship management will be the responsibility of the Director of Finance and Information; however, operationally it will be the responsibility of the Treasury Department. This will extend to meeting all relationship banks on a regular basis to discuss services provided and any new or improved products of potential interest to the Trust to ensure optimum efficiency is achieved.

3.2.8 Banking Covenant Compliance

In situations where funding arrangements are attached to financial covenants, a regular review of the Trust’s performance against these covenants and future forecast performance should be included in the monthly treasury report so that potential problems can be identified at an early stage. Any breaches of any banking covenants will be reported to the next Board of Directors meeting as part of the monthly Finance Report.

3.2.9 Legal Risk Management

The Trust will ensure that its Treasury Management activities comply with the regularity requirements. It will demonstrate compliance to relevant parties it deals with, if required to do so.

4. Duties

The key responsibilities of the relevant stakeholders are as follows:

4.1 Board of Directors:

Approve external funding arrangements

Approve overall Treasury Management Policy and any amendments as required.

Approve the Trust’s interest rate, foreign currency, funding and investment approaches, including permitted instruments, counterparts and authority levels

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Responsibility is delegated to the Head of Treasury Services by the Board of Directors. The Director of Finance and Information meets with the Treasury Department regularly to discuss issues that should be brought to the attention of the Finance and Performance Committee, or Board of Directors.

4.2 Director of Finance and Information

Approve the Trust’s treasury procedures, controls and detailed policies

Approve external funding arrangements within delegated authority

Approve cash budgets and cash management systems.

Define the Trust’s treasury approach for approval by the Board of Directors. Ensure treasury activities are reported on a timely and accurate basis. Manage key banking relationships. Manage treasury activities within the agreed policies and procedures.

4.3 LPFT Finance Department

Accurate and timely recording in the accounting records of all treasury transactions, including confirmation with counterparty documentation.

The co-ordination of treasury operations within LPFT is the responsibility of the Head of Treasury Services.

Audit will review the Trust’s treasury activities and any significant deviations will be reported to the Audit Committee or Board of Directors, where appropriate.

5. Treasury Reporting

5.1 To ensure all relevant parties are aware of treasury activities, and appreciate the Trust’s financial position in relation to this, it is vital that accurate, regular reporting of treasury activities should be produced.

5.2 Weekly Treasury Report

A cash report will be prepared weekly reflecting current investments. This will be supported by a weekly review meeting as required.

Circulation: Treasury Department

Monthly – within the Trust’s finance report.

5.3 Key Performance Indicators (KPI) Report

Reports are prepared monthly, quarterly and on ad-hoc basis to the Director of Finance and Information, Board of Directors and the Finance and Performance committee. Taken together these reports contain the following information:

Working Capital commentaries

Capital Programme development

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Details of Investment Portfolios

Better payments practice compliance

Financial covenant compliance, which will also include the forecasting against such covenants until the financial year end to act as an early warning of potential risk areas

Liquidity and securing of funding

Interest rate exposure

Bank relationships

Foreign exchange translation exposure

Short Term / Long Term Cash flow Forecasts.

5.4 Other Reports

Other reports will be provided where required.

5.5 Performance Management

To performance manage treasury activities and decisions, key metrics will be produced in which to judge, benchmark, and report. Where appropriate narrative will accompany metrics, for example to explain over or under performance, and plans to improve low metric ratings.

The Treasury function will be responsible for producing NHS Improvement resource ratings for debt service cover and liquidity.

This policy will be reviewed on a yearly basis.

6 Definitions

6.1 The following definitions are used within the policy:

6.1.1 Recognised Rating Agency

Only the following are recognised rating agencies:

Standard & Poor’s

Moody’s Investors Service

Fitch Ratings Ltd.

Permitted Rating Requirement

The short-term rating should be at least:

P-1 Moody’s rating; or

A+ Standard & Poor’s rating; or

A+ Fitch rating.

Short-term ratings cover investments placed for less than one year and as such will cover the investing activities under this policy. Longer term ratings provide a picture

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of the projected longer term health of an entity and may also be considered, if available.

6.1.2 Permitted Institutions

Permitted Institutions include:

The U.K. Government, or an executive agency of the U.K. Government that is legally and constitutionally part of any department of the U.K. Government, including the U.K. Debt Management Agency Deposit Facility

The Board of Directors have previously agreed to limit investments to UK clearing banks (with a requirement to also have UK Nationality). This limits investments to the following banks:

1. Barclays Bank Plc 2. The Co-operative Bank Plc 3. HSBC Bank Plc 4. Lloyds Bank Plc 5. The Royal Bank of Scotland Plc

The members of the UK Cheque and Credit Clearing Company Limited are listed below and they are all regulated by the Financial Conduct Authority (FCA); -

1. Bank of England 2. Bank of Scotland Plc 3. Barclays Bank Plc 4. Clydesdale Bank Plc 5. The Co-operative Bank Plc 6. HSBC Bank Plc 7. Lloyds Bank Plc 8. Nationwide Building Society 9. National Westminster Bank Plc 10. The Royal Bank of Scotland Plc 11. Santander UK Plc

The template for assessing permitted institutions for Potential Investments proposed by the trust can be found in Appendix 5.

6.1.3 Maximum Maturity Date

For UK Government bonds, there is no maximum maturity date but the investments must be capable of being realised within three months. For other investments, the maturity date should be before or on the approximate date when the invested funds will be needed, and in any event the maturity should not exceed one year.

7. Equality Impact Assessment (EIA)

7.1 This policy has been Equality Impact Assessed at Stage 1. There was no detrimental effect on any of the diverse groups.

8. Review and Revision Arrangements including Version Control

8.1 The minimum review period will be six months; the maximum period will be five years.

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9. Archiving Arrangements for this Policy 9.1 Archived versions of this policy will be retained with the Board of Directors minutes. 10. Monitoring Compliance and Effectiveness of Policies and Procedures

11. References

Managing Operating Cash in NHS Foundation Trusts (2005)

Monitor: Managing Operating Cash Link

NHS Foundation Trusts audit code (2016)

National Audit Office: NHS Foundation Trusts audit code

12. Associated Documentation

Standing Financial Instruction

LPFT SFIs Link

Systems Monitoring and/or Audit

Criteria Measurable Lead Officer

Frequency Reporting to Action Plan/Monitoring

Treasury Management System

Performance against Treasury metrics (See Appendix 4)

Head of Treasury Services

Monthly, Quarterly and Ad hoc

Board of Directors Finance and Performance Committee

Performance -will be monitored by the Director of Finance and Information, the Finance and Performance Committee, and the Board of Directors