HSBC 2015 Annual Report Download - page 227

HSBC HOLDINGS PLC
225
Strategic Report Financial Review Corporate Governance Financial Statements Shareholder Information
Pension risk
(Audited)
We operate a number of pension plans throughout the world, as described in the Pension risk section on page 189 and below.
A global pension risk framework and accompanying global policies on the management of risks related to defined benefit and
defined contribution plans is in place. The Global Pensions Oversight Committee is responsible for the governance and
oversight of all pension plans sponsored by HSBC around the world.
In order to fund the benefits associated with defined benefit plans, sponsoring Group companies (and, in some instances,
employees) make regular contributions in accordance with advice from actuaries and in consultation with the schemes’
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 HSBC’s cash flow 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 are required when plan assets are considered insufficient to cover the existing pension liabilities. Contribution
rates are typically revised annually or triennially, depending on the plan. The agreed contributions to the principal plan 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;
• the prevailing economic environment leading to corporate failures, thus triggering write-downs in asset values (both equity and debt);
• 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).
A plan’s investment strategy is determined after taking into consideration the market risk inherent in the investments and its
consequential impact on potential future contributions. The long-term investment objectives of both HSBC and, where
relevant and appropriate, the trustees are:
• to limit the risk of the assets failing to meet the liabilities 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.
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, where relevant, desired levels of out-performance. The benchmarks are reviewed at least triennially
within 18 months of the date at which an actuarial valuation is made, or more frequently if required by local legislation or
circumstances. The process generally involves an extensive asset and liability review.
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 varies in different jurisdictions, however all fiduciaries are
required to put the plan members’ needs above all others.
Defined contribution plans result in far less exposure to market risk for the Group, but remain exposed to operational and
reputational risks as they place the responsibility and flexibility more directly with employees. To manage these risks, the
performance of defined contribution investment funds is monitored and local engagement with employees is actively
promoted to ensure they are provided with sufficient information about the options available to them.
Pension plans in the UK
The HSBC Bank (UK) Pension Scheme (the principal plan) has both defined benefit and defined contribution sections. The
defined benefit section accounts for approximately 72% of our total defined benefit obligations around the world. All new
employees have joined the defined contribution section since 1996 and from 1 July 2015 the defined benefit section was fully
closed to future accrual so that all future pension provision for all employees is provided by the defined contribution section.
The principal plan is overseen by an independent corporate trustee who has a fiduciary responsibility for the operation of the
pension plan. The trustee is responsible for monitoring and managing the investment strategy and administration of scheme
benefits. 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 which governs decision-making about how investments are made and the need for adequate diversification is taken
into account in the choice of asset allocation and manager structure in the defined benefit section. Longevity risk in the
principal plan is assessed as part of the measurement of the pension liability and managed through the funding process of
the plan.