HSBC 2012 Annual Report Download - page 250

HSBC HOLDINGS PLC
Report of the Directors: Operating and Financial Review (continued)
Risk > Other material risks / Pension risk / Sustainability risk / Footnotes
248
After the 2008 valuation, HSBC considered that
the agreed recovery plan payments, together with
investment returns (at an expected level of 240 basis
points above the Libor swap curve), would be
sufficient to meet the deficit as at 31 December 2008
over the agreed period. HSBC also agreed with the
Trustee, that at each subsequent actuarial valuation
any shortfall in investment returns relative to this
expected level, subject to a maximum of 50 basis
points per annum, would be eliminated by payment
of equal cash instalments over the remaining years to
the end of the recovery plan period.
Although the 2011 triennial valuation disclosed
no deficit and therefore no technical provisions
recovery plan is required, HSBC and the Trustee
have agreed to maintain this investment performance
underwriting agreement. The investment
performance will be assessed every three years,
with an end date of 31 December 2017. Any
payments due would only be payable if a Technical
Provisions deficit is present at the reference date.
HSBC Bank is also making ongoing
contributions to the principal plan in respect of
the accrual of benefits of defined benefit section
members. Since April 2010, after completion of the
2008 valuation, HSBC has paid contributions at the
rate of 34% of pensionable salaries (less member
contributions).
Following completion of the 2011 triennial
valuation, HSBC will pay contributions at the rate
of 43% of pensionable salaries (less member
contributions) from 1 April 2013. An additional
employer contribution will be paid on or before
30 April 2013 equal to 9% of pensionable salaries,
in respect of the period 1 January 2012 to 31 March
2013.
Future developments
(Unaudited)
In January 2013, as part of a wider review of
employee benefits, HSBC announced proposals to
cease future accrual of service for active members of
the Defined Benefit Section with effect from 30 June
2014. Under the proposals, all active members of the
Defined Benefit Section will become deferred
members from 30 June 2014 (and will become
members of the Defined Contribution Section from
1 July 2014).
The valuation of the Scheme’s defined benefit
obligation is sensitive to changes in actuarial
assumptions. The proposed removal of future salary
escalation from the pay assumptions is estimated to
reduce the defined benefit obligation by
approximately US$0.3bn and the proposed change in
the underlying inflation assumption for indexation
from RPI, for active members, to CPI, for deferred
members, by a further US$0.5bn. The proposed
cessation of the Scheme to provide ill-health benefits
to members, to be covered by insurance policies
provided by HSBC under these proposals, is
estimated to reduce the defined benefit obligation by
approximately US$0.5bn.
The consultation period for these proposals will
end, and a final decision is expected to be made, in
the second quarter of 2013 at which time a past
service credit will be recognised in the income
statement.
The future effect of these proposed changes on
the income statement is dependent primarily on the
level of pension contributions made by HSBC and
employees to the Defined Contribution Section, the
final outcome of which remains uncertain. In all
reasonably likely scenarios, the net effect on
earnings over time is not expected to be material.
The HSBC Group Hong Kong Local Staff
Retirement Benefit Scheme
(Audited)
The scheme mainly invests in bonds with a smaller
portion in equities and each investment manager
has been assigned an investment mandate with the
targeted asset allocation. The ranges of target asset
allocations for the portfolio are as follows: Bonds
and cash 55-100%, Equity 0-25% and Alternative
Investments 0-20%. Alternative Investments refer to
high-return and high-risk alternatives, including but
not limited to private equity funds, hedge funds,
energy, gold, agriculture, commodities and
distressed assets.
The latest actuarial valuation of the defined
benefit scheme was made at 31 December 2010 by
Wing Lui, Fellow of the Society of Actuaries, of
Towers Watson Hong Kong Limited. At that
valuation date, the market value of the defined
benefit scheme’s assets was US$1,109m. On an
ongoing basis, the defined benefit scheme's assets
represented 104% of the actuarial present value of
the benefits accrued to members, after allowing for
expected future increases in salaries, and the
resulting surplus amounted to US$41m. On a wind-
up basis, the scheme’s assets represented 110% of
the members’ vested benefits, based on current
salaries, and the resulting surplus amounted to
US$105m. The attained age method has been
adopted for the valuation and the major assumptions
used in this valuation were a discount rate of 6% per
annum and long-term salary increases of 5% per
annum. The recommended employer contribution
rate as a percentage of scheme salaries is 14.3% over