Barclays 2014 Annual Report Download - page 184

182 I Barclays PLC Annual Report 2014 barclays.com/annualreport
Risk performance
Market risk
Risk review
Functional currency of operations
Functional currency of operations
As at 31 December 2014
Foreign
currency
net
investments
£m
Borrowings
which hedge
the net
investments
£m
Derivatives
which hedge
the net
investments
£m
Structural
currency
exposures
pre-
economic
hedges
£m
Economic
hedges
£m
Remaining
structural
currency
£m
US Dollar 23,728 5,270 1,012 17,446 6,655 10,791
Euro 3,056 328 238 2,490 1,871 619
Rand 3,863 – 103 3,760 – 3,760
Japanese Yen 364 164 208 (8) – (8)
Other 2,739 – 1,198 1,541 – 1,541
Total 33,750 5,762 2,759 25,229 8,526 16,703
As at 31 December 2013
US Dollar 34,220 5,555 12,558 16,107 5,812 10,295
Euro 9,336 538 5,570 3,228 2,833 395
Rand 3,835 – 114 3,721 – 3,721
Japanese Yen 454 89 352 13 – 13
Other 2,850 – 1,101 1,749 – 1,749
Total 50,695 6,182 19,695 24,818 8,645 16,173
During 2014, total structural currency exposure net of hedging instruments remained stable at £16.7bn (2013: £16.2bn) and broadly in line with
the overall RWA currency profile. Foreign currency net investments decreased by £16.9bn to £33.8bn (2013: £50.7bn) driven predominantly by the
restructuring of Group subsidiaries. The hedges associated with these investments decreased by £16.9bn to £2.8bn (2013: £19.7bn).
Pension risk review
The UK Retirement Fund (UKRF) represents approximately 92% (2013: 91%) of the Group’s total retirement benefit obligations globally. The other
material overseas schemes are in South Africa and the US where they represent approximately 4% (2013: 5%) and 2% (2013: 2%) respectively of
the Group’s total retirement benefit obligations. As such, this risk review section will focus exclusively on the UKRF. Note that the scheme is closed
to new entrants.
Pension risk arises as the estimated market value of the pension fund assets might decline, or the investment returns might reduce; or the
estimated value of the pension liabilities might increase.
See page 146 in the 2014 Barclays PLC Pillar 3 Report for more information on how pension risk is managed.
Assets
The Board of Trustees defines an overall long-term investment strategy for the UKRF, with investments across a broad range of asset classes. This
ensures an appropriate mix of return-seeking assets to generate future returns as well as liability matching assets to better match the future
pension obligations. The main market risks within the asset portfolio are against interest rates and equities.
Fair value of UKRF plan assets increased by 14% to £26.9bn. See Note 35 on page 323 for details.
Liabilities
The retirement benefit obligations are a series of future cash flows with relatively long duration. On an IAS 19 basis these cash flows are sensitive
to changes in the expected long-term inflation rate and the discount rate (AA corporate bond yield curve):
Q An increase in long-term inflation corresponds to an increase in liabilities; and
Q An increase in the discount rate corresponds to a decrease in liabilities.
Pension risk is generated through the Group’s defined benefits schemes and this risk is deemed to move to zero over time as the chart below
shows. The chart below outline the shape of the liability cash flow profile, that takes account of future inflation indexing of payments to
beneficiaries, with the majority of the cash flows (approximately 75%) falling between 0 and 40 years, peaking within the 21 to 30 year band and
reducing thereafter. The shape may vary depending on changes in inflation expectation and mortality and it is updated in line with triennial
valuation process.
For more detail on liability assumptions see Note 35 on page 323.