hsbc bank (uk) pension scheme...a new segregated section, the hsbc bank plc section (or “hbeu...

HSBC Bank (UK) Pension Scheme

Annual Report & Financial Statements for the year ended 31 December 2019

Scheme registration number: 10117950

HSBC Bank (UK) Pension Scheme Annual Report & Financial Statements for the year ended 31 December 2019

1

Table of contents

Trustee and advisors 2

Trustee’s Report 5

DC Governance Statement 17

Actuarial Certification of Calculation of Technical Provisions – 2016 HSBC UK Section Actuarial Valuation 29

Actuarial Certification of Calculation of Technical Provisions – 2016 HSBC Global Services Section Actuarial Valuation 30

Actuarial Certification of Calculation of Technical Provisions – 2018 HSBC Bank plc Section Actuarial Valuation 31

Actuarial Certificate of Schedule of Contributions – HBUK Section 32

Actuarial Certificate of Schedule of Contributions – HSBC Global Services Section 33

Actuarial Certificate of Schedule of Contributions – HSBC Bank plc Section 34

Summary of Contributions 35

Independent Auditors’ Statement about Contributions to the Trustee of the HSBC Bank (UK) Pension Scheme 37

Independent Auditors’ Report to the Trustee of the HSBC Bank (UK) Pension Scheme 38

Fund Account 40

Statement of Net Assets available for benefits at 31 December 41

Notes to the Financial Statements 42

Further information 73

Appendices 75

Defined Benefits Statement of Investment Principles

Defined Contributions Statement of Investment Principles

HSBC Bank (UK) Pension Scheme Annual Report & Financial Statements for the year ended 31 December 2019 Trustee and advisors 2

Trustee and advisors

Trustee HSBC Bank Pension Trust (UK) Limited 8 Canada Square London, E14 5HQ

Secretary to the Trustee J McKenzie

Principal Employers HSBC UK Bank plc 1 Centenary Square Birmingham, B1 1HQ

HSBC Global Services (UK) Limited 8 Canada Square London, E14 5HQ

HSBC Bank plc 8 Canada Square London, E14 5HQ

Administrator Willis Towers Watson Limited (Technology and Administration Services) PO Box 652 Redhill Surrey, RH1 9AL

Actuary C Singer Willis Towers Watson Limited Watson House London Road Reigate Surrey, RH2 9PQ

Legal Advisor Sacker & Partners LLP 20 Gresham Street London, EC2V 7JE

Independent Auditors PricewaterhouseCoopers LLP 7 More London Riverside London, SE1 2RT

Bankers HSBC UK Bank plc 2nd Floor 62-76 Park Street London, SE1 9DZ

Defined Contribution Investment Fund Administration FIL Life Insurance Limited Oakhill House 130 Tonbridge Road Hildenborough Kent, TN11 9DZ

Investment Custodians HSBC Bank plc 8 Canada Square London, E14 5HQ

Northern Trust Global Securities Limited 50 Bank Street London, E14 5NT

The Bank of New York Mellon (International) Limited One Canada Square London, E14 5AL

Investment Consultants Willis Towers Watson Limited Watson House London Road Reigate Surrey, RH2 9PQ

Redington Limited Floor 6 One Angel Court London, EC2R 7HJ

Lane Clarke & Peacock LLP 95 Wigmore Street London, W1U 1DQ

HSBC Global Asset Management (UK) Limited 8 Canada Square London, E14 5HQ

Property Valuer CBRE Limited St Martin's Court 10 Paternoster Row London, EC4M 7HP

Property Legal Advisors Gowling WLG (UK) LLP Two Snowhill Birmingham, B4 6WR

Reed Smith The Broadgate Tower, 20 Primrose Street London, EC2A 2RS

Stephenson Harwood LLP 1 Finsbury Circus London, EC2M 7SH

Shepherd and Wedderburn LLP 1 Exchange Crescent Conference Square Edinburgh, EH3 8UL


Defined Benefit Investment Managers Alpha Real Capital LLP 388 Euston Road, Floor 6, London, NW1 3BG

Ashmore Investment Management Ltd 61 Aldwych London, WC2B 4AE

AXA Investment Managers UK Limited 7 Newgate Street London, EC1A 7NX

BlackRock Investment Management (UK) Limited 12 Throgmorton Avenue London, EC2N 2DL

Brandywine Global Investment Management LLC (until March 2019) 2929 Arch Street, Suite 800 Philadelphia, PA 19104 United States of America

Fulcrum Asset Management LLP (until May 2019) Marble Arch House 66 Seymour Street London, W1H 5BT

Greencoat Capital LLP Burdett House, 15-16 Buckingham Street London, WC2N 6DU


Insight Investment Management (Global) Limited 160 Queen Victoria Street London, EC4V 4LA

LaSalle Investment Management One Curzon Street London, W1J 5HD

Legal and General Assurance (Pensions Management) Limited One Coleman Street London, EC2R 5AA

Loomis Sayles & Company LP One Financial Center Boston, MA 02111 United States of America

M & G Investment Management Limited Laurence Pountney Hill London, EC4R 0HH

Montagu Private Equity LLP 2 More London London, SE1 2AP

Pathway Capital Management LLC 2211 Michelson Drive, Ninth Floor Irvine, CA 92612 United States of America

Aberdeen Standard Life Investments Limited 1 George Street Edinburgh, EH2 2LL

Vantage Infrastructure (UK) Limited (previously known as Hastings Fund Management (UK) Limited) 2nd Floor, St Mary Axe London, EC3A 8FR

Wellington Management International Limited Cardinal Place 80 Victoria Street London, SW1E 5JL


Defined Contribution Investment Managers Artemis Fund Managers Limited Cassini House 57 St James's Street London, SW1A 1LD

BlackRock Investment Management (UK) Limited 12 Throgmorton Avenue London, EC2N 2DL


Ninety One UK Limited (previously known as Investec Asset Management) Woolgate Exchange 25 Basinghall Street London, EC2V 5HA

Jupiter Unit Trust Managers Limited The Zig Zag Building 70 Victoria Street London, SW1E 6SQ

Kames Capital plc (exited May 2019) Kames House 3 Lochside Crescent Edinburgh, EH12 9SA

Legal and General Assurance (Pensions Management) Limited One Coleman Street London, EC2R 5AA

M & G Investment Management Limited Laurence Pountney Hill London, EC4R 0HH

MFS International (UK) Limited 1 Carter Lane London, EC4V 5ER

Newton Investment Management (from May 2019) BNY Mellon Centre 160 Victoria Street London EC4V 4LA

River & Mercantile Asset Management LLP 30 Coleman Street London EC2R 5AL

RWC Partners Limited (exited October 2019) 60 Petty France London, SW1H 9EU

Schroder Investment Management Limited 31 Gresham Street London, EC2V 7QA

Threadneedle Pensions Limited Cannon Place, 78 Cannon Street London, EC4N 6AG

GW&K Investment Management LLC (previously known as Trilogy Global Advisors LP) 222 Berkeley Street Boston MA 02116 United States of America

WHEB Asset Management LLP (from April 2019) 7 Cavendish Square London, W1G 0PE

Legacy additional voluntary contributions (“AVC”) providers AVCs that are not held in the Scheme’s DC platform are provided by managers detailed in Note 12 to the Financial Statements.

HSBC Bank (UK) Pension Scheme Annual Report & Financial Statements for the year ended 31 December 2019 Trustee’s Report 5

Trustee’s Report

HSBC Bank Pension Trust (UK) Limited (the “Trustee”) is pleased to present the Annual Report and Financial Statements of HSBC Bank (UK) Pension Scheme (the “Scheme”) for the year ended 31 December 2019.

Scheme constitution and management

The Scheme is the main pension vehicle for UK employees of the HSBC Group.

The Scheme was established as the Midland Bank Pension Scheme under a Trust Deed dated 28 December 1950 to provide defined benefit (“DB”) pensions to the employees of Midland Bank Limited.

Benefits accrued under the Scheme have changed since its establishment, including closure of DB pensions on 30 June 1996 being replaced by defined contribution (“DC”) benefits for new employees, closure to future accrual for DB benefits on 30 June 2015 with all employees accruing DC benefits, and sectionalisation of the Scheme with the introduction of the HSBC Global Services Section (or “HGSU Section”) in October 2015.

From 1 July 2018, following restructuring of the HSBC Group, HSBC UK Bank plc replaced HSBC Bank plc as the principal employer of the Bank Section which was also renamed as the HBUK Section. A new segregated section, the HSBC Bank plc Section (or “HBEU Section”) of the Scheme was created with HSBC Bank plc as principal employer.

