Administration and expenditure of the Chancellor's departments, 2008-09 - Treasury Contents

Supplementary written evidence submitted by HM Treasury


Do large minority shareholders attend the quarterly meetings with UKFI? (Q401-Q402)

  The Committee asked about UKFI's relationships with large minority shareholders.

  Quarterly meetings are held between the UKFI CEO and senior Treasury officials, to allow Treasury to assess UKFI's performance. These meetings are weighted towards a forward-looking, risk-based analysis of progress against the UKFI Business Plan and Investment Mandate. Large minority shareholders in the relevant banks do not attend these meetings.

  UKFI recognises that rebuilding the confidence of existing and potential shareholders will be essential if the banks are to attain a full market valuation for their shares. This is especially important given the Government's intention not to be a permanent shareholder.

  Since the publication of UKFI Strategy: Market Investments and Annual Report and Accounts in July 2009, UKFI has held over 130 meetings with UK-based and global institutional shareholders, including current and potential shareholders in RBS and Lloyds.

  The aims of these meetings are:

    — to canvas other investors' views on the issues facing the banks, and what steps the banks should be taking to address these. Given the relative size of the Government's shareholdings in the two banks it is important that UKFI's views are well-informed;

    — to explain the arm's length nature of UKFI's relationship with Government, and to explain the objective of protecting and enhancing the value of Government's stakes with a view to an exit from the shareholdings. This is intended to address any misunderstandings or fears about possible non-shareholder-oriented goals that UKFI, as a Government-related entity, might be perceived to have; and

    — to demonstrate the UKFI is a responsible and responsive steward of the taxpayer's investment. UKFI aims to promote the development of a broad group of investors who are comfortable with the direction that the banks are taking, and who would be willing to enter into transactions with the Government over time.

  UKFI continues to build relationships with other investors, and is committed to continuing its policy of engagement with them around major business issues and in deliberation on matters brought to vote at the banks' Annual General Meetings and all other meetings of shareholders.

What was the reasoning behind the targets that were given to RBS and to Lloyds for additional lending? (Q403-Q406)

  The lending commitments agreed with RBS and Lloyds Banking Group are the result of careful, detailed negotiations between the institutions concerned and HM Government.

  The lending agreements were negotiated individually with the banks, taking account of their specific circumstances, expertise and capacity.

Could you share the work on risk management of the Mapeley contract? (Q427)

  HM Revenue & Customs (HMRC) has been very conscious of the potential impact of the economic downturn and it own vacation plans on Mapeley's financial position. To that end, it has carried out a detailed analysis of Mapeley's financial viability. Ongoing monitoring activity takes place, by intelligent review of published information. Two-way dialogue at senior stakeholder level in the partnership augments this analysis.

  A financial model has been constructed which shows the impact of a variety of factors on Mapeley's financial viability; these include external economic factors (eg inflation, borrowing interest rates) and contractual (particularly the extent and timing of HMRC exiting buildings under the flexibility provisions). Mapeley were fully consulted during the development of the model and provided property specific data and management information relating to their own cash flows. These inputs are fed in to the model so that it can be used for robust decision-making, rather than HMRC relying upon scenario assumptions when determining its tactical and strategic estate plans. The model can be updated and continues to be used to inform vacation plans as well as allowing a number of economic scenarios to be run.

  HMRC has discussed the results of the initial modelling with Mapeley with a view to identifying the options for maximizing HMRC's capacity to use the STEPS contract to generate financial efficiencies, whilst ensuring the ongoing financial viability of the partnership arrangement. HMRC has drawn on the modelling work as vacation plans have become clearer and both partners have discussed where it may be possible to amend plans in order to reduce the financial pressure on Mapeley whilst enabling the Department to vacate surplus space. We are in discussion with Mapeley based on those planned vacations.

  HMRC is refining this modelling to enable it to undertake comparative analysis of the impacts of a range of service and portfolio related contractual strategies and actions, both on its own financial position and on Mapeley's financial viability. The model, once fully constructed, will form a platform to inform ongoing measurement of value for money from the STEPS contract.

  Whilst the Department has prioritised the discussions and supporting modelling work intended to help Mapeley manage its financial pressures, HMRC has also refreshed and enhanced previous work done on business continuity planning in the event of Mapeley default. Through this planning and the work on Mapeley's financial viability, HMRC's Executive Committee is confident in its ability to manage any risks to its estates management plans effectively.

Why is outcome 2(a) "Supporting low inflation" described as "met-ongoing"? (Q433-Q435)

  The rationale behind the "met-ongoing" assessment is that consumer price inflation (CPI) hasn't been more than 1% above or below the 2% target since February, but also that the monetary policy framework allows the Monetary Policy Committee (MPC) to look through short-term fluctuations to keep inflation at target over the medium term. As the latest MPC remit states:

    "The framework takes into account that any economy at some point can suffer from external events or temporary difficulties. The framework is based on the recognition that the actual inflation rate will on occasions depart from its target as a result of shocks and disturbances. Attempts to keep inflation at the inflation target in these circumstances may cause undesirable volatility in output."

