HSBC Bank (UK) Pension Scheme HSBC Global Services Section

Transcription

1 HSBC Bank (UK) Pension Scheme HSBC Global Services Section Actuarial valuation as at 31 December July 2018 willistowerswatson.com

2 Summary The HSBC Bank (UK) Pension Scheme was segregated into two sections with effect from 30 September 2015: the HSBC Bank Section and the HSBC Global Services Section. The Scheme was segregated further with effect from 1 July 2018 to create an additional Section known as the HSBC Bank plc Section, with the HSBC Bank Section renamed as the HBUK Section. The terms on which the Scheme was further segregated are set out in the 58 th Deed of Variation ( Deed of Amendment, Admission and Agreement, or the Second Segregation Deed ) dated 3 April The main results of the actuarial valuation for the HSBC Global Services Section of the Scheme are as follows: The liabilities of this Section of the Scheme are highly sensitive to the level of salary growth (over deferred pension revaluation) each year, and the period over which salary growth is expected to apply. This feature is likely to result in significant volatility of the Section s funding level over time. The technical provisions funding level as at 31 December 2016 has increased to 96% against the assets stated in the annual report and accounts (2015: 91%), corresponding to a deficit of 60 million as at 31 December 2016 (2015: 74 million). However, after the receipt of funding for enhanced early retirement pensions (contributions for which were received after the valuation date) and certain other post-valuation date experience, the technical provisions funding level increases to 101%, which corresponds to a surplus of 14 million. Since the HSBC Global Services Section s technical provisions exceed the value of the assets stated in the annual report and accounts, a recovery plan is required. However, under this plan, this Section is expected to have achieved full funding on the technical provisions assumptions by the date of this report. Accrual of defined benefits ceased prior to the segregation of the Scheme (although salary linkage was retained) and so no contributions are required to be paid in respect of benefit accrual. Employer contributions will be paid at the rate of 1% of DC members DC pensionable salaries (as defined in the Scheme s trust deed and rules) from 1 July 2018 to provide for the cost of providing defined benefit risk benefits to members of this Section. In addition, employer contributions will be paid at the initial rate of 6.17 million in each calendar year to provide for the expenses of administering defined benefit payments and defined contribution payments to be made from the HSBC Global Services Section of the Scheme. The defined benefit asset cover by reference to the Scheme Actuary s statutory estimate of solvency in respect of the defined benefits as at 31 December 2016 has reduced to 84% (2015: 155%) against the assets stated in the annual report and accounts. After allowing for certain post-valuation date events, the asset cover is 109% at 31 December 2016 in respect of defined benefit assets and liabilities. Contents Summary Introduction Scope Next steps Limitations Statutory funding objective Contribution requirements Projections and sensitivities Discontinuance Statutory estimate of solvency Relationship between the cost of securing benefits and the technical provisions Projections and sensitivities Additional information Risks Benefit summary Membership data Asset information Statutory Certificate Glossary Throughout this report the following terms are used: Section of the Scheme HSBC Global Services Section of the HSBC Bank (UK) Pension Scheme Trustee HSBC Bank Pension Trust (UK) Ltd Principal Employer For the purposes of this report, this phrase refers to the Employer performing the role of the bank under the Trust Deed and Rules. For this Section, this is HSBC Global Services (UK) Limited Employers Participating Employers of the Scheme Trust Deed & Rules The Scheme s Trust Deed and Rules adopted by the 37 th Deed of Variation dated 30 April 2003 (as subsequently amended) 1

3 Introduction Scope This report is the actuarial valuation of the HSBC Global Services Section of the HSBC Bank (UK) Pension Scheme as at 31 December 2016 and I have prepared it for the Trustee. As noted in the Limitations section of this report, others may not rely on it. The actuarial valuation is required under the terms of Clause 18 of the Trust Deed & Rules and Part 3 of the Pensions Act Clause 18 of the Scheme s Trust Deed and Rules requires the Actuary appointed by the Trustee of the Scheme to report to the Trustee and the Principal Employer of the Scheme (as defined above) on the financial position of the Scheme at periods not exceeding 3 years and make such recommendations as he thinks fit. This report is addressed to the Trustee and the Principal Employer, thus satisfying this Clause. However, in practice, the Principal Employer has sought separate advice on the funding policy to be adopted for the Scheme and this report has therefore, effectively, been prepared on behalf of the Trustee to satisfy the Trust Deed and Rules and the relevant statutory requirements applicable to this investigation. A copy of this report must be provided to the Employers within seven days of its receipt. The main purposes of the actuarial valuation are to review the financial position of the HSBC Global Services Section of the Scheme relative to its statutory funding objective and to determine the appropriate level of future contributions. The report explains the financial position of this Section of the Scheme at 31 December 2016 using several different measures of its liabilities and how it has changed since the previous valuation at 31 December This report and the work involved in the actuarial valuation are within the scope of, and comply with, the Financial Reporting Council s Technical Actuarial Standards 100: Principles for Technical Actuarial Work and 300: Pensions. Next steps The Trustee is required to disclose to members, in a summary funding statement, certain outcomes of this actuarial valuation within a reasonable period. Members may also request a copy of this report. The financial position of the HSBC Global Services Section of the Scheme and the level of contributions by the Employers to be paid will be reviewed at the next actuarial valuation, which is expected to be carried out at 31 December In intervening years the Trustee will obtain annual actuarial reports on developments affecting this Section of the Scheme s assets and technical provisions. The next such report, which will have an effective date of 31 December 2017, must be completed by 31 December C G Singer Fellow of the Institute and Faculty of Actuaries Towers Watson Limited, a Willis Towers Watson Company 1 July 2018 Towers Watson Limited Watson House London Road Reigate Surrey, RH2 9PQ Authorised and regulated by the Financial Conduct Authority 1

