Contingent Liabilities

Analyse and advise on the UK government’s contingent liabilities

The Contingent Liability Central Capability (CLCC) is an analytical and advisory unit formed within UK Government Investments (UKGI) to strengthen contingent liability expertise across government.

 

Contingent liabilities

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 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 has been 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.

The CLCC works with departments, providing guidance and promoting best practice across government to assess the financial impacts of contingent liabilities consistently and accurately.

One of the areas of focus is on new contingent liabilities, looking at loan guarantees and indemnities. The CLCC works with departments to quantify risks, incorporate risk mitigations and charge appropriate premiums for risk transferred to the government. For example, subject to meeting the original policy intention the government’s exposure to risk can be limited by design features such as caps on the government’s commitment (by amount, time or cover), experience monitoring processes and risk-sharing (incentivising the private sector to manage risks through proportionate sharing of losses or an initial excess).

The team also reviews existing contingent liabilities on both an individual and portfolio basis, to inform HM Treasury’s risk management and contingency planning. This includes conducting stress tests to determine the economic conditions to which the government is especially vulnerable.