  If CPI does move more than 1% above or below the 2% target, the remit states that the Governor of the Bank of England must explain in an open letter the reasons for the deviation from target, the action the MPC proposes to take, the expected duration of the deviation and how the proposed action meets the remit of the MPC.

Can you confirm the number of families that were supposed to be helped by the Housing Benefit change? (Q458-Q459)

  Our latest estimate is that around 200,000 working families will gain about £1,000 a year following the disregard of Child Benefit from the calculation of their Housing Benefit and/or Council Tax Benefit award. These customers are already in receipt of Housing Benefit and/or Council Tax Benefit and so we can be confident they will gain.

  In addition to those families who are already in receipt of Housing Benefit and/or Council Tax Benefit, the introduction of the disregard will also bring a further set of families onto entitlement for these benefits. Because of uncertainty about the extent to which this group will take up the benefits they are entitled to, reference to them is not included in the press notice issued by DWP in November when the change came into effect.

  Our current estimate is that around a further 200,000 working families who become newly entitled to Housing Benefit and/or Council Tax Benefit because of the disregard will need to make a claim. We have not included this group in our media strategy because of the dependency upon them to make a claim.

  The estimate for AME cost of the disregard announced at Budget 2008 was £330 million per annum. This estimate took a cautious approach for costing purposes (the potential maximum cost to the exchequer) by including both existing customers who will gain and assuming full take-up by those who become newly entitled to Housing Benefit and/or Council Tax Benefit.

  The disregard of Child Benefit from the calculation of the Housing Benefit and/or Council Tax Benefit award applies to all customers in the Social and Private Rented Sectors.

What discussions has Treasury had with the Crown Estate regarding seabed leasing for renewable energy offshore? (Q520)

  The Crown Estate operates at arm's length from the Treasury and enjoys a substantial degree of independence in its commercial activity. The Treasury's main focus of interest is in the commercial activity of the Estate as an integral corporate entity. The Crown Estate has shown itself capable of delivering successful financial results, while contributing to sustainable development, over a number of years and in a variety of property fields.

  In the offshore energy field—both wave power and wind power—the Crown Estate is working constructively with the expert departments, notably DECC and the Scottish Government. It meets relevant people both in formal committees and ad hoc as issues arise.

How are you monitoring NS&I's performance now that they have suspended the value-add indicator? (Q534-Q536)

NS&I's performance

  NS&I's performance is measured against three main financial targets: Value Added (measure of cost effectiveness against comparable (ie similar maturity) alternative wholesale sources of financing), Net Finance (the net flow of customer deposits), and the cost of administering funds (which benchmarks NS&I's efficiency against the industry). The minister sets annual targets for these measures.

  Last year, NS&I was affected by a series of unexpected events, and was operating in a volatile environment. It saw the flight to safety, followed by falling base rates, and the dislocation between base rate and LIBOR.

  NS&I did not benefit from the market instability. It kept rates within the pricing corridor and stopped all discretionary marketing, such as TV and press advertising for instance, and adopted—as best as it could—a low profile. However, in the interest of financial stability it remained open to new customers and focused on maintaining its usual service standards, in spite of the additional unsolicited inflows. At each stage it was quick to point out the effect of the changing environment on the dynamics of its business, presenting the options to stay on track (to reduce net financing and keep value added on track). It recommended and we agreed to an approach, which preserves the brand and Net Financing, at the expense of short term Value Added. Net Financing in 2008-09 was £12.5 billion against a remit of £4.6 billion.

  For 2009-10, HMT agreed a net financing target of zero, with a range of -£2 billion to +£2 billion. NS&I's focus in 2009-10 is on delivering its modernisation programme for the benefit of customers, preserving net financing for the government and supporting financial stability in terms of maintaining an appropriate competitive position.

Value Added (VA)

  The cost effectiveness of NS&I in the form of VA is measured against the cost of the most directly comparable form of alternative wholesale financing. For variable rate products we compare the cost of funding to the Bank of England base rate, and for fixed rate products, the comparator is the yield on fixed rate gilts.

  In the current unprecedented economic environment, the comparators NS&I previously used to measure NS&I's cost-effectiveness and set its interest rates are no longer as meaningful. The base rate is now at a historically low level and financial markets have been unusually volatile over the last year. It is worth noting that the distorted Value Add comparators could have resulted in NS&I's Value Add figures being artificially depressed or flattered.

  Under the circumstances and the actions agreed on pricing, NS&I agreed with HMT that NS&I's Service Delivery Measure target for value added would be temporarily suspended from Quarter 4 2008-09 and no target set for 2009-10.

