RBS 2011 Annual Report Download - page 247

RBS Group 2011 245
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 Main scheme’s
assets which are held separately from the assets of the Group.
Significant changes to asset strategy are discussed with the Groups
Pension Risk Committee which was established in 2011. The Group and
the trustee must agree on the Main scheme 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 the annual change in the
Consumer Price Index, 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.
Risk management framework
From a sponsor perspective, the Group manages this risk using a
framework that encompasses risk reporting and monitoring, stress
testing, modelling and an associated governance structure that helps
ensure the Group is able to fulfil its obligation to support the defined
benefit pension schemes to which it has exposure.
Reporting and monitoring
The Group maintains an independent review of risk from a sponsor
perspective within its pension funds. It achieves this through underlying
regular pension risk reporting and monitoring to the Group Board, Group
Board Risk Committee and Group Risk Committee on the material
pension schemes that the Group has an obligation to support.
Stress testing and modelling
Throughout 2011, various pension risk stress testing initiatives were
undertaken, focused both on internally defined scenarios and on
scenarios undertaken to meet integrated EBA, IMF and FSA stress
testing requirements. On an annual basis, the Internal Capital Adequacy
Assessment Process is also modelled; this entails assessing changes in
pension asset and liability values over a 12-month horizon under various
stresses and scenarios.
Governance
Akey component of the pension risk framework is the Pension Risk
Committee, which was established in 2011 and has the authority to
articulate the Group’s view of risk appetite for the various RBS pension
schemes. The Pension Risk Committee also serves as a formal link
between the Group and the Trustee of the Group’s largest pension
schemes on risk management asset strategy and financing issues and,
during 2011, facilitated an agreement between the two on mechanisms
for reducing risk within the RBS Group Pension Fund.
Improvements in 2011 and next steps
As part of the continuing development of the pension risk management
framework within RBS Group, key achievements in 2011 focused on
improved stress testing and risk governance mechanisms. The
framework will continue to be developed in 2012 with improvements in
risk reporting and monitoring, modelling and stress testing capability
along with the embedding of the pension risk governance structure
implemented in 2011.
Main scheme
The most recent funding valuation, at 31 March 2010, was agreed during
2011. It showed that the value of liabilities exceeded the value of assets
by £3.5 billion at 31 March 2010, a ratio of assets to liabilities of 84%. In
order to eliminate this deficit, the Group has agreed to pay additional
contributions each year over the period 2011 to 2018. These
contributions started at £375 million per annum in 2011, increasing to
£400 million per annum in 2013 and from 2016 onwards will be further
increased in line with price inflation. Further details are given in Note 4 of
the consolidated accounts.
The assets of the Main scheme, which represent 84% of Group pension
plan assets at 31 December 2011, are 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 also uses
derivatives within its portfolio to manage the allocation to asset classes
and to manage risk within asset classes.