4 Limitations Third parties This report has been prepared for the Trustee for the purpose indicated. It has not been prepared for any other purpose. As such, it should not be used or relied upon by any other person for any other purpose, including, without limitation, by individual members of the Scheme for individual investment or other financial decisions, and those persons should take their own professional advice on such investment or financial decisions. Neither I nor Towers Watson Limited accepts any responsibility for any consequences arising from a third party relying on this report. Except with the prior written consent of Towers Watson Limited, the recipient may not reproduce, distribute or communicate (in whole or in part) this report to any other person other than to meet any statutory requirements. Data supplied The Trustee bears the primary responsibility for the accuracy of the information provided, but will, in turn, have relied on others for the maintenance of accurate data, including the Principal Employer who must provide and update certain membership information. Even so it is the Trustee's responsibility to ensure the adequacy of these arrangements. I have taken reasonable steps to satisfy myself that the data provided is of adequate quality for the purposes of the investigation, including carrying out basic tests to detect obvious inconsistencies. These checks have given me no reason to doubt the correctness of the information supplied. It is not possible, however, for me to confirm that the detailed information provided, including that in respect of individual members and the asset details, is correct. This report has been based on data available to me as at the effective date of the actuarial valuation and takes no account of developments after that date except where explicitly stated otherwise. Some personal data of members (such as date of birth and salary) is required for the running of this Section of the Scheme, including for paying out the right benefits. The use of this data is regulated under the European Union General Data Protection Regulation ( the GDPR ) 2016/679, which places certain responsibilities on those who exercise control over the data (known as data controllers under the GDPR). Data controllers would include the Trustee of the Scheme and may also include the Scheme Actuary and Towers Watson, so we have provided further details on the way we may use this data on our website at Assumptions The choice of long-term assumptions, as set out in the HSBC Global Services Section s Statement of Principles dated 1 July 2018, is the responsibility of the Trustee, in agreement with the Principal Employer, after taking my advice. They are only assumptions; they are not predictions and there is no guarantee that they will be borne out in practice. In fact I would expect the experience of this Section of the Scheme from time to time to be better or worse than that assumed. The Trustee and the Principal Employer must be aware that there are uncertainties and risks involved in any course of action they choose based on results derived from these assumptions. The funding of the HSBC Global Services Section of the Scheme is subject to a number of risks and it is not possible to make an allowance for all such risks in providing our advice. Unless stated, no explicit allowance has been made for any particular risk. In particular, no explicit allowance has been made for climate-related risks. 2

5 Introduction Statutory funding objective The Trustee's only formal funding objective is the statutory funding objective under the Pensions Act 2004, which is to have sufficient and appropriate assets to cover the HSBC Global Services Section s technical provisions. For the HSBC Global Services Section of the Scheme, the technical provisions are to be calculated as the sum of: the additional voluntary contribution balances (other than those not on the Fidelity platform) relating to defined benefit membership of the Scheme attributable to hybrid members who are members of the HSBC Global Services Section, as stated in the audited accounts for this Section of the Scheme as at the valuation date, plus the accumulated defined contribution balances held in respect of the members of the HSBC Global Services Section of the Scheme, as stated in the audited accounts for this Section of the Scheme as at the valuation date, plus the amount expected to be required as at 31 December 2016 to provide for the defined benefits of hybrid members provided under this Section of the Scheme arising from service completed up to 30 June 2015 and based on assumptions about what the future will bring. The assumptions used will be based on the principles set out in the Statement of Principles dated 1 July The benefits taken into account in the funding plan are those payable to the member under the Scheme as a whole less those due to be paid from the HBUK Section of the Scheme. The technical provisions are calculated by projecting the benefits (which are mostly pension payments) expected to be paid in each year after the valuation date and then discounting the resulting cashflows to obtain a present value. Benefits accrued in respect of service only up to 30 June 2015, the date that the Scheme closed to future accrual, are taken into account in this calculation (although where applicable an allowance is made for an assumed level of increase to future pensionable earnings for employed members). The main benefits taken into account in this actuarial valuation are summarised in the section of this report. The projections allow for benefit payments being made from the HSBC Global Services Section of the Scheme over the next 80 or so years. Most of these payments depend on future increases in price inflation statistics subject to specified limits. The method and assumptions for calculating the technical provisions as at 31 December 2016 have been agreed between the Trustee and the Principal Employer and are documented in the Statement of Principles dated 1 July The main assumptions used to calculate the HSBC Global Services Section s technical provisions are set out in the section of this report. These main assumptions are broadly the same as those adopted for the 2015 investigation, except that: The investment return assumption is 100 bps above that implied by market conditions as at 31 December 2016 on a portfolio of gilts that closely match this Section s liabilities. This compares to an assumption of 140 bps over the expected future cash returns (as implied by LIBOR swap rates) as adopted for the 2015 investigation. Inflation-linked assumptions are based on expected Retail Prices Index (RPI) inflation as implied by gilt markets as at 31 December 2016, rather than as implied by swap markets, as used for the 2015 investigation. The mortality assumption adopted for the 2016 technical provisions has been calculated consistently with that adopted for the 2015 investigation. The base tables and associated multipliers have been updated to reflect the weighted average of Scheme s mortality experience over the six years from 1 January 2011 to 31 December The long term rates for future improvements in 3

