Select Committee on Treasury Minutes of Evidence


Examination of Witnesses (Questions 40-59)

MR ROBERT STHEEMAN, MS JO WHELAN AND MR JIM JUFFS

10 JANUARY 2007

  Q40  Mr Newmark: I still do not understand. I am a person with a business background, so I spent my whole time effectively figuring out what you have been trying to figure out until I got here: how can I better manage my debt portfolio; how can I better manage my cash? If I saw the debt market go where it is today and I owned a series of companies, I would be issuing as much debt as possible and taking advantage of these historic rates, because it is unlikely we are going to see it lower. If I did a risk-benefit analysis, I would say it is more likely to go up than down, and so I do not understand why there has not been more issuing of long-dated gilts given that that is the case.

  Mr Stheeman: I think the answer is that there has, and, as I said earlier, we have been issuing record amounts, but the point is we cannot ignore and there are other considerations which we have to take into account in terms of risk. If we put everything into the long end, if in a record year, with £63 billion announced at the time of the Budget, we said we are going to do absolutely everything in longs and linkers—

  Q41  Mr Newmark: You have got a lot of demand for it still. It is still there.

  Mr Stheeman: The demand certainly seems there, but how do we know that the market will take it down that easily?

  Q42  Mr Newmark: Because the market will start moving and reacting, and then you will know when to stop.

  Mr Stheeman: But the trouble with that is that we announce at the beginning of the year what we are going to do for that year. That is part of being predictable, and we do not change within year what we are going to do; and I think that is quite an important point to make because otherwise we would be accused of being opportunistic, which we are trying not to do. We are trying to be pragmatic and, in terms of cost minimisation, decisions are taken at the beginning of each financial year for that year. The other point we have to manage and think about is simply the redemption profile. Yes, we can put everything into the long end, but I mentioned earlier that we already have the longest average maturity of any debt manager and by quite a long way. There comes a point where we have to talk about how we have managed that redemption profile, we also have to think how much we have redeemed in specific years. If, for instance, all the bonds are maturing, what do we replace them with? All those factors feature in that.

  Q43  Chairman: Can we turn to the cash management side. You say the two big outcomes from your 2004-05 review of the cash management function have been the development here of a benchmark approach to performance measurement and the implementation of risk limits. How have those changes practically enhanced your public accountability?

  Mr Stheeman: The answer is that we have just been in the process of implementing it. They have not yet, but they will, I think we can say fairly. I mentioned the statement at the time of the Pre-Budget Report and we said specifically at the time, the PBR said, that formal reporting and publication of the performance related to cash management against these KPIs will begin for the outturn in 2007-08, and we are considering it, I can also say, for the outturn of 2006-07, this financial year, and it will lead to better accountability. We are developing, for instance, a benchmark which represents either a default strategy as well for cash management; and it is easier for us to do in cash management than it is in debt management, because in the cash market we are not just the market ourselves, we are only a participant; but this benchmark, as I say just, is one specific aspect of what it is that the Treasury wants us to deliver in terms of the cash management objective. We will be reporting specifically on that, and I think that will go a long way towards enhancing accountability.

  Q44  Chairman: Our cash management activity is driven by cash flow forecasts provided by the Treasury, as I understand it. How accurate has that forecasting been? Do you factor the accuracy into your cash management performance measurement?

  Mr Stheeman: That is a very good question.

  Q45  Chairman: Otherwise you do not have control over it, do you?

  Mr Stheeman: The DMO has no control of the actual forecast itself. The result of government cash management overall is clearly influenced by the quality of that forecast. In other words, the numbers that we receive are the numbers which we act on and which we trade on. We do not try and second-guess the forecast which we receive from the Treasury and which the Treasury puts together as a result of input which it gets from departments across government. There can be, for instance, at times, large swings which arise from late payments of tax receipts, and early payments from another part of government. That is something that the Treasury itself specifically at the moment is looking at: how across government it can better manage the whole forecasting process. We at the DMO are the recipients of that forecast and, you are absolutely right, there is a key impact on us and, if that forecast is not accurate, it can impact overall on the cost-effectiveness of cash measurement. The one thing I would say is, in practice, inaccuracies in the forecast tend to be ones of timing rather than size. The timing tends to be very much the key. That is where the inaccuracies arise. The size of the forecast per se over time tends to be pretty well known in advance.

  Q46  Chairman: What is the answer to my question then? How do you factor into the performance measurement the accuracy of the forecast?

  Mr Stheeman: I do not think we can split it out. That is the answer. In other words, the forecast is one part of what goes into the overall performance of government cash management.

  Q47  Chairman: So, in the end, we are measuring your performance in this respect against some factors of which you do not really have control.

  Mr Stheeman: To a certain extent that is true.

