Warwickshire’s Phil Triggs enters Room151

Phil Triggs, LGC Finance Officer of the Year – 2011, prolific fundraiser and Warwickshire County Council’s Group Head of Pensions and Treasury spoke to Room151 about risk, cash management and pensions.

Room151: Let’s start with treasury management strategy: we’re seeing a very defensive mindset currently among LA wholesale depositors. Are you revising your counterparty selection criteria – or any aspect of your current TMS – in light of what’s been happening in recent months?

Phil Triggs: Treasury managers in the main are maintaining smaller, very high quality counterparty lists. Warwickshire always has and continues to set a high bar in terms of its lending criteria. Rating agencies seem far more proactive and are looking further along the curve in comparison with 2008. They seem keener to justify their existence. Warwickshire acts immediately on any detrimental change.  Currently, we only have four overseas banks on the list and this results from a tightening of the criteria above what was previously a very safe level. Preservation of capital is sacrosanct within our strategy.

R151: Have you taken any counterparties off your approved list recently and if you can’t say who – can you say why?

PT: A number of UK institutions have fallen off in recent weeks as the European pressures and high risks have taken hold. One new development is the advent of inter local authority lending and borrowing which is far more commonplace this year. Treasury managers would sleep far more soundly at night with an entire portfolio of local authority borrowers.

R151: What does the current turmoil in Europe do for confidence in a LA treasury department?

PT: France is about to lose its coveted AAA rating and the only firm decision taken last week at the European summit was to hold another meeting in three months’ time. For any chance of restoring stability, there must be a fiscal union, resulting in the creation of collective responsibility for sovereign debt and bank solvency in all member countries. Currently, Germany won’t even discuss this.

Last week, the ECB announced that it will offer all eurozone banks loans for three years in unlimited amounts at an interest rate of 1%. The idea is that the banks will use this money to buy bonds issued by their own governments. If the Greek or Italian governments default on their debts, the Greek and Italian banks will go bust. But they will go bust anyway, so all the incentives are for the eurozone banks to go for broke, risk their entire capital in the government debt market and make maximum use of the new ECB credit lines.

What does this do for our confidence? The current predicament is bad enough and will worsen. The tensions, political uncertainties, inept handling and persistent procrastination keep us all on a knife edge. Warwickshire has a zero appetite for risk, keeping all deals ultra short, within the UK and constantly monitored. 

R151: Ratings agencies have been redefining their criteria for assessing the credit worthiness of financial institutions – has this work proved beneficial in helping to monitor risk?

PT: Fitch has introduced new viability ratings, designed to be internationally comparable and represent the agency’s view as to the intrinsic creditworthiness of a counterparty. The viability rating represents the capacity of the bank to maintain ongoing operations and to avoid failure, the latter being indicated by extraordinary and company specific measures becoming necessary to protect against a bank’s default. We regard this as a significant development in the ongoing use of rating agencies in the assessment of counterparty risk.

R151: How is treasury risk management evolving at Warwickshire and do you think practices across the board have improved in recent years?

PT: The treasury team constantly scans the FT, internet and draws on broker intelligence for any signs of negative sentiment regarding individual countries and institutions. The lessons learnt by other local authorities and my witnessing the interrogations of the treasury advisors by the DCLG Select Committee struck deep. The current risk environment and uncertainty will continue over at least the medium term. One massive improvement is the monitoring and reporting of the treasury management function to Council on a quarterly basis and the interest and discussion devoted to these reports. Prior to the Iceland default, the reports were annual and went through on the nod.

R151: The NLGN launched a report on Capital Futures and financing options this week and clearly there is some momentum gathering behind the potential for local authorities tapping the bond markets. Which current borrowing options look attractive to you?

PT: With the UK’s status as an ultra-safe haven, UK sovereign debt yields have recorded record lows in recent weeks, at some points in time even safer than Germany. Warwickshire funded its 2011/12 requirement from the PWLB, but is aware of the possibilities of local bond issuance. Work is currently underway to ensure that our approved treasury management policy and strategy will allow this extra club in the golf bag.

R151: We’re seeing some interesting initiatives come to the fore such as Enterprise Zones and Tax Increment Financing – do you think these present good opportunities for local authorities?

PT: The Enterprise Zones were a key part of urban regeneration in the 1980s and 90s. We will need to see more detail but the key features of the new EZs will be a relaxed planning regime and 100% business rate relief of up to £275,000 over five years with local authorities able to keep the rates generated by the new zones. Promising tomorrow’s business rates seems to be a cheaper option than providing tax relief today and the focus of the incentives has moved from property owners to property occupiers.

R151: What scope do you think there is for LA treasury and LGPS to work together on new infrastructure projects?

PT: With the recent pensions reforms still under the consultation process, there still exists the possibility of a high opt out by active members which could result in the LGPS schemes becoming cash flow negative and mature. This will drastically affect the long term nature of the LGPS scheme. Warwickshire was planning to consider infrastructure as an asset class but has decided to suspend any allocation, pending the outcome of the Hutton reforms and how this feeds through into the membership profile.

R151: We’ve spoken to a number of people recently who manage both the treasury and the pensions function at their LAs. As someone who does that, do you see any conflict of interest between acting in the interest of both pensioners and the authority and, if so, how do you manage it?

I have never agonised over any conflict of interest. The recent statutory requirement to maintain separate bank accounts for the pension fund and the local authority has drawn a firmer line between the two operations. The current market turmoil and uncertainty has affected treasury and pensions, it would seem, in equal measures. 

R151: You’ve spoken of there being a good deal of misunderstanding and misinformation surrounding pension reform: what message would you want public sector workers to be getting at the moment?

PT: Even after allowing for the planned increases in employee contributions and switching to a career average scheme, the LGPS remains outstandingly good value. Lord Hutton could have been far more severe in his recommendations. Danny Alexander, Chief Secretary to the Treasury, has pledged that the reforms should last 25 years. In recent months, I have detected a sentiment within the public sector where significant numbers of staff plan to enjoy their disposal income now and resign themselves to the nanny state to fund their retirements in the future. Given the significant drain on future resources caused by a significant proportion of pensioners within our population, I would urge staff not to rely on this outcome, given the perilous state of government finances today and no prospect of any swift resolution to this current fiscal predicament.

R151: Do you think pension reform is going to have a meaningful impact on LGPS investment strategies?

PT: The biggest impact on investment strategies will result from the possible future mature status of the funds. The long term view could morph into medium or short term and this will affect the risk appetite with a move from return seeking assets into gilts and corporate bonds. Such alternatives as private equity and infrastructure, essential for diversification, will be less applicable to the LGPS.

R151: Localism agenda – general power of competence – devolution of power from central government – are LA treasurers on the cusp of a brave new world and how could their work be affected by all of the above?

PT: In my career, change and the advents of brave new worlds have been the only constants.

R151: I’ve read that in addition to being LGC finance officer of the year, you’re a special sergeant, football referee, marathon runner and fundraiser. Would you tell us a little about the charities you’ve raised money for and why you chose to work with them?

PT: Initially, I raised funds for Cancer Research, having lost close family members to the disease. I have also raised money for CLIMB, a children’s charity that came to my attention via a work colleague. I’ve raised in the region of £25,000 and will run my fourth London Marathon in 2012. My target is to achieve the World Top Ten marathons with Paris, Rotterdam and Honolulu the only remaining events.