HSBC 2010 Annual Report Download - page 174

HSBC HOLDINGS PLC
Report of the Directors: Operating and Financial Review (continued)
Risk > Other material risks > Reputational risk / Pension risk / Sustainability risk
172
Other material risks
Reputational risk
(Unaudited)
The safeguarding of our reputation is of
paramount importance to our continued
prosperity and is the responsibility of every
member of staff.
We regularly review our 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.
We have always aspired to the highest standards
of conduct and, as a matter of routine, take account
of reputational risks to our business. Reputational
risks can arise from a wide variety of causes,
including ESG issues and operational risk events. As
a banking group, our good reputation depends upon
the way in which we conduct our business, but it can
also be affected by the way in which clients, to
whom we provide financial services, conduct
themselves. The training of Directors on
appointment includes reputational matters.
Group functions with responsibility for activities
that attract reputational risk are represented at the
Group Reputational Risk Committee (‘GRRC’),
which is chaired by the Group Chairman. The
primary role of the GRRC is to consider areas and
activities presenting significant reputational risk and,
where appropriate, to make recommendations to
the Risk Management Meeting and the GMB for
policy or procedural changes to mitigate such risk.
Reputational Risk Committees have been established
in each of the Group’s regions. These committees
are required to ensure that reputational risks are
considered at a regional as well as Group level.
Minutes from the regional committees are tabled at
GRRC.
Standards on all major aspects of business
are set for HSBC and for individual subsidiaries,
businesses and functions. Reputational risks,
including ESG matters, are considered and assessed
by the Board, the GMB, the Risk Management
Meeting, subsidiary company boards, Board
committees and senior management during the
formulation of policy and the establishment of our
standards. These policies, which form an integral
part of the internal control system (see page 202), are
communicated through manuals and statements of
policy and are promulgated through internal
communications and training. The policies cover
ESG issues and set out operational procedures in
all areas of reputational risk, including money
laundering deterrence, counter-terrorist financing,
environmental impact, anti-corruption measures and
employee relations. The policy manuals address risk
issues in detail and co-operation between GMO
departments and businesses is required to ensure a
strong adherence to our risk management system and
our sustainability practices.
Pension risk
(Unaudited)
We operate a number of pension plans throughout
the world, as described in Note 7 on the Financial
Statements. Some of them are defined benefit plans,
of which the largest is the HSBC Bank (UK) Pension
Scheme (‘the principal plan’).
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 HSBC’s cash flow 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 principal
plan 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).
A 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. The long-term