RBS 2010 Annual Report Download - page 205

Reputation risk*
Reputation risk is defined as the potential loss in reputation that could
lead to negative publicity, loss of revenue, costly litigation, a decline in
the customer base or the exit of key Group employees.
Reputation risk can arise from actions taken by the Group or a failure to
take action, such as failing to assess the environmental, social or ethical
impacts of clients or projects that the Group has provided products or
services to.
The Group seeks to safeguard its reputation by considering the impact on
the value of its franchise from how it conducts business, its choice of
customers and the way stakeholders view the Group. Managing the
Group’s reputation is the joint responsibility of all employees, and
reputational considerations should, as part of standard practice, be
integrated into the Group’s day-to-day decision making structures.
Currently the Group manages reputational risk through a number of
functions, such as divisions, Group Communications, Group
Sustainability and an Environmental, Social and Ethical (ESE) risk
management function. The latter function is responsible for assessing
ESE risks associated with business engagements and business divisions.
The Board has ultimate responsibility for managing any impact on the
reputation of the Group arising from its operations. The Group
Sustainability Committee (established at the beginning of 2010) sets the
overall strategy and approach for the management of Group sustainability,
however all parts of the Group take responsibility for reputation
management.
The risk is viewed as material given the central nature of the Group’s
market reputation in the strategic risk objectives.
Pension risk*
The Group is exposed to risk from its defined benefit pension schemes to
the extent that the assets of the schemes do not fully match the timing
and amount of the schemes’ liabilities. Pension scheme liabilities vary
with changes to long-term interest rates, inflation, pensionable salaries
and the longevity of scheme members as well as changes in legislation.
The Group is exposed to the risk that the market value of the schemes’
assets, together with future returns and any additional future contributions
could be considered insufficient to meet the liabilities as they fall due. In
such circumstances, the Group could be obliged, or may choose, to make
additional contributions to the schemes.
The RBS Group Pension Fund (“Main scheme”) is the largest of the
schemes and the main source of pension risk. The Main scheme
operates under a trust deed under which the corporate trustee, RBS
Pension Trustees Limited, is a wholly owned subsidiary of The Royal
Bank of Scotland plc and the trustee board comprises six directors
selected by the Group and four directors nominated by members.
The trustee is solely responsible for the investment of the schemes
assets which are held separately from the assets of the Group. The
Group and the trustee must agree on the investment principles and the
funding plan.
In October 2006, the Main scheme was closed to new employees. In
November 2009, the Group confirmed that it was making changes to the
Main scheme and a number of other defined benefit schemes including
the introduction of a limit of 2% per annum (or Consumer Price Indices
(CPI) inflation, if lower) to the amount of any salary increase that will
count for pensionable purposes.
Risk appetite and investment policy are agreed by the trustee with
quantitative and qualitative input from the scheme actuaries and
investment advisers. The trustee also consults with the Group to obtain
its view on the appropriate level of risk within the pension fund.
The Group maintains an independent review of risk within its pension
funds. The Group Risk Committee now monitors pension obligation risk
on an ongoing basis with a monthly report illustrating the funding
positions and key sensitivities of the Group’s pension schemes.
Additionally, as part of the Internal Capital Adequacy Assessment
Process (ICAAP) process, the change in asset and liability values is
modelled over a twelve-month time horizon under a stressed scenario.
The funding valuation of the Main scheme at 31 March 2010 is currently
in progress. Further details are given in Note 4 on the accounts.
The Main scheme, which represents 84% of plan assets at 31 December
2010, is invested in a diversified portfolio of quoted and private equity,
government and corporate fixed interest and index-linked bonds, and
other assets including property and hedge funds. The trustee has taken
measures to partially mitigate inflation and interest rate risks both by
investment in suitable physical assets and by entering into inflation and
interest rate swaps. The Main scheme has an additional exposure to
rewarded risk by investing in equity futures.
The table below shows the impact on the Main schemes assets and
liabilities (measured according to IAS 19 ‘Employee Benefits’) of changes
in interest rates and equity values at the year end, taking account of the
current asset allocation and hedging arrangements.
Change
in value
of assets
£m
Change
in value of
liabilities
£m
Decrease/
(increase) in net
pension
obligations
£m
As at 31 December 2010
Fall in nominal swap yields of 0.25% at all durations with no change in credit spreads 422 193 229
Fall in real swap yields of 0.25% at all durations with no change in credit spreads 355 799 (444)
Fall in credit spreads of 0.25% at all durations with no change in nominal or real swap yields 98 1,005 (907)
Fall in equity values of 10% (1,083) — (1,083)
203RBS Group 2010
Business review
Risk and balance sheet management