HSBC 2015 Annual Report Download - page 192

Report of the Directors: Risk (continued)
Other material risks / Footnotes
HSBC HOLDINGS PLC
190
allowing for expected future salary increases. As there was
no resulting surplus or deficit, there was no need for the
Bank to pay any additional contributions.
In carrying out this assessment, the future expected
pension payments out of the plan were valued with the
following assumptions:
• future inflation was assumed to be in line with the
Retail Price Index (‘RPI’) swap break-even curve at
31 December 2011;
• salary increases were assumed to be 0.5% above the RPI
each year;
• pensions were assumed to increase in line with the 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 1.6% a
year;
• the mortality assumptions were set based on the SAPS
S1 series of tables adjusted to reflect the plan’s actual
mortality experience over the prior six years (2006 to
2011); and
• mortality rates were also assumed to improve further in
the future in line with standard tables of improvements,
the Continuous Mortality Investigation core projections,
but with the additional assumption that the long run
improvement rate would not fall below 2% a year for
men and 1.5% a year for women.
The benefits expected to be paid from the defined benefit
section from 2016 are shown in the chart below.
Future benefit payments ($m)
As part of the 31 December 2011 valuation, the actuary
also assessed the amount needed to meet the obligations
of the principal plan if the plan was stopped and an
insurance company was asked to guarantee all future
payments. Because the plan is large, it is unlikely that an
insurance company would be able to do this for the whole
plan, so in practice the Trustee would continue to manage
the plan without further support from HSBC. The amount
of assets needed under this approach was estimated to be
£26bn ($41bn). This is larger than the previous amount
because it assumes that people will live for even longer and
that the Trustee would adopt a much less risky investment
strategy, investing mainly in UK government bonds, which
would have a lower expected investment return. It also
included an explicit allowance for the future administrative
expenses of the plan.
HSBC and the Trustee have developed a general framework
which will see the principal plan’s investment strategy
become less risky over time. This is referred to as the Target
Matching Portfolio (‘TMP’), as it would contain investments
that closely match the expected benefit payment profile.
Progress towards the TMP can be achieved by investment
returns or additional funding from HSBC. In 2013, HSBC
agreed to make general framework contributions of £64m
($95m) in each of the calendar years 2013, 2014 and 2015
and £128m ($190m) in 2016. Further contributions had been
agreed to be made in future years, which were linked to the
continued implementation of the general framework.
The 31 December 2014 valuation has been agreed in
principle with the Trustee, and is expected to be finalised
by its statutory deadline of 31 March 2016. The final
agreement should result in a surplus of circa £500m
($741m) as at the valuation date of 31 December 2014 and
on the Trustee’s prudent actuarial assumptions. The
general framework implementation has also continued
such that the conditions on the future contributions would
be removed. As a result the following payments would be
payable in the future: £64m ($95m) in each of 2017, 2018,
2019, and £160m ($237m) in each of 2020 and 2021, which
in addition to the amounts agreed before would give a
total of £640m ($949m) payable from 2016 to 2021.
The principal plan changed in 2015 and from 30 June
members stopped accruing future defined benefits. Defined
benefit pensions accrued up to 30 June 2015 will retain their
link to employee salaries, underpinned by the Consumer Price
Index (‘CPI’), while members are still employees of the bank.
To support the establishment of the ServCo group and to
ensure that employees transferred retained existing pension
benefits, a new section of the principal plan was created with
segregated assets and liabilities. The new section provides
ServCo group employees with their defined contribution
pension and, where relevant, defined benefit pension benefits
arising from future salary increases above CPI.
Defined contribution plans
Our global strategy is to move from defined benefit to
defined contribution plans, where local law allows and it is
considered competitive to do so. In defined contribution
pension plans, the sponsor contributions are known,
while the ultimate pension benefit will vary, typically
with investment returns achieved by investment choices
made by the employee. While the market risk of defined
contribution plans is significantly less than that of defined
benefit plans, the Bank is still exposed to operational and
reputational risk.
Sustainability risk
Assessing the environmental and social impacts
of providing finance to our customers is integral to
our overall risk management processes.
In 2015, we continued to implement all of our sustainability
risk policies. Our training for risk and relationship managers
during the year focused on the new policies on agricultural
commodities, forestry and World Heritage Sites and Ramsar
Wetlands, issued in 2014. Following a recommendation
by Internal Audit in 2015, we took steps to integrate the
management of sustainability risk more fully into the Risk
-
200
400
600
800
1,000
1,200
1,400
1,600
2016 2021 2026 2031 2036 2041 2046 2051 2056 2061 2066 2071 2076 2081 2086 2091 2096