In the ever-evolving landscape of pension risk management, the need for robust risk assessment and strategic planning has become increasingly vital, especially in the face of emerging challenges, such as climate change. The pension strategy team at the globally-renowned bank, HSBC, has been at the forefront of leveraging innovative solutions to enhance risk management practices and drive investment optimisation.

Leveraging Moody’s PFaroe DB’s superior capabilities, including security-level asset modelling and long-term asset-liability projection, HSBC has improved its governance protocols and increased efficiency and productivity, while continually responding to its regulatory obligations.

Business case

For over a decade, HSBC has been using Moody’s advanced platform PFaroe DB to support risk monitoring, assessment of capital requirements, and regulatory submissions such as ICAAP and stress testing across 14 pension plans globally. With $40 billion in assets under modelling spanning jurisdictions such as the US, UK, EU, Canada, Hong Kong, Switzerland, and Mexico, HSBC recognised the need to address the impact of climate change on its pension plans. Driven by a commitment to align their financing portfolio to net zero by 2050 and achieve net zero in operations and supply chain by 2030, HSBC sought to proactively assess the resilience of their pension plans consistently within their business-wide climate scenario analysis.

The challenges

Over time, HSBC’s pension strategy team has faced and overcome a series of challenges that have tested its operational efficiency and strategic decision-making processes. Initially, the team faced the task of gaining transparency over data outside its direct ownership and control over modelling, to avoid over-reliance on third-party consultancies. This shift towards internal ownership of data and modelling capabilities was crucial to its capacity to make informed decisions, and drive investment strategy optimization.

Subsequently, HSBC adapted to changes in regulatory capital requirements applicable to pension plans. This required a deep dive into its financial data and risk management practices to ensure compliance with regulatory standards, and to improve overall financial health.

As HSBC identified increasing commercial and risk management rationale to expand its pension modelling to full global coverage, it needed further insight as to the risk profiles of all its global plans to make informed decisions with confidence. Managing multiple plans across different regions required a comprehensive understanding of each plan’s unique characteristics and risk profiles, necessitating a more sophisticated approach to data analysis and risk assessment.

Another significant hurdle was influencing the investment strategy for each of the global plans, despite not having direct control. This required a collaborative approach with plan sponsors, trustees and other stakeholders to align investment decisions with the organisation’s overall strategic objectives. An important aspect of building the investment strategy is a focus on the resulting cashflow profile which was a particularly complex challenge for its large pension plans.

The solution

By adopting PFaroe’s detailed, security-level asset modelling capabilities – including fixed-income modelling for securities considering listed and private bonds – HSBC has been able to derive deep insight into its pension plans globally.

The ALM functionality within PFaroe has been instrumental in helping HSBC evaluate the impact of various economic stresses on assets and liabilities. By conducting stress tests across multiple periods, HSBC can now better understand the pension plans’ potential risks and vulnerabilities. In so doing it has been able to identify, commercially prioritize, and implement effective risk management strategies.

In the rapidly evolving world of climate risk analysis, by accessing the industry-specific stress testing functionality that PFaroe provides, HSBC has been able to analyse the impact of various scenarios on assets and liabilities – allowing the pension strategy team to more effectively respond to potential climate-related risks and opportunities. This tailored feature has provided the clear insight HSBC requires to manage exposures towards its net-zero objectives.

Furthermore, PFaroe’s adherence to SR 11-7 model risk management guidelines has given the team confidence in PFaroe’s model governance practices and has reinforced its trust in the analytical output’s accuracy.

Client testimonial

“PFaroe’s innovative features, such as its advanced stress testing capabilities, have truly transformed our operations and enhanced our risk management practices. The detailed modelling capabilities have provided us with invaluable insights into our assets and liabilities, enabling us to make more informed decisions and optimize pension plan investment strategies in collaboration with our trustees and other fiduciaries. All of this translates to tangible and material financial benefits to our organisation and its shareholders. The team are very helpful and knowledgeable and great partners.”

– Chris Roberts, Global Head of Pension Strategy