HSBC 2009 Annual Report Download - page 265

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An exception report must be made to the local
compliance function and escalated to the Head of
Group Compliance in respect of any breach which
has given rise to a fine and/or costs levied by a court
of law or regulatory body where the amount is
US$1,500 or more, and material or significant issues
are reported to the Risk Management Meeting of
GMB and/or the Group Audit Committee.
In addition, operating companies are required to
submit quarterly returns detailing outstanding claims
where the claim (or group of similar claims) exceeds
US$10 million, where the action is by a regulatory
authority, where the proceedings are criminal, where
the claim might materially affect the Group’s
reputation, or, where the GMO Legal department has
requested returns be completed for a particular
claim. These returns are used for reporting to the
Group Audit Committee and the Board, and
disclosure in the Interim Report and Annual Report
and Accounts, if appropriate.
Group security and fraud risk
(Unaudited)
Security and fraud risk issues are managed at Group
level by Group Security and Fraud Risk. This unit,
which has responsibility for physical risk, fraud,
information and contingency risk, and security and
business intelligence, is fully integrated within the
central GMO Risk function. This enables the Group
to identify and mitigate the permutations of these
and other non-financial risks to its business lines
across the jurisdictions in which it operates.
Pension risk
(Unaudited)
HSBC operates a number of pension plans
throughout the world, as described in Note 8 on the
Financial Statements. Some of them are defined
benefit plans, of which the largest is the HSBC Bank
(UK) Pension Scheme.
In order to fund the benefits associated with
these plans, sponsoring group companies (and, in
some instances, employees) make regular
contributions in accordance with advice from
actuaries and in consultation with the scheme’s
trustees (where relevant). The defined benefit plans
invest these contributions in a range of investments
designed to meet their long-term liabilities.
The level of these contributions has a direct
impact on the cash flow of the Group and would
normally be set to ensure that there are sufficient
funds to meet the cost of the accruing benefits for the
future service of active members. However, higher
contributions will be required when plan assets are
considered insufficient to cover the existing pension
liabilities as a deficit exists. Contribution rates are
typically revised annually or triennially, depending
on the plan. The agreed contributions to the HSBC
Bank (UK) Pension Scheme are revised triennially.
A deficit in a defined benefit plan may arise
from a number of factors, including:
• investments delivering a return below that
required to provide the projected plan benefits.
This could arise, for example, when there is a
fall in the market value of equities, or when
increases in long-term interest rates cause a fall
in the value of fixed income securities held;
• the prevailing economic environment leading to
corporate failures, thus triggering write-downs
in asset values (both equity and debt);
• a change in either interest rates or inflation
which causes an increase in the value of the
scheme liabilities; and
• scheme members living longer than expected
(known as longevity risk).
The plan’s investment strategy is determined
after taking into consideration the market risk
inherent in the investments and its consequential
impact on potential future contributions.
Ultimate responsibility for investment strategy
rests with either the trustees or, in certain
circumstances, a Management Committee. The
degree of independence of the trustees from HSBC
varies in different jurisdictions. For example, the
HSBC Bank (UK) Pension Scheme, which accounts
for approximately 70 per cent of the obligations
of the Group’s defined benefit pension plans, is
overseen by a corporate trustee who regularly
monitors the market risks inherent in the scheme.
Reputational risk
(Unaudited)
The safeguarding of HSBC’s reputation is
of paramount importance to its continued
prosperity and is the responsibility of every
member of staff.
HSBC regularly reviews its policies and procedures
for safeguarding against reputational and operational
risks. This is an evolutionary process which takes
account of relevant developments and industry
guidance such as The Association of British
Insurers’ guidance on best practice when responding
to environmental, social and governance (‘ESG’)
risks.