RBS 2013 Annual Report Download - page 358
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Business review Risk and balance sheet management
356
Other risks* continued
Conduct risk continued
Risk mitigation
Assurance and monitoring activities are essential to ensure that the
Group can demonstrate compliance with existing rules and regulations,
assess whether it is managing its conduct risks appropriately, and
determine whether key controls are effective. In 2013, the Group Conduct
and Regulatory Affairs assurance function provided Group-wide
assurance over specific compliance topics, as well as thematic process
reviews.
Pension risk
Definition
Pension risk is the risk arising from contractual or other liabilities to, or
with respect to, the Group’s pension schemes, whether established for its
employees or for those of a related company or otherwise. It also means
the risk that the Group may make payments or other contributions to, or
with respect to, a pension scheme because of a moral obligation, or
because it considers that it needs to do so for some other reason.
Sources of risk
The Group has exposure to pension risk through its defined benefit
schemes worldwide. The five largest schemes, which represent around
96% of the Group’s pension liabilities, are the Royal Bank of Scotland
Group Pension Fund (‘main scheme’), the Ulster Bank Pension Scheme
(Republic of Ireland), the Ulster Bank Pension Scheme, the Royal Bank
of Scotland Americas Pension Plan and the Royal Bank of Scotland
International Pension Trust. The main scheme is the principal source of
pension risk.
Pension scheme liabilities vary with changes in long-term interest rates
and inflation as well as with pensionable salaries, the longevity of scheme
members and changes in legislation. Meanwhile, pension scheme assets
vary with changes in interest rates, inflation expectations, credit spreads,
exchange rates and equity and property prices. The Group is exposed to
the risk that the market value of the schemes’ assets - together with
future returns and any additional future contributions - becomes
insufficient to meet liabilities as they fall due. In such circumstances, the
Group could be obliged (or may choose) to make additional contributions
to the schemes or be required to hold additional capital to mitigate this
risk.
Governance
The main scheme operates under a trust deed. The trustee is responsible
for the investment of the main scheme’s assets which are held separately
from the assets of the Group. The Group and the trustee must agree on
the plan to fund the main scheme. The corporate trustee, RBS Pension
Trustee Limited, is a wholly owned subsidiary of The Royal Bank of
Scotland plc. The trustee board currently comprises six directors selected
by the Group and three directors nominated by members.
*unaudited
The Pension Risk Committee, acting as a sub-committee of the Group
Asset and Liability Management Committee (GALCO), considers the
Group’s view of pension risk. The Pension Risk Committee considers
mechanisms that could potentially be used for managing risk within the
funds as well as financial strategy and employee welfare implications, It
also reviews actuarial assumptions from a sponsor perspective as
appropriate. The Pension Risk Committee is a key component of pension
risk management and serves as a formal link between the Group and the
Investment Executive, which acts on behalf of the trustee of the Group’s
largest pension schemes, where risk management, asset strategy and
financing issues are discussed. The Investment Executive also consults
with the Group to obtain its view on the appropriate level of risk within the
pension fund.
For further information on the Group’s risk governance, see page 176.
Risk management
Risk appetite and investment policy for the schemes are defined by the
trustee with quantitative and qualitative input from actuaries and
investment advisers.
As the sponsor of its defined benefit pension schemes, the Group
manages the risk it faces using a pension risk management framework.
This encompasses risk monitoring, modelling, stress testing and
reporting. As sponsor, the Group maintains an independent view of the
risk inherent in its pension funds. In addition to the scrutiny provided by
the Pension Risk Committee, the Group also achieves this through
regular pension risk monitoring and reporting to the Group Board, Group
Executive Committee and Group Board Risk Committee on the material
pension schemes that the Group has an obligation to support.
Risk measurement
Pension risk reporting is submitted to the Group Board monthly in the
RBS Risk Management Report. The report includes an assessment of
the sensitivities of the Group’s pension schemes to interest rates and
inflation, a breakdown of the assets by class, and measurement of the
overall deficit or surplus position based on the latest data.
Throughout 2013, various pension risk stress-testing initiatives were
undertaken, focused both on internally defined scenarios and on
scenarios to meet integrated PRA stress testing requirements.
Risk mitigation
The trustee has taken measures partially to mitigate inflation and interest
rate risks both by investing in suitable physical assets and by entering
into inflation and interest rate swaps. The main scheme also uses
derivatives to manage the allocation of the portfolio to different asset
classes and to manage risk within asset classes. The assets of the main
scheme, which represent 85% of Group pension plan assets at 31
December 2013, 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.