HSBC 2008 Annual Report Download - page 367

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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:
%
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 2008, this strategy was substantially in place and details of the swap arrangements are included in
Note 43.
The latest actuarial investigation of the principal plan was made at 31 December 2005. At that date, the market value
of the HSBC Bank (UK) Pension Scheme’s assets was US$18,072 million (including assets relating to the defined
benefit plan, the defined contribution plan, and additional voluntary contributions). The market value of the plan
assets represented 89 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 US$2,065 million. 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 2005. Salary increases were assumed to be 1 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, were assumed to be in line
with RPI. The projected cash flows were discounted at the LIBOR swap curve at 31 December 2005 plus a margin
for the expected return on the investment strategy of 110 basis points per annum. The mortality experience of the
plan’s pensioners over the three year period since the previous valuation was analysed and the mortality assumption
set on the basis of this with allowances for medium cohort improvements on the PA92 series of tables from the
valuation date.
In anticipation of the results of the 2005 investigation, on 22 December 2005 HSBC Bank plc made an additional
contribution of US$1,746 million to the principal plan in order to reduce the deficit of the plan. Following receipt of
the valuation results, HSBC agreed with the Trustee to meet a schedule of additional future funding payments, as set
out below:
US$m1 £m
2007 ...................................................................................................................................................... 587 300
2012 ...................................................................................................................................................... 678 465
2013 ...................................................................................................................................................... 678 465
2014 ...................................................................................................................................................... 678 465
1 The payment schedule has been agreed with the Trustee in pounds sterling and the equivalent US dollar amounts are shown at the
exchange rate effective as at 31 December 2008. The amount for 2007 was paid in March 2007, and is shown above at the exchange
rate at that time.
HSBC considers that the contributions set out above are sufficient to meet the deficit as at 31 December 2005 over
the agreed period.
HSBC Bank plc also decided to make ongoing contributions to the principal plan in respect of the accrual of benefits
of defined benefit section members at the rate of 36 per cent of pensionable salaries from 1 January 2007, until the
completion of the next actuarial valuation, due as at 31 December 2008. During 2006 HSBC paid contributions at the
rate of 20 per cent of pensionable salaries. A further 2 per cent of pensionable salaries is being paid over the period
1 January 2007 to 31 December 2014 to make good the difference in contributions during 2006.