HSBC 2007 Annual Report Download - page 368

HSBC HOLDINGS PLC
Notes on the Financial Statements (continued)
Note 8
366
Net liabilities recognised on balance sheet in respect of defined benefit plans
2007 2006
US$m US$m
Defined benefit pension plans ........................................................................................................... 1,968 4,553
– HSBC Bank (UK) Pension Scheme ............................................................................................... 808 3,745
– Other plans ...................................................................................................................................... 1,160 808
Defined benefit healthcare plan ......................................................................................................... 925 1,002
2,893 5,555
HSBC pension plans
HSBC operates some 196 pension plans throughout the world, covering 86 per cent of HSBC’s employees, with a
total pension cost of US$1,179 million (2006: US$1,058 million; 2005: US$1,007 million), of which US$626 million
(2006: US$668 million; 2005: US$546 million) relates to plans outside the UK.
Progressively, HSBC has been moving to defined contribution plans for all new employees. The pension cost for
defined contribution plans, which cover 49 per cent of HSBC’s employees, was US$485 million (2006:
US$456 million; 2005: US$389 million).
Both HSBC’s and, where relevant and appropriate, the trustees’ long-term investment objectives for defined benefit
plans are:
• to limit the risk of the assets failing to meet the liability of the plans over the long-term; and
• to maximise returns consistent with an acceptable level of risk so as to control the long-term costs of the defined
benefit plans.
Both HSBC and, where relevant and appropriate, the trustees, consider that the investment policy should be
consistent with meeting their mutual overall long-term investment objectives. In pursuit of these long-term
objectives, a benchmark is established for the allocation of the defined benefit plan assets between asset classes. In
addition, each permitted asset class has its own benchmarks, such as stock market or property valuation indices and
desired levels of out-performance where relevant. This is intended to be reviewed at least triennially within 18
months of the date at which the actuarial valuation is made, or more frequently if circumstances or local legislation so
require. The process generally involves an extensive asset and liability review.
The Group’s defined benefit plans, which cover 37 per cent of HSBC’s employees, are predominantly funded plans
with assets which, in the case of most of the larger plans, are held in trust or similar funds separate from HSBC. The
plans are reviewed at least annually or in accordance with local practice and regulations by qualified actuaries. The
actuarial assumptions used to calculate the defined benefit obligations and related current service costs vary
according to the economic conditions of the countries in which they are situated.
The largest plan exists in the UK, where the HSBC Bank (UK) Pension Scheme covers employees of HSBC Bank plc
and certain other employees of HSBC. This plan comprises a funded defined benefit plan (‘the principal plan’) which
is closed to new entrants, and a defined contribution plan which was established on 1 July 1996 for new employees.
The principal plan holds a diversified portfolio of investments to meet future cash flow liabilities arising from
accrued benefits as they fall due to be paid. The Trustee of the principal plan is required to produce a written
Statement of Investment Principles (‘SIP’). The SIP sets out the principles governing how decisions about
investments are made.
In 2006, HSBC and the Trustee of the principal plan agreed to change the investment strategy in order to reduce the
investment risk. This involved switching from a largely equity-based strategy to a strategy largely based on holding
bonds together with a more diverse range of investments. The principal plan committed to undertake a programme
including entering into swap arrangements whereby the principal plan is committed to making LIBOR related interest
payments in exchange for cash flows paid into the plan, based on a projection of the future benefit payments from the
principal plan. The asset allocation for this strategy is: