The 30 Year Plan

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It’s that time in the calendar when finance teams don’t get much sleep or to enjoy the long Bank Holiday weekends! The year-end process is well under way, and on top of all that there is the 30 Year Plan.

The 30 Year Plan is a fundamental part of the governance of an organisation, taking the agreed strategic goals and converting them into more detailed plans for operational delivery, infrastructure improvements, and growth. The financial modelling of these plans can be complex considering both sector wide impacts such as Welfare Reform and the continued rent reductions, as well as more specific organisational challenges such as transformational change or the need for refinancing. During its development, the plan will be tested for affordability and adjusted to produce outputs that meet the risk appetites of the Board. Also ensuring that they give sufficient headroom against the bank covenants.

This is all well and good, but only produces one picture of how the plan may turn out. It relies on a range of economic and operational assumptions that are often quickly superseded by real events – having both positive and negative effects. The reason for stress testing is to examine the impact of changes in the key assumptions within the plan.

For example, inflationary increases, changes to LIBOR or reductions in selling prices, to show the impact on the bottom line and in particular on the key lending covenant ratios. Stress testing gives the Board some sense of the risk level inherent in the plan and the room to manoeuvre if things change. Internal limits or “Golden Rules” will be set allowing headroom over and above the lender requirements on key ratios to act as early warnings. This will allow time for the Board to take corrective action should a limit be reached. How close these limits are to the actual lender covenants will depend on the risk appetite of the Board.

The regulator also requires the modelling of a “Perfect Storm” scenario, where multi-variate scenarios are modelled to the point where the tightest covenant conditions are breached and the plan is broken. This may feel like an academic number crunching exercise, but it is intended to inform the Board about the combination of factors that could bring about a crisis. The expectation is that they will seek assurance that conditions are being monitored and will formulate contingency plans to tackle the problems before they sink the organisation.

There are a number of risks on the radar:

  • The impacts of Brexit are uncertain but documented as creating possible labour shortages, a weaker pound and increased costs of materials
  • Pensions continue to be impacted by continuing low gilt rates
  • Uncertainty around future rents continues
  • The potential for interest rate increases after the sustained period of low rates.

You need to recognise the warning signs and add them to the KPIs.

Contingency plans could include:

  • Stopping discretionary spending
  • Putting planned maintenance on hold
  • Delaying development
  • Selling off assets – which ones you choose will depend whether it’s a cash crisis or a reduction in surplus. The link to the Asset & Liability register here is clear –
    • Which assets could you sell and how quickly?
    • What contingent liabilities do you have
    • Have you stress tested the plan for the impact of those liabilities crystallising.

And finally, what are the triggers and who has the authority to put the plans into action?

The 30 year FFR is due for submission to NROSH by 30 June so financial plans should be approaching completion and being approved by the Board.

If you need any help with this process or with modelling the perfect storm then please contact the Altair finance team.

Altair are an approved Brixx partner.