The Scheme is managed by a corporate trustee, HSBC Bank Pension Trust (UK) Limited (registration number 00489775), whose role is to ensure that the Scheme is administered in accordance with the Scheme Rules and pensions legislation. The Trustee is supported by the Pension Scheme Executive (the “PSE”) which manages the Scheme on a day to day basis on behalf of the Trustee.

The Board of the Trustee meets quarterly, with additional meetings when required to consider special business. The Trustee operates committees of the Board which meet at least quarterly. The committee structure and membership changed on 1 March 2019 following amendments to the Trustee’s articles of association and governance structure. The committees were structured as follows:

Committees up to 28 February 2019: Committees from 1 March 2019

Asset and Liability Committee (“ALCo”)Monitors and reviews investment performance of DB and DC assets together with changes in the liability profile of the Scheme’s DB pensions

Asset and Liability Committee (“ALCo”) Unchanged

Audit and Risk Committee (“A&R”)Reviews internal control systems and compliance with external financial reporting obligations; makes recommendations to the Board for the appointment, remuneration and terms of engagement of the external auditor; considers administration and communication matters; and monitors the exercise of certain delegated discretionary powers

Audit and Risk Committee (“A&R”) Unchanged except monitoring of operational risk has been moved to the Appeals, Discretions & Operations Committee. The A&R retains overall responsibility for risk management oversight of operations

Appeals and Discretions Committee (“A&D”)Considers member disputes raised under the IDRP (Internal Disputes Resolution Procedure) and monitors the execution of certain discretionary powers delegated to the PSE

Appeals, Discretions & Operations Committee (“AD&O”)Unchanged except monitoring of operational risk has been moved from A&R

Communications and Engagement Committee (“C&E”)Considers all aspects of member communications and engagement to ensure that members are given the information that they require, delivered in ways that would help them obtain their desired pensions outcomes

DisbandedCommunications strategy has been elevated to Board level for direct reporting to and consideration by all Board members rather than a sub-committee

Nominations and Governance Committee (“NomCo”)Considers appointments and succession of Trustee Directors

Governance and Nominations Committee (“GovCo”)Unchanged

Chairs’ CommitteeA forum for the Chair of the Board and the chairs of the above committees to discuss the Scheme's priorities and coordinate the activities of the committees and the PSE

Chairs’ CommitteeUnchanged

Directors may attend meetings of committees of which they are not formal members to observe and broaden their understanding of the matters considered by those committees and, where required, to make up a quorum.


Trustee Directors

An Ordinary Resolution was passed by the sole shareholder on 1 March 2019 to enable changes to the Trustee composition of the Trustee Board which were proposed by the principal employers. Changes to directorships and committee membership from 1 March 2019 are noted below. Further details can be found in the significant changes in the year section below.

Regardless of how they are appointed, all Directors have a legal duty to treat all members equally and act independently of employers.

The Scheme has a conflicts of interest policy which requires all Directors to disclose all conflicts and excuse themselves from any meetings or decisions where they are conflicted.

During 2019 and up to the date of signing these financial statements, the composition of the Board of Directors of the Trustee was as set out below. Except where indicated, Directors served throughout the period.

Director Committee membership up to 28 February 2019

Committee membership from 1 March 2019

Term Changes

Employer Nominated Directors: R Picot Chair of the Board,

Nomco (Chair) Chair of the Board, GovCo (Chair) December 2021

C Beale ALCo, A&R (Chair) ALCo (Chair) February 2021 A Ling A&R, A&D AD&O (interim Chair) until

September 2019, A&R (Chair) January 2022

H Pugsley - AD&O, A&R February 2024 (from 1 March 2019) A Robinson ALCo, C&E ALCo January 2022 F Sullivan C&E (Chair) Deputy Chair of the Board, GovCo January 2021 A Thomas ALCo, A&R ALCo, A&R April 2021 (until 23 September 2019)

Member Nominated Directors:L Aspell ALCo (Chair) - - (until 1 March 2019) R Dixon A&R, C&E A&R February 2021 B Horler A&D, C&E AD&O, GovCo February 2022 A Lonsdale A&R, A&D - - (until 1 March 2019) K Plummer A&D, C&E AD&O February 2023 S White ALCo, Nomco ALCo, GovCo February 2024

Independent Trustee - Capital Cranfield M Trouard-Riolle AD&O (Chair) from September

2019 (From 23 September 2019)

Significant changes in the year

Changes to the Trustee Board and Committees

After consultation with the Trustee, HSBC Bank plc (the sole shareholder of the Trustee Company) passed an Ordinary Resolution of HSBC Bank Pension Trust (UK) Limited on 1 March 2019 to allow for changes to the constitution of the Trustee Board by way of ordinary resolution of the Trustee Company.

It was resolved that from 1 March 2019, the Trustee Board is constituted of six employer nominated directors, four employee nominated directors and one independent director, resulting in a reduction in the total number of directors from 13 to 11. It was intended that a further review of the number of Trustee directors will be considered. This review took place in June 2020 with advice from an independent third party and concluded that the change from 13 to 11 directors was successfully implemented and that further reductions in director numbers was not desirable.

Following a special Board meeting on 11 February 2019 when the selection process was approved and after legal advice, an independently chaired selection panel was constituted to interview those serving member nominated directors who wished to be considered for re-appointment and new terms in order to implement the reduction of member nominated directors from 6 to 4. It was also approved that future directors will be selected from member nominations using the same process rather than by election.

It was also resolved that from 1 March 2019 the committees structure and membership be amended. Changes to the committees are detailed in the Scheme constitution and management section above.

Capital Cranfield was appointed as independent Trustee from 23 September 2019.


Longevity hedging

The Trustee decided in March 2017 to begin the process of entering into longevity swaps contracts to cover approximately 25% of pensions in payment. The Trustee approved the appointment of an external advisor to assist in selecting counterparties and negotiate policies that met the Trustee’s objectives, which include (but not limited to): level of coverage, counterparty risk management, costs and efficient operation.

The Trustee invited a number of reinsurance providers to tender and received a proposal which led to the Trustee agreeing to extend coverage from 25% to 75%. The Trustee selected the Prudential Insurance Company of America (“PICA”) to cover 50% and Swiss Re Europe SA (“Swiss Re”) to cover 25% of pensions in payment. The Trustee selected HSBC Insurance (Bermuda) to create and operate captive insurers for each policy.

The policies were negotiated using 31 December 2017 datasets for the selection of covered individuals. The policy reinsured by PICA was executed on 27 June 2019 and the policy reinsured by Swiss Re was executed on 11 December 2019. Both policies provide coverage with effect from 1 January 2019. As such the agreed models and datasets are amended where required by the legal agreements for the previously selected individuals.

Changes to the rules

Changes to the Scheme Deed & Rules that were executed during the year are as follows:

Deed of Variation dated 29 May 2019 to permit increased flexibility around payments of uncrystallised funds pension lump sums in order to allow member to efficiently manage their tax liabilities.

Consolidated Trust Deed and Rules dated 16 December 2019 to consolidate the previous consolidated deed dated 30 April 2003 and subsequent deeds of variation.

Deed of Variation dated 17 December 2019 to permit transfer of HGSU and HBEU Section death in service benefits under DC rules to the HBUK Section.

Copies of the Scheme’s Deeds and Rules are available on the Scheme’s website as detailed on page 73.

Developments after the year end

Coronavirus (“COVID-19”)

Since its discovery in late 2019 as a new strain of coronavirus disease, COVID-19 has developed into a worldwide pandemic in 2020 resulting in severe restrictions on social interactions by authorities around the world. These restrictions have resulted in a large reduction in economic activity where workers are unable to attend work and/or where customer demand has fallen.

As a result, in March 2020 global markets saw significant levels of reduction in capital values resulting in falls in the Scheme’s asset values for both DB and DC investments. Global markets have since seen increased volatility as they react to ongoing developments relating to the extent of the pandemic and responses to it by authorities. The financial statements value investments as at a specific point in time when the extent of infections and restrictions on economic activity were localised, the first restrictions began on 22 January 2020 in Wuhan and the World Health Organisation declared a pandemic on 11 March 2020, and as such no adjustments have been made to the value of investment assets as at 31 December to take into account events after the year end, see Note 28 for further details.

