HSBC 2009 Annual Report Download - page 392

HSBC HOLDINGS PLC
Notes on the Financial Statements (continued)
Note 8
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closed to new entrants, and a defined contribution plan which was established in 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 which governs decision-making about how 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 mainly equity-based strategy to one based largely on holding bonds
and a more diverse range of investments, and included a commitment to undertake a programme of swap
arrangements by which the principal plan makes LIBOR-related interest payments in exchange for the receipt of cash
flows which are based on projected future benefit payments to be made from the principal plan. The asset allocation
for this strategy was:
%
Equities ................................................................................................................................................................................ 15.0
Bonds ................................................................................................................................................................................... 50.0
Alternative assets1 ................................................................................................................................................................ 10.0
Property ................................................................................................................................................................................ 10.0
Cash ..................................................................................................................................................................................... 15.0
100.0
1 Alternative assets include emerging market bonds, loans, and infrastructure assets.
At 31 December 2009, the above strategy remained substantially in place with details of the swap arrangements
included in Note 43.
The latest actuarial investigation of the principal plan was made as at 31 December 2008 by C G Singer, Fellow of
the Institute of Actuaries, of Watson Wyatt Limited, a Towers Watson company. At that date, the market value of the
HSBC Bank (UK) Pension Scheme’s assets was £10.6 billion (US$15.5 billion) (including assets relating to the defined
benefit plan, the defined contribution plan and additional voluntary contributions). The market value of the plan assets
represented 77 per cent 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, and the resulting deficit
amounted to £3.2 billion (US$4.7 billion). The method adopted for this investigation was the projected unit method.
The expected cash flows from the plan were projected by reference to the Retail Price Index (‘RPI’) swap break-even
curve at 31 December 2008. Salary increases were assumed to be 0.5 per cent per annum above RPI and inflationary
pension increases, subject to a minimum of zero per cent and a maximum of 5 per cent (maximum of 3 per cent per
annum in respect of service accrued since 1 July 2009), were assumed to be in line with RPI. The projected cash
flows were discounted at the LIBOR swap curve at 31 December 2008 plus a margin for the expected return on the
investment strategy of 190 basis points per annum. The mortality experience of the plan’s pensioners over the three
year period since the previous valuation was analysed and, on the basis of this analysis, the mortality assumptions
were set based on the SAPS S1 series of tables which best fit the pensioner experience. Allowance was made for
future improvements to mortality rates in line with the medium cohort projections with a minimum improvement rate
set at 1.75 per cent for males and 1.25 per cent for females.
HSBC Bank plc has agreed with the Trustee to reduce the deficit of the plan by meeting a schedule of additional
future funding payments as set out below (unless a mutually agreed alternative is adopted by 30 June 2010):
US$m1 £m
2009 ......................................................................................................................................................... nil nil
2010 ......................................................................................................................................................... nil nil
2011 ......................................................................................................................................................... nil nil
2012 ......................................................................................................................................................... 754 465
2013 ......................................................................................................................................................... 754 465
2014 ......................................................................................................................................................... 754 465
2015 ......................................................................................................................................................... 1,022 630
2016 ......................................................................................................................................................... 1,022 630
2017 ......................................................................................................................................................... 1,022 630
2018 ......................................................................................................................................................... 1,022 630
1 The payment schedule was agreed with the Trustee in pounds sterling and the equivalent US dollar amounts are shown at the exchange
rate effective as at 31 December 2009.