6 mortality under the CMI Core Projection Model have been retained for males and females but the assumption has been updated to reflect the 2016 CMI model. The pension amount thresholds for high and low earners have been updated to reflect inflation over The assumption for salary increases for the 2016 investigation is 0.25% pa above RPI inflation (up to an assumed maximum of 300,000 pa) compared to the 0.5% pa above RPI inflation (up to an assumed maximum of 300,000 pa) assumed for the 2015 investigation. An allowance is made for employed members in service (or active members) to withdraw from service before normal pension age, at a rate of 5% pa, and for employed members in service to opt to retire early at a rate of 15% pa from age 55 onwards, taking a pension reduced for early payment on actuarially neutral terms. By comparison, at the 2015 investigation, an allowance was made for active members to withdraw from service before normal pension age at a rate of 10% pa, and no allowance was made for early retirement. Valuation Statement The following table shows the aggregate defined benefit liability payable from the Scheme as a whole for members of the HSBC Global Services Section, the liability in respect of their defined benefit underpin benefits payable from the HBUK Section of the Scheme, and the resulting net defined benefit liability payable from the HSBC Global Services Section (i.e. this Section s technical provisions ) as at the date of the actuarial valuation (31 December 2016), together with the defined contribution liabilities at that date. It compares these with the market value of the Section s assets, and also shows the corresponding figures from the previous actuarial valuation. The table also reflects some key post-valuation date events as follows: for enhanced early retirement terms. Contributions have been paid after the valuation date to fund enhanced early retirement pensions payable on redundancy which have been awarded prior to the valuation date. Transfers between Sections of the Scheme. The Trustee maintains a policy for transferring assets between Sections of the Scheme when members change employment between employers of different sections of the Scheme. As at the date of this report, the net transfers payable to the HBUK Section, from the HSBC Global Services Section, in respect of employment transfers prior to 31 December 2016 is expected to be 2 million. 4

7 HSBC Global Services Section of the HSBC Bank (UK) Pension Scheme Valuation statement (Technical Provisions) 31 December 2016 m 31 December 2015 Aggregate defined benefit liability payable from the Scheme as a whole (including that payable from both the HBUK Section and HSBC Global Services Section): Employed active members 2,133 2,163 Deferred pensioners Pensioners and dependants Total 2,635 2,321 Underpin defined benefit liability met from the HBUK Section: Employed active members (1,911) (1,985) Deferred pensioners (140) (41) Pensioners and dependants (284) (94) m Total (2,335) (2,120) Net defined benefit liability to be met from the HSBC Global Services Section: Employed active members Deferred pensioners 5 - Pensioners and dependants Total Before post-valuation adjustments Defined Benefit liabilities Defined Contribution liabilities 1, Liabilities total 1, Defined Benefit assets in audited accounts Defined Contribution assets in audited accounts 1, Assets total 1, Surplus/(Shortfall) (assets less technical provisions) (60) (74) Level (assets technical provisions) 96% 91% Post-valuation adjustments Net transfer payments expected (2) 63 paid for enhanced early retirement terms Defined Benefit assets (after adjustment) After post-valuation adjustments Defined Benefit liabilities Defined Contribution liabilities 1, Technical Provisions 1, Defined Benefit assets Defined Contribution assets 1, Assets total 1, Surplus/(Shortfall) (assets less technical provisions) Level (assets technical provisions) 101% 102% 5

8 Developments since the previous valuation The funding shortfall (relative to the assets in the audited accounts) has decreased from 74m at the previous valuation to 60m at this valuation. However, after allowing for the post-valuation adjustments at each valuation date outlined on the previous page, the funding surplus reduced from 19m at the previous valuation to 14m at this valuation. The main factors contributing to this reduction are shown below (further detail is provided in the Additional Information section of this report). Deficit at 31 December Reduction in deficit Interest on surplus Investment conditions (58) - Increase in deficit Other experience (3) Changes in assumptions Miscellaneous Net transfers payment expected to be made (2) Deficit at 31 December m 6