COVID-19 may also have an effect on mortality rates and assumptions which may in turn have an effect on the value of the Scheme’s actuarial liabilities and funding position which then may result in changes to the Scheme’s long term funding strategies. The Scheme’s Actuarial Valuations as at 31 December 2019 are ongoing and will consider the effects of COVID-19 on the Scheme’s liabilities, however, due to the ongoing situation and unpredictable nature of the pandemic mortality assumptions may not change for these valuations. The Trustee will continue to monitor events and obtain actuarial advice and, if necessary obtain further actuarial valuations.

The Trustee has monitored and will continue to monitor the effects of COVID-19 on the financial strength of the sponsoring employers.

Operational impacts

The biggest impact faced by the Scheme is continuity of operations and services to members. The PSE has been able to continue to manage the Scheme on behalf of the Trustee as its pre-existing Business Continuity Plan sets out homeworking as a response to site unavailability with annual testing of this capability, however, in practice PSE staff regularly work from home and as such were well placed to pivot to homeworking. The Trustee’s Board Meeting in March 2020 was successfully convened by teleconference. The majority of the PSE’s focus and responses to COVID-19 has been the oversight of operational suppliers. While the PSE had previously assessed suppliers’ business continuity plans it has liaised with the Scheme’s key operational suppliers to ensure that all relevant business continuity tools and activities are deployed appropriately to respond to COVID-19 specific issues, such as the unavailability of multiple work sites and the rapid deployment of extended remote working capabilities.

The supplier with the biggest potential impact on members is the Scheme Administrator due to direct interaction with members and reliance on their processes to pay benefits in full and as they fall due. The PSE is satisfied that they have implemented responses to mitigate impacts as far as possible, however, some disruption has been experienced. As a result the PSE continues to monitor service levels closely in order to respond to issues on a timely basis.


The most significant issue experienced by members is the temporary closure of the Scheme’s DC Property Fund due to suspension of two of the underlying funds because they were unable to provide accurate pricing of the funds in the current environment. This means that members may not make any contributions into the Property Fund nor switch out or sell any part of their DC pension pot that is invested in the Property Fund. Contributions that would normally have been invested in the Property Fund have been redirected to the cash fund during this temporary closure. Member taking benefits may retain their investments until the fund re-opens. Where benefits must be taken the Trustee intends to use unallocated funds with the agreement of the employer on a case by case basis. Further information can be found on the Scheme website as detailed on page 73.

Except for the DC Property Fund, the impact on investment operations has not been significant due to the nature of the investment strategy (fewer transactions) and highly automated nature of processes. However, the PSE has obtained confirmation of COVID-19 specific responses from the DC platform manager (Fidelity) and DB custodians to ensure all impacts are mitigated as far as possible.

Financial developments and Financial Statements

The following is a summary of the financial transactions for the year ended 31 December 2019:

HBUKDB

HBUKDC

HGSUDB

HGSUDC

HBEUDB

HBEUDC

Total Total

2019 2019 2019 2019 2019 2019 2019 2018

£m £m £m £m £m £m £m £m

Contributions and income received 114.9 128.8 65.4 224.6 11.4 52.7 597.8 527.6

Benefits and expenses paid (815.3) (67.2) (22.5) (46.7) (7.1) (10.5) (969.3) (1,005.2)

Net dealings with members (700.4) 61.6 42.9 177.9 4.3 42.2 (371.5) (477.6)

Net investment returns 2,485.3 393.0 49.7 313.8 8.9 76.3 3,327.0 (648.1)

Net transfers between sections 234.4 (1.1) (222.6) (8.3) (7.1) 4.7 - -

Net change in funds during the year 2,019.3 453.5 (130.0) 483.4 6.1 123.2 2,955.5 (1,125.7)

Net assets at the end of the year 28,663.9 2,400.3 280.3 1,978.8 85.2 468.3 33,876.8 30,921.3

The financial statements included in this Annual Report & Financial Statements are the accounts required by the Pensions Act 1995. They have been prepared and audited in compliance with regulations made under sections 41(1) and (6) of that Act.

Contributions

Contributions are paid to the Scheme in accordance with the Schedules of Contributions that were certified by the actuary on 1 July 2018 for the HBUK and HGSU sections of the Scheme. The contributions received for the HBEU Section were paid in accordance with the Scheme rules until 17 December 2019 when the section’s first schedule of contributions was certified and came into force.

Contributions were also received in addition to those required by the Schedules of Contributions and Scheme Rules, details of which can be found in the Summary of Contributions.

A Summary of Contributions payable to the Scheme is found on pages 35 to 36. The Scheme’s auditors provide a separate statement which is found on page 37 as to whether the contributions received are, in all material respects, in accordance with the relevant Schedules of Contributions.

After the year end a new schedule of contributions for the HBUK Section was agreed and certified by the Scheme Actuary on 31 March 2020.

Copies of the Schedules of Contributions are available from the Scheme website as detailed on page 73.


Membership and benefits

A summary of the membership of the Scheme by section, benefit type and member type as at 31 December 2019 is set out in the table below:

Active members

Deferred members

Pensioner members

Total

HBUK Section DB only benefits - 43,619 46,286 89,905 DC only benefits 19,773 39,812 1,548 61,133 DC with DB salary underpin (hybrid) 3,021 879 2,612 6,512

22,794 84,310 50,446 157,550

HGSU Section DC only benefits 15,598 7,028 40 22,666 DC with DB salary underpin (hybrid) 1,540 56 204 1,800

17,138 7,084 244 24,466

HBEU Section DC only benefits 3,509 842 6 4,357 DC with DB salary underpin (hybrid) 204 15 18 237

3,713 857 24 4,594

Total members as at 31 December 2019 43,645 92,251 50,714 186,610


Pensioner members include 6,221 spouses and dependants of deceased members (2018: 6,086) and 48 members whose benefits are provided by annuities (2018: 67). Employees who have opted-out of the Scheme are shown as new members when auto-enrolled and as leavers when opted-out.

A summary of the movements of members in the Scheme is set out in the table below:

Active members

Deferred members

Pensioner members

Total

Reported as at 31 December 2018 42,641 95,901 48,949 187,491Adjustments 79 (462) 35 (348)

Members at beginning of the year 42,720 95,439 48,984 187,143

New members 6,479 11 459 6,949Members leaving active service (4,952) 4,558 - (394)Retirements (554) (6,081) 2,372 (4,263)Deaths (35) (166) (1,063) (1,264)Ceased widow/dependant benefits - - (38) (38)Members leaving the Scheme before retirement

(13) (1,510) - (1,523)


Opening membership numbers have been adjusted for late notifications of membership movements in the previous year.

Pension increases (DB)

Pensions in payment

Pensions in payment are increased annually by the lower of 5% (3% for pensions accrued from 1 July 2009) or the increase in the RPI, except for members of schemes which merged into the HSBC Bank (UK) Pension Scheme which may have different caps. Annual increases are effective from 1 January each year based on the preceding October RPI. The Trust Deed also gives power to the Trustee, with the approval of the Employer, to make discretionary increases above the guaranteed level. No discretionary increases were granted for 2018 or 2019 (2017: none).


Pensions in payment were reviewed in December 2019 and the increase in RPI for the twelve months ended in October 2019 was 2.1%. Pension increases were:

1 January 2020 A general increase of 2.1% (2.1% for pensions accrued from 1 July 2009)



Deferred pensioners

For those entitled to a deferred DB pension, awards have been made as follows:

For members who have left or are being treated as having left service under the Security of Employment Policy/Agreement, increases awarded are the same as those for pensions in payment (as above).

For members of the Samuel Montagu section of the Scheme who have left service, an increase in line with the practice which existed prior to the merger of the Samuel Montagu Scheme with the HSBC Scheme.

For all other deferred members, no increases were awarded with the exception of statutory increases applicable to the members in question.

Transfer values

In accordance with the Pension Schemes Act 1993, all transfers paid to other pension schemes during the year were calculated and verified by the Scheme's Actuary or calculated in accordance with instructions prepared by the Actuary. It is the Trustee’s general policy to make no allowance for discretionary benefits (including discretionary increases to pensions whilst in payment) when calculating transfer values. However, the Trustee does make allowance for some discretionary practices in certain cases in the light of legal and actuarial advice. No transfers were reduced to less than their cash equivalent value.

From 1 February 2010 a decision was made by the Trustee not to allow members to transfer benefits into the Scheme from any other pension arrangement on a DB basis.

Actuarial liabilities

In accordance with Financial Reporting Standard 102, “The Financial Reporting Standard applicable in the United Kingdom and the Republic of Ireland” (FRS 102), the financial statements do not include liabilities in respect of promised retirement benefits.

