Barclays 2015 Annual Report Download - page 182

180 I Barclays PLC Annual Report 2015 home.barclays/annualreport
Risk review
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):
 an increase in long term inflation corresponds to an increase in liabilities
 an increase in the discount rate corresponds to a decrease in liabilities.
Pension risk is generated through the Group’s defined benefit schemes and this risk is set to reduce over time as our main defined benefit schemes
are closed to new entrants, and in many cases closed to future accruals. The chart below outlines the shape of the UKRF’s liability cash flow profile
that takes account of future inflation indexing of payments to beneficiaries, with the majority of the cash flows (approximately 83%) 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 the triennial valuation process.
For more detail on liability assumptions see Note 35 to the financial statements.
14.7%
23.1%
24.9%
19.8%
12.5%
5.0%
Proportion of liability cash flows
0-10 years
11-20 years
21-30 years
31-40 years
41-50 years
51 years +
Risk measurement
In line with Barclays risk management framework, the assets and liabilities of the UKRF are modelled within a VaR framework to show the volatility of
the pension positions on a total portfolio level. This ensures that the risks, diversification and liability matching characteristics of the UKRF obligations
and investments are adequately captured. VaR is measured and monitored on a monthly basis. It is discussed at pension risk fora such as the Market
Risk Committee, Pensions Management Group and Pension Executive Board. The VaR model takes into account the valuation of the liabilities
following an IAS 19 basis (see Note 35 Pension and post-retirement benefits in the financial statements). The trustees receive quarterly VaR
measures on a funding basis.
The pension liability is also sensitive to post-retirement mortality assumptions (see Note 35).
In addition to this, the impact of pension risk to the Group is taken into account as part of the stress testing process. Stress testing is performed
internally at least on an annual basis. The UKRF exposure is also included as part of the regulatory stress tests and exercises indicated that the UKRF
risk profile is resilient to severe stress events.
The defined benefit pension scheme affects capital in two ways. An IAS 19 deficit impacts the CET1 capital ratio, and pension risk is also taken into
account in the Pillar 2A capital assessment.
Triennial valuation
Please see Note 35 Pensions and retirement benefits for information on the funding position of the UKRF.
Insurance risk review
Insurance risk is managed within Africa Banking primarily in the Wealth, Investment Management & Insurance (WIMI) portfolios and is reported
across four significant categories. Please see page 138 of the Barclays PLC 2015 Pillar 3 Report for more information on the definitions and
governance procedure.
The risk types below mainly determine the regulatory capital requirements. The year-on-year decrease in risk appetite was agreed as part of the
medium-term planning process.
Analysis of insurance riska
As at 31 December
2015 2014
Position
£m
Appetite
£m
Position
£m
Appetite
£m
Short term insurance underwriting risk 30 32 40 44
Life insurance underwriting risk 17 20 21 28
Life insurance mismatch risk 12 20 16 40
Life and short-term insurance investment risk 11 18 12 14
In 2015, the largest year-on-year movement was in short-term insurance underwriting risk where the reduction in the position reflected the closure
of the Agriculture book to new insurance business.
For mismatch risk, the 2015 Appetite was materially lower than the 2014 Appetite as the level of mismatch between policyholder assets and
policyholder liabilities decreased following the adoption of improved reserving methodologies and sign off by the independent statutory actuary
function. As a result, while 2015 Position has reduced in absolute terms, the utilisation against appetite has increased.
From 2016 onwards, the methodology for assessment of Insurance Risk will change from a CAR-based approach to a Solvency Assessment and
Management (SAM) based approach (the Solvency II equivalent) which is considered to be a more robust risk management approach with
well-developed methodologies.
Note
a The figures in the table are reported using Capital Adequacy Requirement (CAR) approach.
Risk performance
Market risk