Introducing the UKGI Contingent Liability Central Capability
The Contingent Liability Central Capability is an analytical and advisory unit formed within UK Government Investments to strengthen contingent liability expertise across government.
As set out in the “Government as Insurer of Last Resort” report published by HM Treasury (HMT) at the March 2020 Budget, a key opportunity identified by HMT’s Balance Sheet Review launched in 2017 is to establish a central capability to advise on the management of contingent liabilities across government.
The government takes on risk that the private sector cannot to protect the population and provide stability when unforeseen events occur. This can create potential liabilities that are uncertain but might lead to future expenditure if specific conditions are met or specific events happen. These liabilities are known as contingent liabilities. Common examples in government include loan guarantees (where government agrees to pay the debts of a third party if they default such as the Enterprise Finance Guarantee (EFG) scheme run by the British Business Bank), and indemnities (protection similar to insurance where government agrees to cover costs if a certain event occurs such as clinical negligence claims against NHS GPs).
Contingent liabilities represent a commitment to possible future expenditure and so are a significant source of fiscal risk to government. HM Treasury (HMT) introduced a new approval framework for contingent liabilities in July 2017. The framework requires contingent liabilities that are novel, contentious or repercussive and have a maximum exposure of over £3 million to be evaluated according to five criteria: rationale; exposure; risk and return; risk management and mitigation; and affordability. The framework has been featured by both the International Monetary Fund (IMF) and the Organisation for Economic Co-operation and Development (OECD) as an example of international best practice in the management of government guarantees.
Contingent Liability Central Capability (CLCC)
The CLCC is being established to build on the existing approval framework and further strengthen contingent liability expertise and risk management across government. It began providing support to government in April 2021. The team comprises actuaries seconded from the Government Actuary’s Department (GAD), credit risk experts, policy professionals and analysts.
Its main areas of focus are to:
- analyse new contingent liabilities, working with departments to quantify risks, incorporate risk mitigations and charge appropriate premiums for risk transferred to the government
- review existing contingent liabilities on both an individual and portfolio basis, to inform risk management and contingency planning. This includes conducting stress tests to determine the economic conditions to which the government is especially vulnerable
- work with departments, providing guidance and promoting best practice across government to assess the financial impacts of contingent liabilities consistently and accurately
Please get in touch at CLCC@ukgi.org.uk
You can find out more about UK Government Investments (UKGI) and the CLCC online.
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