Under section 222 of the Pensions Act 2004, every scheme is subject to the Statutory Funding Objective, which is to have sufficient and appropriate assets to cover its Technical Provisions, which represents the present value of benefits to which members are entitled based on pensionable service to the valuation date. This is assessed at least every 3 years by the Actuary in an Actuarial Valuation using assumptions agreed between the Trustee and the principal employers for each section and set out in the Statement of Funding Principles, a copy of which is available on the Scheme website as detailed on page 73.

The latest Actuarial Valuations were as at 31 December 2016 for the HBUK and HGSU Sections and as at 31 December 2018 for the HBEU Section. Latest Actuarial Reports are as at 31 December 2018 for the HBUK and HGSU sections.

The results of the latest Actuarial Valuations (2016 for HBUK and HGSU and 2018 for HBEU) and annual Actuarial Reports (2018 for HBUK and HGSU) are as follows:

31 December 31 December 2018 2016

HBUK Section Value of DB Technical Provisions £24.7bn £25.5bn Value of assets available to cover DB Technical Provisions £26.6bn £26.9bn

Value of assets as a percentage of DB Technical Provisions 108% 105%

HGSU Section Value of DB Technical Provisions £419m £300m Value of assets available to cover DB Technical Provisions £411m £314m

Value of assets as a percentage of DB Technical Provisions 98% 105%

HBEU Section Value of DB Technical Provisions £71m - Value of assets available to cover DB Technical Provisions £79m -

Value of assets as a percentage of DB Technical Provisions 111% -

As noted in the HGSU Actuarial Valuation as at 31 December 2016, the Actuary took into account funding payments received after the date of the Valuation and up to the date of certification of the Valuation which were attributable to benefits accrued up to the date of the Valuation. This resulted in an additional £76m added to available assets to cover Technical Provisions.


The value of Technical Provisions is based on pensionable service to the valuation date and assumptions about various factors that will influence the relevant section of the Scheme in the future, such as the levels of investment returns and pay increases, when members will retire and how long members will live.

Members with DB benefits received a Summary Funding Statement to update them on the Scheme’s funding level within three months of each actuarial valuation or actuarial report being received from the Actuary.

Recovery plan

A recovery plan was not required for the HBUK Section (formerly the Bank Section) and the HBEU Section of the Scheme. As noted above, the HGSU Actuarial Valuation took into account funding payments received after the date of the Valuation and up to the date of certification of the Valuation which were attributable to benefits accrued up to the date of the Valuation. Therefore, as at the effective date of the HGSU Actuarial Valuation, there was a Technical Provisions deficit and as a result a Recovery Plan was required to be put into place that recognised the payments described above which had already been received by the time of certifying the valuation.

Method

The actuarial method used in the calculation of the Technical Provisions is the Projected Unit Credit Method.

Significant DB actuarial assumptions

A summary of main assumptions are below:

Assumption HBUK Section31 December 2016 Actuarial Valuation

HGSU Section31 December 2016 Actuarial Valuation

HBEU Section31 December 2018 Actuarial Valuation

Discount interest rate 0.7% pa above the yield on a matching portfolio of gilts of approximate nature and duration of DB liabilities as at 31 December 2016, net of investment expenses.

1.0% pa above the yield on a matching portfolio of gilts of approximate nature and duration of DB liabilities as at 31 December 2016, net of investment expenses.

0.7% pa above the yield on a matching portfolio of gilts of approximate nature and duration of DB liabilities as at 31 December 2018, net of investment expenses.

Future RPI inflation In line with gilt market terms. In line with gilt market terms. In line with gilt market terms.

Future CPI inflation 0.5% pa below RPI inflation. 0.5% pa below RPI inflation. 0.5% pa below RPI inflation.

Pension increases Based on RPI and CPI which may be modified dependent on the floor or cap applied to each portion of a member’s benefit.

Based on RPI and CPI which may be modified dependent on the floor or cap applied to each portion of a member’s benefit.

Based on RPI and CPI which may be modified dependent on the floor or cap applied to each portion of a member’s benefit.

Pay increases 0.25% pa above RPI price inflation. 0.25% pa above RPI price inflation. 0.25% pa above RPI price inflation.

Mortality Based on standard mortality tables (self-administered pension schemes – series 2) adjusted for the weighted experience of the Scheme over the six years to the date of the valuation and for improvements to mortality as agreed between the Trustee and the Sponsor.

Based on standard mortality tables (self-administered pension schemes – series 2) adjusted for the weighted experience of the Scheme over the six years to the date of the valuation and for improvements to mortality as agreed between the Trustee and the Sponsor.

Based on standard mortality tables (self-administered pension schemes – series 2) adjusted for the weighted experience of the Scheme over the six years to the date of the valuation and for improvements to mortality as agreed between the Trustee and the Sponsor.

Full details of all assumptions can be found in the Actuarial Valuations and Statement of Funding Principles for each section, these can be obtained from the Scheme at the address and website detailed on page 73.

Next actuarial valuation

The Trustee is required to produce actuarial valuations at least every three years. The Trustee has agreed with the principal employers to produce valuations for all sections of the Scheme as at 31 December 2019.

Investment Management

Investment strategy and principles

The Trustee is responsible for determining the Scheme’s investment strategy.

The Trustee is required under section 35 of the Pensions Act 1995 to have a Statement of Investment Principles (“SIP”). During the year the Scheme had two SIPs, one for DB investments and one for DC investments.

Following the completion of the 2016 Actuarial Valuations and Bank Ringfencing, new SIPs were put in place from July 2018 and further updated in September 2019 mainly for additional Environmental, Social & Governance (“ESG”) principles, changes to regulatory requirements (that were due to be implemented in October 2019) and consistency of wording between the DB and DC SIPs. The SIPs were further updated in June 2020 mainly for regulatory changes (which are due to be implemented by October 2020) and updating DB Strategy.


Changes to the SIPs did not result in changes to the DC Strategies, Freechoice fund choices or underlying investment funds. The September 2019 changes have also not resulted in changes to DB investment strategy or managers, however, the changes reinforce the Trustee’s strong belief that ESG risks are long-term material financial investment risk and as a result require appropriate management by the Trustee, PSE and investment managers. Where investment managers or investee companies do not appropriately mitigate these long-term material investment risks investment managers may be deselected and investee companies disinvested. The June 2020 DB SIP was changed to reflect an updated position for Target Matching Portfolio (“TMP”) asset allocation, with the aim for achieving TMP by the end of 2020 (previously by the end of 2025) and to remove the strategic asset allocation which is no longer relevant.

Copies of the SIPs currently in force are appended to the Annual Report & Financial Statements and are available from the Scheme’s website as detailed on page 73.

As set out in the SIPs the Trustee’s investment strategy considers the Scheme’s investments in the following groupings:

HBUK Section DB

HGSU Section DB

HBEU Section DB

DC assets for all sections

HBUK Section DB strategy

The investment objective of the HBUK Section’s DB investments is to maintain a portfolio (together with contributions agreed with the principal employer) that meet the cost of current and future benefits on a Technical Provisions basis within specified investment risk constraints.

In order to meet this goal the SIP defines a long term goal of reaching the TMP asset allocation by the end of 2020. This TMP represents a low risk portfolio which matches the Scheme’s cash flow requirements in order to pay benefits also known as a Cash flow driven investment (“CDI”) strategy.

The following table shows the year end position of the Scheme’s journey to the TMP:

Value at Allocation TMP

2019 2019 Target

£m Allocation

LEGACY RETURN SEEKING PORTFOLIO

Private equity 274.5 0.96%

UK commercial property 481.3 1.68%

Leveraged (secured) loans 46.1 0.16%

Global credit 1,408.5 4.94%

Legacy portfolios being exited 4.2 0.01%

Total Return Seeking 2,214.60 7.75% 0.00%

TARGET MATCHING PORTFOLIO

Gilts, swaps and cash 14,110.50 49.37% 47.00%

UK matching property 361.3 1.26%

Ground rents 346.1 1.21%

Infrastructure debt 491.7 1.72%

Index-linked sterling credit 549.6 1.92%

Renewables 236.0 0.83%

Total Illiquid Matching 1,984.70 6.94% 9.00%

Buy and maintain credit portfolios 5,860.30 20.50%

TMP eligible credit 2,444.80 8.55%

Run off credit 1,968.00 6.89%

Total Credit 10,273.10 35.94% 44.00%

Total HBUK Section 28,582.90 100.00% 100.00%

(ex AVCs & longevity insurance)


HGSU and HBEU sections’ DB strategies

The investment objective of the HGSU and HBEU sections DB investments is to maintain a portfolio (together with contributions agreed with the principal employer) that meet the cost of current and future benefits on a Technical Provisions basis. The SIP does not specify the asset allocation for the investments of the two sections but requires the Trustee to review and set an asset allocation at least once every three years.

