HSBC 2012 Annual Report Download - page 249

247
Overview Operating & Financial Review Corporate Governance Financial Statements Shareholder Information
The principal plan – target asset allocation
2012 2011 2006
% % %
Equities ........................... 15.5 15.5 15.0
Bonds .............................. 60.5 60.5 50.0
Alternative assets75 ......... 9.5 9.5 10.0
Property ........................... 9.0 9.0 10.0
Cash ................................ 5.5 5.5 15.0
100.0 100.0 100.0
For footnote, see page 249.
As a result of a special contribution to the
principal plan in June 2010 of £1,760m
(US$2,638m), a cash generating portfolio was
established. The portfolio comprised supra-national,
agency and government-guaranteed securities,
ABSs, corporate subordinated debt and auction
rate securities. A further special contribution in
December 2011 of £184m (US$286m) added to this
portfolio. The contribution was used to
purchase ABSs from HSBC at an arm’s length value
determined by the Scheme’s independent third-party
advisers. However, these assets may be
supplemented with other assets from time to time.
The latest actuarial valuation of the principal
plan was made as at 31 December 2011 by
C G Singer, Fellow of the Institute of Actuaries, of
Towers Watson Limited. At that date, the market
value of the HSBC Bank (UK) Pension Scheme’s
assets was £18.3bn (US$28.3bn) (including assets
relating to the defined benefit plan, the defined
contribution plan and additional voluntary
contributions). The market value of the plan assets
represented 100% of the amount expected to be
required, on the basis of the assumptions adopted,
to provide the benefits accrued to members after
allowing for expected future increases in earnings.
There was therefore no resulting surplus/deficit.
The method adopted for this valuation was the
projected unit method.
The expected cash flows from the principal plan
were projected by reference to the Retail Price Index
(‘RPI’) swap break-even curve at 31 December
2011. Salary increases were assumed to be 0.5%
per annum above RPI and inflationary pension
increases, subject to a minimum of 0% and a
maximum of 5% (maximum of 3% per annum in
respect of service accrued since 1 July 2009), were
assumed to be in line with RPI. The projected cash
flows were discounted at the Libor swap curve at
31 December 2011 plus a margin for the expected
return on the investment strategy of 160bps per
annum. The mortality experience of the principal
plan’s pensioners over the six-year period (2006-
2011) was analysed and, on the basis of this analysis,
the mortality assumptions were set, based on the
SAPS S1 series of tables adjusted to reflect the
pensioner experience. Allowance was made for
future improvements to mortality rates in line
with the Continuous Mortality Investigation core
projections with a long run improvement rate set at
2% for males and 1.5% for females. The benefits
payable from the defined benefit plan from 2013 are
expected to be as shown in the chart below.
Benefit payments (US$m)
0
250
500
750
1,000
1,250
1,500
1,750
2,000
2013 2019 2025 2031 2037 2043 2049 2055 2061 2067 2073 2079 2085 2091 2097
As part of the 31 December 2011 valuation,
calculations were also carried out as to the amount
of assets that might be needed to meet the liabilities
if the Scheme was discontinued and the members’
benefits bought out with an insurance company
(although in practice this may not be possible for
a plan of this size) or the Trustee continued to run
the plan without the support of HSBC. The amount
required under this approach was estimated to be
£26.2bn (US$40.6bn) as at 31 December 2011.
In arriving at this estimation, a more prudent
assumption about future mortality was made than
for the assessment of the ongoing position and it was
assumed that the Trustee would alter the investment
strategy to be an appropriately matched portfolio of
UK government bonds. An explicit allowance for
expenses was also included.
Based on the latest valuation as at 31 December
2011 and there being no deficit, no Technical
Provisions Recovery Plan is required and the
schedule of future funding payments agreed after
the 2008 actuarial valuation was dissolved.
HSBC and the Trustee have developed a general
framework, which, over time, will see the Scheme’s
asset strategy evolve to be less risky and further
aligned to future cash-flows, referred to as the Target
Matching Portfolio (‘TMP’). Evolution to the TMP
can be achieved by asset returns in excess of that
assumed and/or additional funding. In February
2013, HSBC agreed to make three general
framework contributions of £64m (US$103m) in
each of the calendar years 2013, 2014 and 2015.