HSBC 2014 Annual Report Download - page 84

HSBC BANK PLC
Report of the Directors: Risk (continued)
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with a clear process to escalate and address matters
at the appropriate level;
• the continued roll-out of training and communication
about the HSBC Values programme that defines the
way everyone in the Group should act and seeks to
ensure that the Values are embedded into our
business as usual operations; and
• the ongoing development and implementation of the
Global Standards around financial crime compliance,
which underpin our businesses. This includes
ensuring globally consistent application of policies
that govern AML and sanctions compliance
provisions.
In July 2014, the new Reputational Risk and Customer
Selection policies were issued which defines a consistent
and structured approach to managing these risks:
• Reputational Risk (new policy): defines reputational
risk and sets out HSBC’s approach to managing it.
• Customer Selection and Business Acceptance (new
policy): outlines the risk factors to be considered
when a new customer relationship is identified.
• Customer Selection and Exit Management: establishes
the globally sustainable approach to customer
selection and exit management for all accounts and
relationships in all business lines. This details the
criteria under which escalation or approval is
required.
• Sixth Filter: customers operating in high risk
jurisdictions carry particular financial crime risks and
may require specific approvals, or be considered for
an exit, if the relationship exceeds HSBC’s global risk
appetite.
HSBC has a zero tolerance for knowingly engaging in any
business, activity or association where foreseeable
reputational damage has not been considered and
mitigated. There must be no barriers to open discussion
and the escalation of issues that could impact negatively
on HSBC. While there is a level of risk in every aspect of
business activity, appropriate consideration of potential
harm to HSBC’s good name must be a part of all business
decisions.
Detecting and preventing illicit actors’ access to the
global financial system calls for constant vigilance and
HSBC will continue to cooperate closely with all
governments to achieve success. This is integral to
the execution of our strategy, to HSBC Values and to
preserving and enhancing our reputation.
Pension risk
Pension risk is the risk that contributions from Group
companies and members fail to generate sufficient funds
to meet the cost of accruing benefits for the future
service of active members, and the risk that the
performance of assets held in pension funds is
insufficient to cover existing pension liabilities. Pension
risk arises from investments delivering an inadequate
return, economic conditions leading to corporate
failures, adverse changes in interest rates or inflation, or
members living longer than expected (longevity risk).
The group operates a number of pension plans
throughout Europe. Some of them are defined benefit
plans, of which the largest is the HSBC Bank (UK) Pension
Scheme (‘the principal plan’).
Over 2014, HSBC established a new Global Pension Risk
Framework with accompanying new global policies on
the management of risks related to defined benefit and
defined contribution plans. HSBC also established a new
Global Pensions Oversight Committee to oversee the
running of all pension plans sponsored by HSBC around
the world. In addition the UK Pension Review Committee
was replaced by the European Pension Review
Committee with an increased scope to oversee the
running of pension plans across the group.
In order to fund the benefits associated with these plans,
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 group’s cash flow and is set to ensure that there are
sufficient funds to meet the cost of the accruing benefits
for the future service of active members. 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 investment
objectives of both the group and, where relevant and
appropriate, the trustees are:
• to limit the risk of the assets failing to meet the
liabilities of the plans over the long-term; and
• to maximise returns consistent with an acceptable
level of risk so as to control the long-term costs of the
defined benefit plans.
In pursuit of these long-term objectives, a benchmark is
established for the allocation of the defined benefit plan
assets between asset classes. In addition, each permitted
asset class has its own benchmarks, such as stock market