The following table shows the asset allocation at the year end for each section against the allocation set by the Trustee in September 2019:

Value at Allocation Allocation

2019 2019 benchmark

£m

HGSU Section

Diversified assets 187.3 62.0% 60.0%

Liability driven investments 114.9 38.0% 40.0%

Total HGSU Section 302.2 100.0% 100.0%

HBEU Section

Diversified assets 57.1 75.3% 60.0%

Liability driven investments 18.7 24.7% 40.0%

Total HBEU Section 75.8 100.0% 100.0%

The HBEU Section transitioned to the allocation benchmark in February 2020.

DB Investment performance

The Trustee assesses the performance of the Scheme’s investments in the following groupings:

HBUK DB investments: the DB SIP does not assign a target performance against a specified benchmark for each underlying portfolio, except for three legacy return seeking portfolios.

HGSU and HBEU DB investments: the DB SIP currently specifies that targets and benchmarks are not applicable for all portfolios. The Trustee currently monitors performance against the investment objective being fully funded on a technical provisions basis.

Money purchase funds are assessed against benchmarks related to the asset class that the fund is invested in. The Trustee receives information about performance against benchmarks on a quarterly basis for each fund. Performance information is provided to members as part of the annual package of information. DC members have access to quarterly fund factsheets on each of the available DC funds via the Scheme website.

Annualised performance of the Scheme’s DB investments over short and longer periods is summarised as:

One year Three year Five year % pa % pa % pa

HBUK Section DB investment performance 9.0 4.6 7.2 HGSU Section DB investment performance 15.0 6.9 n/a HBEU Section DB investment performance 13.0 n/a n/a

1. The HGSU Section was created on 1 October 2015 and as such a performance figure is not available for 5 years

2. The HBEU Section was created on 1 July 2018 and as such performance figures are not available for 3 years or longer


Where applicable DB investments are benchmarked on an individual portfolio basis and as such there is no overall Scheme or section benchmark return. Details of benchmarks and target returns can be found in the SIP.

The following table sets out performance of the HBUK Section’s portfolios that are assigned a performance target:

Value at Portfolio Target

2019 performance performance

HBUK Section £m 1 year 1 year

Return seeking private equity

Pathway 274.5 -1.7% 29.2%

TMP eligible credit

Loomis 1,243.6 11.1% 10.0%

Wellington 1,201.2 0.8% -1.4%

Total Return Seeking 2,719.3

DC investment strategy and performance

There is no overall Scheme asset allocation for DC funds as each member may choose from a variety of investment strategies and may be at different stages of life-styling.

Money purchase funds are assessed against benchmarks related to the asset class that the fund is invested in. The Trustee receives information about performance against benchmarks on a quarterly basis for each fund. Performance information is provided to members as part of the annual package of information. DC members have access to quarterly fund factsheets on each of the available DC funds via the Scheme website. Annualised returns for the DC funds were:

One year Three year Five year

Fund return

Benchmark return

VarianceFund

returnBenchmark

returnVariance

Fund return

Benchmark return

Variance

%pa %pa %pa %pa %pa %pa %pa %pa %paActive funds Global Equity 22.9 20.5 +2.4 9.7 9.8 -0.1 12.1 11.7 +0.4UK Equity 22.4 19.2 +3.2 6.0 6.9 -0.9 7.5 7.5 -Emerging Markets Equity 15.7 14.3 +1.4 8.9 9.4 -0.5 9.5 9.5 -Global Bonds 1 5.5 2.7 +2.8 4.3 2.5 +1.8 - - -Sterling Corporate Bonds 2 9.7 9.3 +0.4 - - - - - -Property 4.2 1.6 +2.6 6.0 6.0 - 6.7 6.6 +0.1Diversified Assets 12.5 6.3 +6.2 4.3 7.1 -2.8 3.5 6.6 -3.1Sustainable & Responsible 22.4 22.8 -0.4 6.7 10.5 -3.8 9.4 12.8 -3.4Cash 0.7 0.6 +0.1 0.5 0.4 +0.1 +0.5 +0.4 +0.1

Passive funds Global Equity 23.3 23.0 +0.3 10.7 10.8 -0.1 10.0 10.0 -UK Equity 19.3 19.3 - 6.9 7.1 -0.2 7.5 7.6 -0.1North American Equity 2 27.8 27.8 - - - - - - -Japanese Equity 2 15.8 15.8 - - - - - - -European (ex UK) Equity 2 20.9 21.0 -0.1 - - - - - -Asia Pacific (ex Japan) Equity 2 12.8 13.1 -0.3 - - - - - -Fixed Annuity Tracker 12.5 11.9 +0.6 4.6 4.7 -0.1 5.9 5.9 -Inflation Linked Annuity Tracker 9.7 9.3 0.4 3.9 4.0 -0.1 5.9 5.9 -Shariah Law 29.4 29.4 - 14.8 14.8 - 15.2 15.2 -

1. The Active Global Bonds fund has been in existence for less than 5 years, as such performance figures are not available for the 5 year period.

2. These funds were introduced in 2018 and as such performance figures are not available for 3 years or longer. Fund factsheets, which report on performance since inception, are available quarterly from the Scheme’s website.

As described in the developments after the year end section Trustee Report, due to the COVID-19 pandemic investment values fell in significantly in March 2020 and have experienced increased volatility since. The pandemic also resulted in the suspension of the Property Fund and remains suspended at the time of signing these Annual Report & Financial Statements.

Further details on the performance of DC funds can be obtained from fund factsheets which are published quarterly and are available from the Scheme’s website. Members can obtain details of current market values and past transactions relating to their own individual DC investment accounts by accessing the My Pension website operated by the Scheme’s administrators. Please see page 73 for details on how to access the Scheme website and the My Pension website.


Management and custody of investments

The Scheme's investments are managed by investment managers appointed by the Trustee which are listed on pages 3 to 4.

The Trustee delegates the day-to-day investment management decisions to professional external investment managers. The Trustee sets the investment strategy for the Scheme after taking advice from the Scheme's investment consultants. The Trustee has put in place investment mandates with its investment managers who implement this strategy.

Investment managers are remunerated by fees based on a percentage of funds under management or an agreed fixed fee. In the case of pooled investment vehicles, where fees are deducted from underlying assets and where the Scheme has negotiated fee rates at less than that which is deducted, the Scheme receives a rebate.

The investment consultants and investment managers are all appropriately authorised under the Financial Services and Markets Act 2000.

The Trustee delegates its voting rights to the investment managers to exercise at their discretion.

The Trustee has considered how environmental, social and governance (“ESG”) factors should be taken into account in its investment process. The Trustee considers that it should in all circumstances act in the best interests of the beneficiaries in accordance with the Rules of the Scheme. The Trustee’s policy is to ask the investment managers that, where this financial consideration is not prejudiced, the managers should take into account what they believe to be relevant ESG issues in assessing future investment returns. The Trustee’s policy in relation to ESG issues are set out in the DB and DC SIPs of the Scheme.

All investment management agreements provide for the Trustee to receive regular reports on portfolio holdings and performance, but the day-to-day management including asset selection has been delegated to the investment managers by the Trustee. Reports are also received and reviewed from investment managers in respect of their engagement with the senior management of investee companies and their voting activity on the resolutions of these companies.

Custody services are provided by HSBC Bank plc, Northern Trust and Bank of New York Mellon. The custodians do not keep custody of the following assets:

Pooled investment vehicles, where each fund manager makes its own arrangements for custody of underlying investments;

Private equity and loan arrangements where the Trustee holds partnership and loan agreements;

Direct property, where title deeds are held by the Scheme’s legal advisers; and

Money purchase and other investments which are in the form of insurance policies, where the master policy documents are held by the Trustee.

The Trustee continues to prohibit investment managers from acquiring investments that result in the Scheme having direct ownership in securities of HSBC Group companies.

Corporate governance and investment risk management

The SIP highlights various types of investment risks and how these are monitored by the Trustee.

