HSBC 2007 Annual Report Download - page 264

HSBC HOLDINGS PLC
Report of the Directors: The Management of Risk (continued)
Pension risk / Reputational risk management / Sustainability risk management
262
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 a regulatory
authority, where the proceedings are criminal, or
where the claim 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 quarterly returns detailing outstanding claims
where the claim (or group of similar claims) exceeds
US$10 million, where the action is by a regulatory
authority, where the proceedings are criminal, where
the claim might materially affect the Group’s
reputation, or, where the Head Office legal
department has requested returns be completed for a
particular claim. These returns are used 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.
Global security and fraud risk
(Unaudited)
Security and fraud risk issues are managed at Group
level by Global Security and Fraud Risk. This unit,
which has responsibility for physical, fraud,
information and contingency risk, and security and
business intelligence, is now fully integrated within
the central Group Risk function. This will facilitate
synergies between it and other risk functions, such
as with Global Retail Risk Management in the
selection, design and implementation of systems and
processes to protect the Group against fraud by
deterring fraudulent activity, detecting it where it
does occur and mitigating its effects.
Pension risk
(Unaudited)
HSBC operates a number of pension plans
throughout the world, as described in Note 8 on the
Financial Statements. Some of these pension plans
are defined benefit plans, of which the largest is the
HSBC Bank (UK) Pension Scheme.
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.
The level of these contributions has a direct
impact on the cash flow of the Group and would
normally be set to ensure that there are sufficient
funds to meet the cost of the accruing benefits for the
future service of active members. However, 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 HSBC
Bank (UK) Pension Scheme 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;
• 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 40 per cent of the net liability of the Group’s
pension plans, is overseen by a corporate Trustee.
This scheme’s Trustee regularly monitors the market
risks inherent in the scheme.