9 Contribution requirements Contributions to provide for benefit accrual Accrual of defined benefits ceased in the HSBC Bank (UK) Pension Scheme with effect from 30 June Thus no contributions are required to be paid in respect of benefit accrual after this date. Contributions for risk benefits and expenses Employer contributions were paid at the rate of 2% of DC members DC pensionable salaries (as defined in the Scheme s trust deed and rules) up until 30 November 2017, of which 1% is a provision for the cost of providing defined benefit risk benefits to DC members and 1% is to provide for the expenses of administering the HSBC Global Services Section of the Scheme. With effect from 1 December 2017, the rate was amended to 1.26% of DC members DC pensionable salaries, of which 0.26% is to provide for the expenses of administering the HSBC Global Services Section of the Scheme. From 1 July 2018, Employer contributions will be paid at the rate of 1% of DC members DC pensionable salaries to make provision for the cost of providing defined benefit risk benefits to members of this Section. This is an allowance having regard to the projected costs arising by reference to the assumptions set out in the. Further employer contributions will be paid at the following rates in each calendar year to provide for the expenses of administering defined benefit payments and defined contribution payments to be made from the HSBC Global Services Section of the Scheme. Calendar Year 1 1 To be paid no later than 31 December of that year Amount m m m m m m 2 Inclusive of expense contributions paid in 2018 under the schedule dated 27 September 2017 Recovery plan As there were insufficient assets to cover the HSBC Global Services Section s technical provisions at the valuation date, the Trustee and the Principal Employer are required to agree a recovery plan. This specifies how, and by when, the statutory funding objective is expected to be met. The HSBC Global Services Section is expected to be in surplus relative to its technical provisions after the post-valuation date events described earlier are taken into account. No further contributions are required to make good the shortfall at 31 December

10 Projections and sensitivities Based on the assumptions underlying the calculation of the HSBC Global Services Section of the Scheme s technical provisions as at 31 December 2016 and allowing for contributions to be paid to the Section of the Scheme as described above, the funding level is expected to increase slightly over the next few years if experience proves to be better than the prudent assumptions made. However, this Section of the Scheme is highly sensitive to the rate at which members salaries increase and how long they remain in service. Even a small variation in experience from the assumptions made in this report would result in significant (proportionate) deviations from the funding plan. The chart below illustrates the estimated sensitivity of the technical provisions as at 31 December 2016 to variations of individual assumptions. (If more than one of these assumptions is varied, the effect may be greater than the sum of the changes from varying individual assumptions.) These are shown here as at 31 December 2016, relative to the funding position after allowing for the postvaluation date events described earlier in this report. Technical provisions surplus ( m) Technical provisions Discount rate 0.3% pa lower Withdrawal rate 5% pa higher (same early retirement rate) CPI assumption 0.5% pa lower (giving larger RPI- CPI gap) CMI 2014 model for future improvements from 2016 (rather than CMI 2016 model) There is also a key risk relating to defined benefits becoming payable following the death in service of defined contribution members of this Section of the Scheme. This risk can be mitigated by the purchase of insurance. 8

11 Introduction Discontinuance In the event that the HSBC Global Services Section of the Scheme is discontinued, the benefits of employed members would crystallise and become deferred pensions in this Section of the Scheme. If the HSBC Global Services Section of the Scheme s discontinuance is not the result of the insolvency of the Employers, the Employers would ultimately be required to pay to this Section of the Scheme any deficit between the Scheme Actuary s estimate of the full cost of securing members benefits with an insurance company (including expenses) and the value of the assets held the employer debt. The Trustee would then normally try to buy insurance policies to secure future benefit payments. However, the Trustee may decide to run this Section of the Scheme as a closed fund for a period of years before buying such policies if it is confident that doing so is likely to produce higher benefits for members or if there are practical difficulties with buying insurance policies, such as a lack of market capacity. If the discontinuance of this Section of the Scheme is a result of the insolvency of the Employers, the employer debt would be determined as above and the HSBC Global Services Section of the Scheme would also be assessed for possible entry to the Pension Protection Fund ( PPF ). If the assessment concluded that the assets (including any funds recovered from the Employers) were not sufficient to secure benefits equal to the PPF compensation then the HSBC Global Services Section of the Scheme would be admitted to, and members compensated, by the PPF. Otherwise the HSBC Global Services Section of the Scheme would be required to secure a higher level of benefits with an insurance company. Statutory estimate of solvency The Pensions Act 2004 requires that I provide the Trustee with an estimate of the solvency of the HSBC Global Services Section of the Scheme at the valuation date. Normally, this means an estimate of the proportion of the accrued benefits that could have been secured by buying insurance policies with the assets held by the HSBC Global Services Section of the Scheme at the valuation date. Due to the nature of the benefits in the HSBC Global Services Section of the Scheme, they are likely to be difficult to match directly through the purchase of insurance contracts. For the purposes of the statutory estimate of solvency, I have assumed that the cost of the annuity purchase would be similar to that seen in the markets around the date of the valuation for small transactions in respect of more traditional style pension benefits, but adjusted to reflect the potential additional costs of buying out benefits in the form of this Sections benefits. Given the relatively unique benefit structure of this Section of the Scheme, the adjustment made is somewhat subjective but nevertheless should provide a high-level indication of the level of buy out coverage. Specifically, in assessing the estimated solvency position, I have assumed that the Trustee would secure annuities on average pricing (inclusive of wind-up expenses) consistent with yields on an appropriately matched portfolio of gilts less 20 bps pa, and have assumed a higher CPI assumption than used in calculating the technical provisions for this Section of the Scheme. The main assumptions used to estimate the solvency position of the HSBC Global Services Section of the Scheme are set out in the section of this report. 9