Alternative indicators

  Over the last two years, NS&I has proved itself to be a reliable, secure and trusted cornerstone of the savings market. NS&I remain committed to delivering Value Add over the longer term; however, there are other measures that illustrate its effectiveness as a cost-effective way of raising funding for the government: a good example is the efficiency ratio [this compares NS&I's administrative costs to the average funds invested by customers]. This currently stands at 20 basis points, which compares extremely well to those of comparable financial services providers and below the target agreed with HMT.

  While Value Added is temporarily suspended due to market conditions, NS&I has developed a proxy value indicator, which has more validity in current circumstances. This is useful for pricing and planning purposes. It is not designed to replace Value Add but to give NS&I a tool to see whether it is delivering cost effective financing while the Value Add comparators are distorted and therefore misleading.

  The alternative value indicator is still calculated in the same way for the fixed book; however, for the variable book it has looked at the average length of time people hold their investment with NS&I. it has compared this average figure to current gilt yields with equivalent maturity dates [ie, the cost to the DMO of raising the money now]. It estimates that, in the current financial year, this has so far delivered a figure of circa £750 million.

What assessment have you made of the impact on the Government's net debt figure of full compliance with IFRS? (Q541)

  None of the existing PFIs coming on balance sheet under International Financial Reporting Standards (IFRS) will be counted against net debt. Any new PFIs will be assessed against both IFRS and National Accounting rules (ONS). If they satisfy IFRS criteria, they will come on balance sheet for resource accounts (and local authority accounts), and if they satisfy National Accounts criteria, they would be counted against net debt. We expect that very few PFIs will remain off balance sheet under IFRS, but the existing off balance sheet schemes and new ones are likely to be outside national accounts and thus outside net debt. The actual position for the first year of IFRS will not be known until the accounting for the 2009-10 financial year has been completed and audited by the NAO.

What proportion of the assets covered by the Asset Protection Scheme, which now and in the future will only apply to RBS, represented assets outside the UK? (Q548)

  HM Treasury does not intend to publish detailed information about individual assets within the Scheme given the commercial sensitivity of such information and the risk that releasing such information would hinder the effective operation of the Scheme. However, now that the accession agreement is signed and all details are finalised, Treasury has published more detail on the asset pool and the due diligence and loss estimation process. This has been deposited in the libraries of both Houses of Parliament and includes information on the location of the Obligor incorporation (extract from Table 3.B, page 18 below). This can be accessed via the following link:

  If RBS had not been able to include foreign assets and assets denominated in foreign currencies the scheme would not deliver its objectives. The RBS balance sheet includes assets denominated in foreign currencies and assets that were issued or purchased by foreign subsidiaries of RBS. Where these assets meet the criteria for entry, it is right that they are included in the APS pool. Failing to do so would not solve RBS' problems and allow it to increase its lending to customers. Some international assets have been excluded from the scheme since it was announced in January 2009. This is because the Government has concluded that specific assets are incompatible with the scheme rules.

Table 3.B


Location of obligor incorporation
Covered assets (£bn)

United Kingdom
Other EU
United States of America

How will HM Treasury report a change in value of the Government's investments in financial institutions in its Resource Accounts? (Q562)

  In accordance with International Accounting Standard 39 (Financial Instruments: Recognition and Measurement), where HM Treasury acquires share capital in a financial institution, it is initially held on the Department's balance sheet as an "Available For Sale Financial Instrument", at the fair value of the consideration paid. Subsequently, the fair value of the investment is reassessed either—in the case of "ordinary shares" capital—by reference to the publicly quoted share price, or—in the case of "B shares" capital—with reference to a valuation model. Any movement in this fair value assessment whilst the investment is held is shown in the "Available For Sale Reserve" in the bottom of the balance sheet.

  Where HM Treasury sells any such Financial Instrument, the fair value of the investment is removed from the balance sheet, with the fair value of the consideration received recorded in the balance sheet; any difference in these two values is then recognised in the Operating Cost Statement, alongside the release of any related "Available For Sale Reserve".

  Under this accounting standard, where the fair value of the investment suffers a significant or prolonged decrease in a given financial year, this loss in value, is recognised in the Operating Cost Statement in the period in question, and not deferred until any future sale date; this treatment does not apply to any significant or prolonged increase in value.

  Financial instruments held by HM Treasury during 2008-09 are reported in the Operating Cost Statement on page 176 of HM Treasury Group's Annual Report and Accounts 2008-09 (HC 611), and in the Balance Sheet on page 177, along with the associated Notes 8 and 13a to those Accounts.

previous page contents next page

House of Commons home page Parliament home page House of Lords home page search page enquiries index

© Parliamentary copyright 2010
Prepared 9 March 2010