The SIP details the Scheme’s policies and principles on ESG matters. The Trustee believes that ESG risks have potentially material impacts on the Scheme’s investment performance and as such expects investment managers to take steps to ensure that ESG factors are considered in all investment decision-making processes. The Trustee has signed up to Task Force for Climate related Financial Disclosure (“TCFD”) and has published its second TCFD Statement in December 2019 which can be obtained from the Scheme’s website as detailed on page 73.

Employer-related investments

The Scheme does not directly invest in HSBC Group companies or joint ventures. However, cash balances held with HSBC Group companies fall within the regulatory definition of employer related investments. These are disclosed in Note 29 of the Financial Statements and represent 1.2% (2018: 0.7%) of net assets.

Indirect investment by managed funds is permitted if in accordance with the investment strategy of that fund. However, indirect investment is monitored by the Trustee and may affect investment decisions in order to reduce indirect exposure to HSBC Group companies and joint ventures. As at 31 December 2019 there was no indirect exposure to the HSBC Group (2018: £16m, 0.1% of net assets).


Statement of Trustee’s responsibilities

Trustee’s responsibilities in respect of the Financial Statements

The financial statements, which are prepared in accordance with United Kingdom Generally Accepted Accounting Practice, including the Financial Reporting Standard applicable in the UK and Republic of Ireland (“FRS 102”), are the responsibility of the Trustee. Pension scheme regulations require, and the Trustee is responsible for ensuring, that those financial statements:

show a true and fair view of the financial transactions of the Scheme during the Scheme year and of the amount and disposition at the end of the Scheme year of its assets and liabilities, other than liabilities to pay pensions and benefits after the end of the Scheme year; and

contain the information specified in Regulation 3A of the Occupational Pension Schemes (Requirement to obtain Audited Accounts and a Statement from the Auditor) Regulations 1996, including making a statement whether the financial statements have been prepared in accordance with the relevant financial reporting framework applicable to occupational pension schemes.

In discharging these responsibilities, the Trustee is responsible for selecting suitable accounting policies, to be applied consistently, making any estimates and judgements on a prudent and reasonable basis, and for ensuring that the financial statements are prepared on a going concern basis unless it is inappropriate to presume that the Scheme will continue as a going concern.

The Trustee is also responsible for making available certain other information about the Scheme in the form of an annual report.

The Trustee also has a general responsibility for ensuring that accounting records are kept and for taking such steps as are reasonably open to it to safeguard the assets of the Scheme and to prevent and detect fraud and other irregularities, including the maintenance of an appropriate system of internal control.

Trustee’s responsibilities in respect of contributions

The Trustee is responsible under pensions legislation for preparing, and from time to time reviewing and if necessary revising, a schedule of contributions showing the rates of contributions payable to the Scheme by or on behalf of employers and the active members of the Scheme and the dates on or before which such contributions are to be paid.

The Trustee is also responsible for keeping records in respect of contributions received in respect of any active member of the Scheme and for adopting risk-based processes to monitor whether contributions that fall due to be paid are paid into the Scheme in accordance with the schedule of contributions.

Where breaches of the schedule occur, the Trustee is required by the Pensions Acts 1995 and 2004 to consider making reports to the Pensions Regulator and to members.

Further information

Requests for additional information about the Scheme generally, or queries relating to members’ own benefits, should be made to the Benefit Administrator listed on page 73.

For and on behalf of the Trustee Directors.

R Picot, Trustee Director A Ling, Trustee Director

Date: 29 July 2020 Date: 29 July 2020

HSBC Bank (UK) Pension Scheme Annual Report & Financial Statements for the year ended 31 December 2019 DC Governance Statement 17

DC Governance Statement

STATEMENT FOR THE YEAR ENDED 31 DECEMBER 2019

1. Introduction

Governance requirements apply to defined contribution (DC) pension arrangements, to help members achieve a good outcome from their pension savings. The Trustee of the HSBC Bank (UK) Pension Scheme (the “Scheme”) is required to produce a yearly statement (which is signed by the Chair of the Trustee) to describe how these governance requirements have been met in relation to:

the default investment options (including the main default options in which members are invested and other “legacy” funds also classed as default arrangements);

the requirements for processing financial transactions;

the charges and transaction costs borne by members;

an illustration of the cumulative effect of these costs and charges;

a ‘value for members’ assessment; and

Trustee knowledge and understanding.

All components are integral to any effective and well governed DC pension scheme, and in providing this statement the Trustee seeks to evidence that the Scheme has fulfilled regulatory requirements and demonstrate that a foundation is in place to fulfil the Trustee mission of “helping members to make well informed decisions about their retirement savings”.

The Pension Scheme Executive (the “PSE”), an in-house team of experienced pension scheme professionals, supports the Trustee in managing the Scheme, including assisting with communication, administration, finance and investments and can provide an informed view on any third-party advice sought.

The Scheme is used as a Qualifying Scheme for automatic enrolment purposes.

This statement covers the period from 1 January 2019 to 31 December 2019 (the “Scheme Year”) and relates only to DC benefits (including AVCs and the DC benefits of hybrid members) in the Scheme.

2. Default arrangements

The Trustee has made available a range of investment funds for members. Each member is responsible for specifying one or more funds for the investment of their account, having regard to their attitude to the risks involved. If a member does not choose an investment option, their account will be invested into the default option applicable to them, which is managed as a “lifecycle” strategy (ie it automatically combines investments in proportions that vary according to the time to retirement age). The lifecycles are 100% invested in equities until twenty years from a member’s target retirement age from which point they transition gradually into less risky assets appropriate to the outcome targeted.

Main default arrangements

The Scheme has different default strategies for members, depending on the type of benefits they have. The default options have been designed to be in what the Trustee believes to be the best interests of the majority of the members based on the demographics of the Scheme’s membership.

The Scheme has two main default lifecycle arrangements: the Flexible Income Strategy and the Lump Sum Strategy. These lifecycle strategies were set as the default investment arrangement for two distinct cohorts of members, those with DC only benefits and those who are “Hybrid” members (former DB active members on 30 June 2015 who became active DC members from 1 July 2015), respectively.

For DC only members, the default lifecycle, the Flexible Income Strategy, transitions from the Global Equities – passive Fund into the Diversified Assets – active Fund and then de-risks into the Global Bonds – active Fund and the Cash – active Fund as the member nears retirement; this is appropriate for those who want to take their benefits in the form of income drawdown in retirement. This is due to a belief that (based on the demographic profile of the membership and the generous contribution structure) members are likely to accrue large pots, and hence likely to drawdown their pension pot gradually in retirement. Market trends and scheme experience since the introduction of Pension Freedoms in 2015 also indicate that members with larger pots are moving away from purchasing annuities and are choosing to drawdown their retirement income instead.

For Hybrid members, the default lifecycle, the Lump Sum Strategy, targets a cash lump sum at retirement. It transitions from the Global Equities – passive Fund into the Diversified Assets – active Fund and the Global Bonds – active Fund and then de-risks into the Cash – active Fund as the member nears retirement. The rationale for this is that many Hybrid members are expected to take a tax-free cash lump sum at retirement, utilising their DC benefits to provide this (as it is usually more advantageous) before giving up DB benefits.


As a material proportion of members have been shown to leave their pots invested past retirement, the Trustee has ensured that both the Flexible Income Strategy and Lump Sum Strategy continue to de-risk after the member’s target retirement date. This was introduced following the triennial investment strategy review in 2017.

Legacy default arrangements

There are two additional legacy default arrangements: the Annuity Purchase Strategy and the Cash Lifecycle. These strategies are no longer used as default options for new members. A number of members who were within one year of their target retirement age at the time of the asset transition were allowed to remain invested in these legacy default lifecycles.

The Annuity Purchase Strategy transitions members from the Global Equities – passive Fund into the Diversified Assets – active Fund and then de-risks into the Fixed Annuity Tracker – passive and Cash – active Funds as the member nears retirement. The objective of the Strategy is to be appropriate for members intending to take their benefits in the form of an annuity at retirement.

The Cash Lifecycle transitions members from the Global Equities – passive Fund into the Diversified Assets – active Fund and then de-risks into the Cash – active Funds as the member nears retirement. The objective of the Strategy is to be appropriate for members seeking to take their entire pot as a cash lump sum at retirement. Following the changes in 2018, this Lifecycle was replaced by the Lump Sum Lifecycle as the default for Hybrid members. The Cash Lifecycle is not available for new investment by members.