12 My estimate of the solvency position of the HSBC Global Services Section of the Scheme as at 31 December 2016 is that the assets stated in the report and accounts as relating to the defined benefits for the HSBC Global Services Section would have met 84% of the cost of buying insurance policies to secure the defined benefit liabilities at that date, based on the assumptions described above. If the allowance is made for the post valuation date adjustments to assets described in the previous sections of this report, then the estimated funding level on a solvency basis would be 109%. Further details are set out in the table below: HSBC Bank (UK) Pension Scheme HSBC Global Services Section Valuation statement () 31 December 2016 m 31 December 2015 Aggregate defined benefit liability payable from the Scheme as a whole (including that payable from both the HBUK Section and HSBC Global Services Section): Employed active members 3,168 2,790 Deferred pensioners Pensioners and dependants Total 3,871 2,987 Underpin defined benefit liability met from the HBUK Section: Employed active members (2,988) (2,736) Deferred pensioners (219) (55) Pensioners and dependants (377) (114) Total (3,584) (2,905) Net defined benefit liability to be met from the HSBC Global Services Section: Employed active members Deferred pensioners 8 - Pensioners and dependants Total Before post-valuation adjustments Total estimated cost of defined benefit liabilities Defined benefit assets in audited accounts (deficit)/surplus (assets less total estimated cost) (47) 45 level (assets total estimated cost) 84% 155% Post-valuation adjustments Net transfer payments expected (2) 63 paid for enhanced early retirement terms Defined benefit assets (after adjustment) After post-valuation adjustments Total estimated cost of buying out defined benefit liabilities Total defined benefit assets (deficit)/surplus (assets less total estimated cost) level (assets total estimated cost) 109% 268% m The change in the solvency level from 268% to 109% is due mainly to salary increases awarded to employed members (in excess of CPI revaluation) over 2016, with the associated creation of accrued benefit within this Section of the Scheme, as well as changes in investment conditions over the period. These were partly offset by expenses and the cost of death benefits for DC members being lower than anticipated. 10

13 The solvency estimate should not be relied upon to indicate the position on a future winding-up. Changes in market interest rates and in the supply and demand for annuities mean that the actual position at any particular point in time can be established only by obtaining specific quotations for buying the insurance policies required to secure the benefits. In addition, a reserve would be required to cover the expected cost of running of the HSBC Global Services Section of the Scheme as a closed fund or winding up this Section of the Scheme. I expect that this would be, broadly, covered by the surplus on this measure. In the event of there being insufficient assets on discontinuance of the Scheme, the coverage for particular benefits would depend on where they fall in the statutory priority order below. Money purchase liabilities, such as those arising from members defined contribution benefits, are excluded from the statutory priority order; their treatment is determined by the HSBC Bank (UK) Pension Scheme s own rules and would normally be that they are secured in full before any other benefits. category 1 benefits relating to certain pension annuities secured by the HSBC Global Services Section of the Scheme before 6 April 1997 (of which I understand there are none for the HSBC Global Services Section of the Scheme); category 2 the cost to the HSBC Global Services Section of the Scheme of securing the compensation that would otherwise be payable by the PPF if the Principal Employer became insolvent; category 3 benefits in respect of any defined benefit voluntary contributions not dealt with above; category 4 all other pensions and benefits due under the HSBC Global Services Section of the Scheme, including pension increases (where these exceed those under the PPF). As the assets of the HSBC Global Services Section covered the Section 179 (PPF) liabilities as at 31 December 2016, this Section of the Scheme is unlikely to have qualified for entry to the PPF had the Principal Employer become insolvent at 31 December Instead, there would have been sufficient assets (after allowing for payments to the HSBC Global Services Section of the Scheme from the Employers for enhanced pensions paid on redundancy, and after allowing for the transfer of assets for members who had changed employment between employers of different sections of the Scheme) to run as a closed fund with members entitlements expected to be met in full. Relationship between the cost of securing benefits and the technical provisions My estimate of the cost of securing defined benefits with an insurance company of 287 million is 13 million lower than the element of this Section s technical provisions relating to defined benefits of 300 million. The solvency estimate assumes no further salary escalation, whereas the technical provisions includes allowance for prospective salary increases that might be awarded in future. This additional reserve is greater than the impact of other assumption differences between the two measures, and so the statutory estimate of the solvency liability is lower than the technical provisions. Projections and sensitivities Based on the assumptions underlying the calculation of the HSBC Global Services Section Section of the Scheme s technical provision as at 31 December 2016 and allowing for contributions to be paid to this Section of the Scheme summarised in the section of this report, the solvency level is projected to reduce as and when salary increases in excess of CPI inflation are awarded to members. The buy-out cost can vary considerably at any time dependent on a number of factors including scheme size, market capacity, as well as insurer pricing and/or the appetite to transact. As an illustration, it would not be unreasonable to see 10% or more fluctuations in market pricing relative to gilt markets. Thus, fluctuations of this nature could lead to solvency coverage of perhaps between (or even beyond) around 100% to 120%. 11