  Ms Whelan: I think it is fair to say that we are measuring government cash management as opposed to DMO's part of cash management in looking at the benchmark that Robert mentioned earlier. So integral to that is both the activity of doing the forecasting and the activity of doing the transactions to offset the forecast.

  Chairman: Let us turn to the Commissioners.

  Q48  Mr Todd: The Commissioners for the Reduction of the National Debt is still enshrined in law as the main governance body for much of your activities here but have not met since Gladstone's day. Indeed, Gladstone may have been at the last meeting in 1860 as Chancellor! Does this suggest a need to modernise the legislative framework for your activities?

  Mr Stheeman: Arguably, yes.

  Q49  Mr Todd: Or is it a case of, "It works okay", in the rather typically English informal, "Anachronisms are no bother to us", way?

  Mr Stheeman: You could say that. Let me put it this way. The Commissioners are there by statute and the positions are ex officio. As you quite correctly pointed out, they have not met for a very long time. The only function that they actually perform as commissioners is to appoint what they call the Comptroller General, who is Jo in this case, and they let us then, if you like, get on with it, and I would not be surprised if some of the commissioners themselves were from time to time surprised to find out that they are actually commissioners. The same probably applies on a slightly different scale (because they do actually perform a function) to the commissioners for PWLB, for instance. Arguably, you would not create something like that if you were to start from scratch—clearly not. The whole set-up and the structure does appear anachronistic. Having said that, in terms of how we carry out the CRND investment function, they play no role whatsoever as commissioners.

  Q50  Mr Todd: They do not have to report on their activities, since there are none, and in law they are accountable for a very large amount of the UK's debt?

  Ms Whelan: Yes. There is about £45 billion under management, but all of the functions are carried out at the official level by us, me and my colleagues.

  Q51  Peter Viggers: I wanted to support Mark Todd's line of questioning. The Chairman said at the beginning of this session that you have quite a heavy duty in terms of annual reports and yet the CRND related investment activities do not appear to have a similar reporting requirement. I put it to you there is no balance there?

  Ms Whelan: I think it is fair to say that most of the accounts and funds which are managed by the CRND do have reports and accounts that are required under statute, but they are prepared, in effect, by the sponsoring department for the fund or the account. For example, the National Insurance Fund is reported on in the National Insurance Fund Account Report that goes before Parliament. We prepare numbers and figures, and so on, that go into that process, we do not ourselves produce a separate report on it, but there are still statutory requirements for some of those accounts to have reports on them.

  Q52  Peter Viggers: Can I be clear how this actually works. Your investment at the moment on behalf of the CRND is restricted to government and government guaranteed securities. In essence, you are borrowing from other parts of the Government. Is that right?

  Ms Whelan: Yes, the investments are either deposits into a pooled account of cash or they are into gilts, but they are not marketable gilts. It is not that we are going out into the market and grabbing gilts that we are also issuing into the market.

  Q53  Peter Viggers: This part of your operation reduces the amount of borrowing that the DMO undertakes through the conventional gilts market. Is that right?

  Ms Whelan: It did a long time ago, but once it is in existence and it is just continuing, there is no new net effect year on year, but, yes.

  Q54  Peter Viggers: Is this kind of borrowing included in the overall borrowing figures?

  Ms Whelan: The central government net borrowing requirement is a net number, if that makes sense.

  Q55  Peter Viggers: So is the answer yes?

  Ms Whelan: I think so, yes.

  Q56  Peter Viggers: What would happen if one of the investment funds actually wanted its money back? Where would that come from?

  Ms Whelan: That would then generate some additional real world borrowing, for example through the gilt—

  Q57  Peter Viggers: Real world?

  Ms Whelan: Yes, meaning using marketable securities.

  Mr Stheeman: Can I stress, that is quite an important point. The vast majority of this is a very small number. The vast majority of the CRND investments are in non-marketable gilts, and so clearly it has no impact, therefore, on what we are doing in terms of our current borrowing.

  Q58  Chairman: But somewhere in your annual review you said that you were looking at investigating scope for providing a more active style of fund management through the private sector. Why would that be more appropriate?

  Ms Whelan: What we aim to provide is a fairly passive, low-cost type of fund management service, and we think that we can do that more cheaply than that being outsourced; but if it were desirable from the perspective of the client fund to have a much more active type of fund management or, indeed, investing in instruments that we have no expertise in, clearly that would need to be done through an outsourcing solution and we were saying that we would be open to investigating that if that looked like a sensible solution.

  Q59  Chairman: Would it be proper for that kind of investment to include investment in non-government securities, in equities, for example?

  Ms Whelan: Some of the funds are required to stick within a very narrow range of conservative instruments because their priority is capital protection, so for those funds, no, that would not be the case, but it is always possible for the sponsors of the fund to decide what they think the fund should be invested in and for that to be something different to what it is currently invested in.


 
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