Additional default arrangement

In March 2020 the Property - active fund was suspended due to issues with accurately valuing two of the underlying funds (resulting from the Covid 19 pandemic). It was decided that new contributions would be re-directed to the Cash – active (ex Property) fund as an interim measure. As a result, the Cash – active (ex Property) fund became a default arrangement as members’ contributions were directed to it without their consent, but members were immediately notified of the position so that they could direct their contributions to another fund if they wished.

The objective of the Cash – active (ex Property) fund is to protect the absolute value of the investment by investing in deposits and other short-term money market instruments. The fund aims to perform in line with the benchmark.

The Trustee is responsible for the Scheme’s investment governance, which includes setting and monitoring the investment strategy for the Scheme’s default arrangements.

Details of the objectives and the Trustee’s policies regarding the default arrangements can be found in a document called the ‘Statement of Investment Principles’ (“SIP”). The Scheme’s most recent DC SIP covering the default arrangements is attached to this annual statement regarding governance.

As stated in the SIP, the Trustee aims to provide default investment options that the Trustee believes to be reasonable for those members that do not wish to make their own investment decisions. The Scheme’s main default options’ objectives are to generate returns significantly above inflation whilst members are some distance from retirement, but then to switch automatically and gradually into less risky assets as the member nears retirement with the asset allocation at retirement being designed to be appropriate for members who wish to flexibly take their benefits through an income drawdown arrangement or remain invested in the Scheme or in the case of the Lump Sum strategy, take their retirement pot as cash.

The objectives of the Scheme’s other default arrangements are noted above.

Monitoring and review

The Trustee formally reviews the strategy and performance of the default arrangements in detail at least every three years or immediately following any significant change in investment policy or the Scheme’s member profile. No detailed review was carried out during the Scheme Year. The last formal review prior to the Scheme Year was carried out on 12 September 2017 and the most recent formal investment strategy and performance review took place on 24 June 2020 and will be covered in next year’s annual governance statement.

The Trustee also carries out interim annual reviews of the default arrangements alongside all available options to members. This review includes analysis of the membership, using the latest available membership data, to review whether the strategy and performance of the default arrangements remain appropriate; the last interim annual review within the Scheme Year took place on 19 February 2019 and concluded that the arrangements remained appropriate.

The Trustee also reviews the performance of the default arrangements against their aims, objectives and policies on a quarterly basis, through a performance report provided by their investment advisers, LCP. This review includes an analysis of fund performance and member activity to check that the risk and return levels meet expectations. The Trustee reviews that took place during the Scheme Year concluded that the default arrangements were performing broadly as expected.


3. Requirements for processing core financial transactions

3.1 DC benefits (including current AVC arrangements)

The processing of core financial transactions is carried out by the administrators of the Scheme, Willis Towers Watson Technology and Administration Solutions (“WTW TAS”). Core financial transactions include (but are not limited to): the investment of contributions, processing of transfers in and out of the Scheme, transfers of assets between different investments within the Scheme, and payments to members or beneficiaries.

Service level agreement

The Trustee has a service level agreement (“SLA”) in place with WTW TAS which covers the accuracy and timeliness of all core financial transactions. The SLA includes (but is not limited to):

The processing of monthly contributions, including resolution of queries with the Bank, and payment reconciliation, with the investment manager within 9 days of receipt of the payroll contribution file (around the 16th of the month). In addition to this the Scheme also targets the investment of contributions within 5 days following deduction from pay, and this target is also monitored quarterly.

The processing of investment fund switches within 2 days of receipt of member request. Members also have the facility to do this online, in which case, the request will be actioned within 24 hours.

The processing of transfer requests (both in and out of the Scheme) within 5 days from receipt of request. Some members also have the facility to run transfer out quotes online.

The processing of retirement requests and payments within 5 days from receipt of request.

The production of annual benefit statements and Statutory Money Purchase Illustration statements within 2 months following the receipt of full, accurate data.

The answering of 80% of member calls within 30 seconds.

Quarterly reporting on the completeness and accuracy of common and conditional data.

Management of member records and financial data.

The provision and management of member online access.

WTW TAS internal controls

The Trustee has received assurance from WTW TAS that there are adequate internal controls to ensure that core financial transactions for the Scheme were processed promptly and accurately during the Scheme Year. The key activities undertaken by WTW TAS to help it ensure that core transactions were processed promptly and accurately included:

Recording all member transactions and benefit processing activities in a work management system which automatically assigns the correct SLA for each activity. Work activity is monitored, with tasks allocated on a daily basis.

Preparing fortnightly, monthly and quarterly reporting which is presented and discussed with the PSE on no less than a monthly basis.

Monthly bank, unit and fund reconciliations are performed, which are provided to the PSE.

Peer review of all monetary transactions with different levels of payment authorisation required depending on the value of the payment.

TAS provided its own annual assurance report (AAF 01/06) during the Scheme Year in order to confirm the adequacy and application of key controls being met.

In addition, analysis was undertaken over the Scheme Year by WTW TAS for any issues, errors or breaches to understand the cause, with rectification plans implemented where necessary, which were monitored on a monthly or more frequent basis. Action taken over the Scheme Year to improve performance is highlighted below.

Trustee monitoring

The Trustee has taken steps to try and ensure that there were adequate internal controls to ensure that core financial transactions relating to the Scheme were processed promptly and accurately during the Scheme Year. The Trustee regularly monitored the timeliness and accuracy of core financial transactions through several channels. The PSE, on behalf of the Trustee:

Reviewed fortnightly and monthly performance reporting on key processes, transactions and complaints. Any issues and anomalies identified were followed up with the administrator for explanation.

Held monthly meetings with the administrator to review and assess service performance, discuss issues, and progress on project related activity.

Reviewed quarterly reporting, which included, but was not limited to membership statistics, member transaction levels, service performance, financial reporting, complaints, errors and breaches, member online usage.


As part of these review processes, the PSE reviewed whether core financial transactions were accurate, up to date and completed within statutory timeframes and within the service levels agreed with WTW TAS. Any issues identified by the PSE as part of its oversight were raised with WTW TAS immediately and steps were taken to resolve the issue (see below for details).

The accuracy and quality of Scheme data is assessed and monitored on a quarterly basis by the Trustee. During the Scheme Year, the suite of data integrity tests was enhanced to include more scheme specific tests. No significant issues/exceptions were identified during the Scheme Year in relation to the accuracy and quality of DC related data.

During the Scheme Year the Trustee also carried out an internal audit of key DC processes which resulted in an overall rating of “Good” meaning that an effective control environment exists with all key controls confirmed as strong in design and operating effectively, and that there are no significant issues/exceptions that have not been highlighted by current oversight activities (see below).

Performance over the Scheme Year

In each quarter of the Scheme Year, transactions were completed within the agreed timescale for the following percentage of cases:

Quarter 1 Quarter 2 Quarter 3 Quarter 4

DC Only 94% 84% 93% 95% Hybrid 75% 61% 78% 92%

For DC only members, overall the Scheme administrators performed ahead of agreed service levels, with an average of 92% for DC in 2019 which slightly exceeded the agreed target of 90%. When these figures are combined with those for Hybrid members, there was a drop-in administrator performance levels, although the drop in service was mainly for queries relating to members’ DB benefits.

The Trustee, via the PSE, required additional disclosures in respect of any transactions and benefit processing activity that were not completed within the agreed timescales, including the cause of the delay, the extent to which agreed timescales were breached and whether the issues causing the delay were systemic. These issues and proposed remedial activities were closely monitored by the PSE, on behalf of the Trustee to minimise the risk of the issues re-occurring

During Q2 of the Scheme Year, WTW TAS carried out improvement activities across a range of processes, which had a direct impact on their core team capacity and resulted in a decrease in the number of transactions completed within the agreed timescales. Following the reduction in service performance, WTW TAS reviewed their resource model, performance and processes further and identified the areas to increase productivity to safely recover service performance and mitigate the risk to adverse member experience in the future. The transactions and activities which were completed outside of agreed timescales during the Scheme Year have been managed and were not caused by systemic issues.

No other issues or anomalies were identified during the Scheme Year in relation to the processing of core financial transactions of DC benefits.

Overall, based on the processes operated and information provided as described above, the Trustee is satisfied that over the Scheme Year (in relation to DC benefits):

the administrator was operating appropriate procedures, checks and controls and operating within the agreed SLA (with the exception of Q2 2019, which is commented on above); and

there have been no known material administration errors in relation to processing core financial transactions; and

all core financial transactions were processed promptly and accurately during the Scheme Year.