14 Introduction Risks The table below summarises the main risks to the financial position of the HSBC Global Services Section of the Scheme and the actions taken to manage them. This Section is unusual in nature as the most significant risks it faces are not those of a typical pension scheme. Risk Employers unable to pay contributions or make good deficits in the future Approach taken to risk At each valuation the Trustee takes advice from an independent specialist on the ability of the Employers to pay contributions to this Section of the Scheme and, in particular, to make good any shortfall that may arise if the experience of this Section of the Scheme is adverse. This advice is taken into account when determining the level of technical provisions and in considering the appropriateness of any recovery plan to remove a deficit relative to the technical provisions. Between valuations the Trustee monitors the Employers financial strength regularly. Salary increases awarded could be higher (or deferred pension increases lower) than those assumed, which would result in higher liabilities The Trustee monitors the impact of salary experience relative to growth in the underpin pension annually. Fewer members leave active service than assumed The Trustee monitors the impact of withdrawal and early retirement experience annually. More defined contribution members die in service than assumed The Trustee considers the exposure to the risk regularly and may seek to insure against this risk. Legislative changes could lead to increases in the HGSU Section of the Scheme s liabilities The Trustee takes legal and actuarial advice on changes in legislation and consults with the Employers, where relevant. Economic risk Demographic risk Legal risk 12

15 Benefits summary The HSBC Bank (UK) Pension Scheme is a registered pension scheme under the Finance Act Before the Scheme was segregated, it was contracted out of the State Second Pension, although it ceased to be contracted out from 30 June 2015 when the Scheme closed to future accrual. When the Scheme was closed to future accrual, salary linkage was maintained for active members and members are paid a pension equal to the higher of their pension as if they became a deferred member at 30 June 2015 revalued in line with statutory provisions ( the underpin pension ), or the pension calculated using pensionable service to 30 June 2015 and their final pensionable salary as at their date of leaving ( the salaried pension ). It is expected that, for most members, the salaried pension will be at least as large as the underpin pension. For members of the HSBC Global Services Section, the underpin pension is paid from the HBUK Section of the Scheme, and any difference between this and the salaried pension is paid from the HSBC Global Services Section of the Scheme. Sectionalisation The Scheme was segregated into two sections with effect from 30 September 2015: the HSBC Bank Section and the HSBC Global Services Section. The Scheme was segregated further with effect from 1 July 2018 to create an additional Section known as the HSBC Bank plc Section, with the HSBC Bank Section renamed as the HBUK Section. The terms on which the Scheme was further segregated are set out in the 58th Deed of Variation ( Deed of Amendment, Admission and Agreement, or the Second Segregation Deed ) dated 3 April The liabilities attributable to the HSBC Global Services Section comprise: the individual Defined Contribution ( DC ) accounts for DC members who are in the service of a participating employer in the HSBC Global Services Section; for hybrid members in the service of a participating employer in the HSBC Global Services Section, the liability to provide benefits in excess of the member s underpin pension, including associated death benefits; and the liability to provide benefits of a defined benefit nature in respect of DC members who die whilst in the service of a participating employer in the HSBC Global Services Section. The liabilities attributable to the HSBC Bank plc Section comprise: the individual Defined Contribution ( DC ) accounts for DC members who are in the service of a participating employer in the HSBC Bank plc Section; for hybrid members in the service of a participating employer in the HSBC Bank plc Section, the liability to provide benefits in excess of the member s underpin pension, including associated death benefits; and the liability to provide benefits of a defined benefit nature in respect of DC members who die whilst in the service of a participating employer in the HSBC Bank plc Section. The liabilities of the HBUK Section comprise all the liabilities of the Scheme other than those attributable to the HSBC Global Services Section or the HSBC Bank plc Section. Summaries of the aggregate benefits provided in each benefit category of the Scheme can be found on the HSBC Future Focus website, the address of which is given below: The details of the benefits modelled for this valuation have been discussed with the Trustee separately. 13

