HSBC 2006 Annual Report Download - page 228

HSBC HOLDINGS PLC
Report of the Directors: The Management of Risk (continued)
Operational risk > Legal litigation risk / Pension risk / Reputational risk / Sustainability risk
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comprises the provision of legal advice and support
in resisting claims and legal proceedings against
HSBC companies, including analysis of legal issues
and the management of any litigation, as well as in
respect of non-routine debt recoveries or other
litigation against third parties.
The Head Office Legal department oversees the
global legal function and is headed by a Group
General Manager who reports to the Group
Chairman. There are Legal departments in 40 of the
countries in which HSBC operates which have
primary responsibility for identifying and assessing
legal risk and advising local management in their
respective jurisdictions on these matters. There is
also a regional level Legal function in each of
Europe, North America, Latin America, the Middle
East and Asia-Pacific.
HSBC policy requires operating companies to
notify the appropriate in-house Legal department
immediately any litigation is either threatened or
commenced against the Group or an employee.
Claims which exceed US$1.5 million, must be
advised immediately to the appropriate regional
Legal department. Claims where the amount exceeds
US$5 million, where the action is by the regulatory
authority, the proceedings are criminal, or any claim
that might materially affect the Group’s reputation
must immediately be advised to the Head Office
Legal department. Such matters are then advised to
the Risk Management Meeting of the Group
Management Board in a monthly paper.
HSBC policy also requires that an exception
report must be made to the local compliance function
and escalated to the Head of Group Compliance in
respect of any breach which has given rise to a fine
and/or costs levied by a court of law or regulatory
body where the amount is US$1,500 or more and
material or significant issues are reported to the Risk
Management Meeting of the Group Management
Board and/or the Group Audit Committee.
In addition, operating companies are required to
submit returns detailing outstanding claims which
exceed US$10 million or which may be sensitive to
the reputation of HSBC for reporting to the Group
Audit Committee and the Board of HSBC Holdings,
and disclosure in the Interim Report and Annual
Report and Accounts if appropriate.
Pension risk
(Unaudited)
HSBC operates a number of pension plans
throughout the world, as described in Note 7 on the
Financial Statements. Some of these pension plans
are defined benefit plans, of which the largest is the
HSBC Bank (UK) Pension Scheme.
The benefits payable under the defined benefit
plans are typically a function of salary and length of
service. In order to fund these benefits, 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.
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;
• 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).
The plan’s investment strategy is determined
in the light of the market risk inherent in the
investments and the consequential impact on
potential future contributions.
Ultimate responsibility for investment strategy
rests with either the Trustees or, in certain
circumstances, a Management Committee. The
degree of independence of the Trustees from HSBC
differs in different jurisdictions. For example, the
HSBC Bank (UK) Pension Scheme, which accounts
for over 80 per cent of the net liability of the
Group’s pension plans, is overseen by a corporate
Trustee. To assist this scheme’s Trustee, HSBC has
proposed a number of techniques for applying the
Group’s existing asset and liability management
strategy and related monitoring mechanisms to the
market risks inherent in the scheme.
These techniques include:
• regular assessments of funding positions;
• regular reviews of investment performance
against market benchmarks;
• half-yearly reviews of the pension schemes’
effect on the Group’s financial statements;
• alignment of investment strategy with the
liability profile of the pension scheme; and