16 Discretionary benefits Section 4 of the Statement of Principles dated 1 July 2018 sets out the treatment of the material discretions in this valuation. Changes to the benefits Since the valuation as at 31 December 2015 no changes have been made to the HSBC Global Services Section of the Scheme s benefits. Uncertainty about the benefits No allowance has been made in the calculation of the technical provisions or the statutory estimate of solvency for possible changes to the benefits that may be required to ensure that the Scheme s provisions in respect of Guaranteed Minimum Pensions do not unlawfully discriminate between male and female members. 14

17 Membership data Defined Benefits A summary of the data provided for this and the previous valuation is presented below. Number of members Number 31 December December 2015 Males Females Total Total Active members 1,349 1,127 2,476 2,936 Deferred pensioners Pensioners Dependants Children Total 1,665 1,389 3,054 3,099 Annual salary or pension m 31 December December 2015 Males Females Total Total Pensionable salaries Deferred pensions Pensioners pensions Dependants pensions Children s pensions Average age Years 31 December December 2015 Males Females All All Active members Deferred pensioners Pensioners Dependants Children Notes on data tables: Deferred pension amounts include revaluation to the valuation date. Accrued pension amounts for actives are as at the valuation date and based on final pensionable salary. Average ages are weighted by salary/pension. 15

18 Asset information Movements in the market value of the HSBC Global Services Section s defined benefit assets The audited accounts supplied as at 31 December 2016 show that the market value of the HSBC Global Services Section s defined benefit assets was million. The change in this Section of the Scheme s defined benefit assets from million as at 31 December 2015 to million as at 31 December 2016 is detailed in the Trustee's Report and Financial Statements over that period. The table below summarises a broad reconciliation of the change (including AVCs): m m Defined benefit assets at 31 December Contributions paid: Employer s normal contributions 24.0 Other income: Individual transfers between Sections Group Transfers from the Bank Section 62.1 Benefits paid: (9.0) - Pension payments (0.7) - Lump sums at retirement (6.0) - LTA and AA tax charges (2.3) Expenses (2.2) Investment dealings: Investment income Investment expenses (2.2) - Change in market value of investments 38.9 Defined benefit assets at 31 December

19 Movements in the market value of the HSBC Global Services Section s defined contribution assets The audited accounts supplied as at 31 December 2016 show that the market value of the HSBC Global Services Section of the Scheme s defined contribution assets was 1,092.1 million. The change in this Section of the Scheme s defined contribution assets from million as at 31 December 2015 to 1,092.1 million as at 31 December 2016 is detailed in the Trustee's Report and Financial Statements over that period. The table below summarises a broad reconciliation of the change: m m Defined contribution assets at 31 December Contributions paid: Employer s normal contributions Members AVC contributions 54.6 Benefits paid: (15.3) - Purchase of annuities (1.0) - Commutations of pensions and lump sum retirement benefits (14.2) - LTA and AA tax charges (0.1) Other: Group Transfers from the Bank Section Individual transfers between Sections (2.5) - Individual transfers out to other schemes (15.9) - Other individual transfers into HSBC Global Services Section 13.5 Investment dealings: Investment income Change in market value of investments Defined contribution assets at 31 December ,092.1 Investment strategy of the HSBC Global Services Section Given the small size of the Section relative to the HBUK Section, the Trustee s policy is to invest the HSBC Global Services Section s assets in a strategy that is easy to implement, minimises costs, utilises the scale from the HBUK Section and is liquid. Given the nature of the liabilities within the HSBC Global Services Section (largely covering the effect of salary increases), the Scheme s assets are allocated to a diversified portfolio of growth assets plus, more recently, a portfolio of index-linked gilts. 17

20 Approximate analysis of the change in funding position The main factors contributing to the change in surplus (between 31 December 2015 and 31 December 2016 (after allowing for the post-valuation asset adjustments outlined earlier in the report) are set out below: 2015 Surplus 19 m Interest on surplus 0 Investment conditions Nominal return achieved on assets (net of investment expenses) relative to assumption Actual inflation over 2016 being lower than expected (6) Change in swap yields and inflation curves (72) Change in outperformance above projected LIBOR (from 140 bps to 160 bps) 18 Other experience Withdrawals and early retirement experience salary link broken earlier than 1 expected Contributions to meet redundancy benefits exceeds cost of benefits granted (on 9 technical provisions basis) Expenses and cost of death benefits for DC members lower than anticipated 20 Real salary growth (relative to experienced inflation) higher than expected (33) Expected net payments due in respect of employment transfers between the (2) HSBC Global Services Section and the HBUK Section of the Scheme (58) (5) Changes in assumptions 32 Mortality assumption 20 Salary escalation 27 Withdrawal and early retirement assumptions (2) Change in reference from swaps plus 160 bps to gilts plus 120 bps 1 Reduction in margin over gilts from 120 bps pa to 100 bps pa (14) Miscellaneous/untraced surplus 14 The miscellaneous/untraced item is proportionately high for this Section, relative to a typical pension scheme. This is to be expected due to the nature of the Section s liabilities which involves the difference between two much larger benefits. 18

21 HSBC Bank (UK) Pension Scheme HSBC Global Services Section Summary of assumptions adopted as at 31 December 2016 Price inflation (RPI) Price inflation (CPI) Technical provisions In line with gilt market terms 0.5% pa below RPI price inflation Statutory estimate of solvency In line with gilt market terms In line with RPI Investment returns Pension increases* RPI based increases 1.0% pa above the yield on a matching portfolio of gilts of approximate nature and duration as at 31 December 2016 for defined benefit liabilities. These returns are assumed to be net of investment expenses. LPI(0,5): In line with RPI price inflation LPI(0,3): In line with RPI price inflation LPI(0,3.5): In line with RPI price inflation LPI(0,2.5): In line with RPI price inflation LPI(3,5): In line with RPI price inflation plus 0.4% pa 0.2% pa below the yield on a matching portfolio of gilts of approximate nature and duration as at 31 December 2016 for defined benefit liabilities. These returns are assumed to be net of investment expenses. In line with gilt market pricing of RPI inflation, taking into account the relevant floor and cap to the pension increase guaranteed and reflecting market implied levels of inflation volatility. CPI based increases LPI(0,5): In line with CPI price inflation LPI(0,3): In line with CPI price inflation LPI(0,2.5): In line with CPI price inflation LPI(3,5): In line with CPI price inflation plus 0.5% pa In line with gilt market pricing of RPI inflation, taking into account the relevant floor and cap to the pension increase guaranteed and reflecting market implied levels of inflation volatility. Fixed increases Fixed (e.g. 0% or 3%): In line with guaranteed fixed rate Fixed (e.g. 0% or 3%): In line with guaranteed fixed rate * LPI (z,y) refers to increases based upon the appropriate measure of inflation subject to a floor of x% per annum and a cap of y% per annum. 19

22 Mortality Technical provisions Statutory estimate of solvency The assumptions for mortality depend on the level of the member s deferred pension, accrued pension or pension in payment as at 1 January 2017, including pension increases, salary increases and statutory revaluation orders which apply, or would have been applied up to and including that date. The post retirement mortality assumption adopted for the calculation of the technical provisions is based on a weighted average of the mortality experienced by Scheme pensioners and dependants over the 6 years to 31 December 2016 (the relative weights increasing linearly from 1 for the 2011 experience to 2 for the 2016 experience). Male pensioners < 11,126 pa 104% SAPS S2 All pensioner Male amounts > 11,126 pa 93% SAPS S2 Normal health pensioner Male amounts light Female pensioners < 11,126 pa 100% SAPS S2 Normal health pensioner Female amounts > 11,126 pa 112% SAPS S2 All pensioner Female amounts light Female dependants < 11,126 pa 93% SAPS S2 Dependant Female amounts > 11,126 pa 88% SAPS S2 Normal health pensioner Female amounts Male dependants All members 114% SAPS S2 Normal health pensioner Male amounts heavy Allowance for future improvements in mortality In line with the CMI Core Projection Model (2016 version), subject to a long term annual improvement rate of 1.5% to 2016 and 2% from 2016 for males and 1.5% for females. 102% SAPS S2 All pensioner Male amounts 93% SAPS S2 Normal health pensioner Male amounts light 98% SAPS S2 Normal health pensioner Female amounts 107% SAPS S2 All pensioner Female amounts light 92% SAPS S2 Dependant Female amounts 88% SAPS S2 Normal health pensioner Female amounts As Technical Provisions 114% SAPS S2 Normal health pensioner Male amounts heavy In line with the CMI Core Projection Model (2016 version), subject to a long term annual improvement rate of 1.5% to 2016 and in line with the CMI Core Projection Model (2014 version), subject to a long term annual improvement rate of 2% from 2016 for males and 1.5% for females. 20

23 In service mortality Technical provisions As above for technical provisions Allowance used for risk benefits is as set out in the tables of demographic assumptions below Statutory estimate of solvency n/a Salary increases 0.25% pa above RPI price inflation (up to an assumed maximum of 300,000 pa) n/a Commutation Early Retirement 25% pension commuted at retirement on terms 10% below aggregate reserves - voluntary Pre 75 females are assumed to all retire at age 55, otherwise employed members are assumed to opt for early retirement at a rate of 15% pa at each age above 55 (with those projected to remain in service at their Normal Pension Age retiring at that age). For post April 2010 service it is assumed for non-contributory and contributory members that benefits payable by reference to a retirement age of 65 will be assumed to be paid at age 60 and subject to an early retirement reduction of 4% pa simple No allowance made None - ill health See Appendix B n/a Age difference between members and their dependants Male 3 years older than female As technical provisions Proportion of deaths that give rise to spouse, civil partner or dependant benefits 90% for men, 70% for women at retirement, reducing as spouses predecease members As technical provisions Withdrawal (i.e. the rate of active members leaving service with deferred benefits) Members withdraw from service prior to NPA at rate of 5% pa n/a Increase in basic state pension n/a n/a Increases in Section 148 orders 1% pa above RPI price inflation As technical provisions 21