3.2 Legacy AVCs

There are a small number of members invested in a relatively large number of legacy AVC arrangements and these investment options are no longer open to contributions. These legacy AVCs only account for a small proportion (less than 0.1%) of the total DC assets within the Scheme. Therefore, the Trustee has taken a proportionate approach to reviewing them, compared to the other DC benefits within the Scheme.

The Trustee carries out an annual review of its legacy Additional Voluntary Contributions (AVC) arrangements with the last review undertaken during the Scheme Year being on 23 May 2019. This review highlighted no material concerns with the legacy AVC arrangements.


4. Member-borne charges and transaction costs

The Trustee is required to set out the charges incurred by members during the Scheme Year in this Statement. As the sponsoring employer pays the DC investment fund annual management charges, platform expenses and all other administration expenses, the member borne charges are limited to the additional fund expenses incurred by the underlying managers in the day-to-day running of the funds (for example, custodian fees etc), with the exception of some legacy AVCs funds (see below).

The Trustee endeavours to ensure that the additional fund expenses are below 0.20% per annum on each fund. As at 31 December 2019, the highest additional expenses of all funds that were available to members was for the Sustainable and Responsible Equities – active Fund, at 0.19%.

The Trustee is also required to disclose transaction cost figures. In the context of this Statement, the transaction costs shown are those incurred when the Scheme’s fund managers buy and sell assets within investment funds but are exclusive of any costs incurred when members invest in and switch between funds.

The transaction costs are borne by members. The charges and transaction costs have been supplied by Fidelity (the Scheme’s platform provider). All transaction cost information has been provided for the Scheme Year for the default arrangements and self-select options (but not the legacy AVC funds).

When preparing this section of the Statement, including the illustrations, the Trustee has taken account of statutory guidance. All additional fund expenses and transaction cost figures shown in this section are over the Scheme Year. Due to the way in which transaction costs have been calculated it is possible for figures to be negative; since transaction costs are unlikely to be negative over the long term the Trustee has shown any negative figure as zero.

Default arrangements charges and transaction costs

The default arrangement for most DC-only members is the Flexible Income Strategy, for most Hybrid members the default arrangement is the Lump Sum Strategy. These default arrangements have been set up as a Lifecycle approach, which means that members’ assets are automatically moved between different investment funds as they approach their retirement date. This means that the level of charges and transaction costs will vary depending on how close members are to retirement and in which funds they are invested.

For the Scheme Year, annualised charges and transaction costs are set out in the following tables.

Flexible Income Strategy (main DC Only default)

Years to retirement Additional fund expenses Transaction costs

20 or more years to retirement 0.00% 0.11%

15 years to retirement 0.02% 0.19%

10 years to retirement 0.03% 0.27%

5 years to retirement 0.04% 0.28% At retirement 0.03% 0.22%

Lump Sum Strategy (main Hybrid member default)


20 or more years to retirement 0.00% 0.11% 15 years to retirement 0.02% 0.19% 10 years to retirement 0.03% 0.27% 5 years to retirement 0.04% 0.28% At retirement 0.02% 0.10%

For the Scheme Year, annualised charges and transaction costs for the legacy default arrangements are set out in the following tables. Charges are only shown at retirement for the Cash Lifecycle as the strategy is closed to new members and all members in this strategy are at least at their Target Retirement Age.

Annuity Purchase Strategy (legacy default and current Freechoice option)




Cash Lifecycle (legacy default arrangement)


At retirement 0.00% 0.00%

Member borne charges and transaction costs are not shown for the additional default arrangement (the Cash-active fund) as it was not considered a default arrangement during the Scheme Year.

Self-select options charges and transaction costs

With the exception of the legacy Cash Lifecycle Strategy, the default arrangements are also available as self-select options for those not defaulted into them. Members also have the choice to invest into any of the 18 funds available in the self-select range (known as “Freechoice”).

The level of charges for each self-select fund and the transaction costs over the Scheme Year are set out in the following table. The underlying funds used within the current main default arrangements are shown in bold.

Fund name Additional fund expenses Transaction costs

UK Equities - active 0.02% 0.13% Diversified Assets - active 0.06% 0.43% Shariah Law Equities - passive 0.00% 0.04% Sustainable and Responsible Equities - active 0.19% 0.18% Global Bonds - active 0.03% 0.13% UK Equities - passive 0.00% 0.00%Global Equities - passive 0.00% 0.11% Property - active 0.03% 0.00%Fixed Annuity Tracker - passive 0.00% 0.00% Inflation Linked Annuity Tracker - passive 0.00% 0.03% Cash - active 0.00% 0.00% European (ex UK) Equities - passive 0.00% 0.00% North American Equities - passive 0.00% 0.00%Japanese Equities - passive 0.00% 0.00% Asia Pacific (ex-Japan) Equities - passive 0.00% 0.03% Global Equities - active 0.09% 0.13% Sterling Corporate Bonds - active 0.01% 0.12% Emerging Markets Equities - active 0.04% 0.39%

The Scheme also has three further legacy lifecycle strategies which were previously available for members to select namely the Capital Lifecycle, Lifecycle 2 and Flexicycle. These strategies are closed to new members, but existing members have been permitted to remain invested.

For the Scheme Year, annualised charges and transaction costs are set out below.

Capital Lifecycle (legacy Freechoice lifecycle)


At retirement 0.05% 0.32%

All members invested in this strategy are past their Target Retirement Age.

Lifecycle 2 (legacy Freechoice lifecycle)



Flexicycle (legacy Freechoice lifecycle)

Flexicycle is a lifecycle strategy that allowed members to create an investment strategy by selecting their preferred growth and consolidation phase funds and the point at which their DC pension pot would switch between them. There was also a choice of switching periods between these phases and a choice of at retirement allocation. The Trustee is therefore not able to display annualised charges and transaction costs for each possible combination in this Statement. The relevant charges and costs can be seen for the possible underlying funds with the options for the growth phase being the Global Equities – active, Global Equities – passive, Diversified Assets – active, Sustainable and Responsible Equities – active and Emerging Markets Equities – active Funds and the options for the consolidation phase being the Fixed Annuity Tracker – passive, Inflation Linked Annuity Tracker – passive, Diversified Assets – active and Cash – active Funds.


Additional Voluntary Contribution fund charges and transaction costs

As well as the DC funds noted above, which contain the majority of the Scheme’s AVC investments, some members were also invested in a number of legacy AVC funds during the Scheme Year.

The majority of the Scheme's legacy AVC assets invested in "with-profits" funds. With-profits returns are delivered through guaranteed annual and non-guaranteed terminal bonuses (guarantees only apply at contractual events, eg retirement) and these can be influenced by the asset allocation within the fund which is itself reflective of the strength of the provider, and therefore affects investment returns and bonus rates.

The Trustee, with their investment advisors, have sought to obtain details of the transaction costs from the Scheme’s legacy AVC providers for the Scheme Year. At the time of producing this statement, that process is still ongoing. The Trustee will continue to ask its legacy AVC providers on a regular basis to disclose details of the transaction cost data with the intention of adding this into the next annual governance statement.

The charges shown for the AVC arrangements are the Total Expense Ratios (“TER”) over the Scheme Year (except where otherwise shown), which includes the annual fund fees as these are not met by the Bank, unlike for the DC funds

Friends Life AVC funds TER* Transaction costs

GM Mixed Fund*** 0.32% *****

GM UK Equity Fund*** 0.36% *****

GM Overseas Equity Fund*** 0.45% *****

GM North American Equity Fund *** 0.48% *****

GM European Equity Fund*** 0.41% *****

GM Asia Pacific ex Japan Equity Fund*** 0.47% *****

GM Property Fund*** 0.60% *****

With-profits Fund 0.64% n /a****

Standard Life AVC funds TER* Transaction costs

Pension Millennium With Profits Fund 1.15% n /a****

Pension With Profits Fund 1.75% n /a****

Standard Life Managed Pension Fund 1.02% 0.00

Standard Life Property Pension Fund*** 1.03% *****

Standard Life European Equity Pension Fund*** 1.02% *****

Standard Life International Equity Pension Fund*** 1.03% *****

Standard Life North American Equity Pension Fund*** 1.01% *****

Standard Life UK Equity Pension Fund*** 1.01% *****

Pension Millennium With Profits 2006 Fund 1.20% n /a****

Other AVC providers TER* Transaction costs

Schroders Life Managed Balanced Fund*** 1.69% *****

Aegon Cash Fund 1.00%** *****

Equitable Life With-Profits Fund 1.50% 1.04%

Phoenix Life With-Profits Fund n/a**** n /a****

Prudential With-Profits Cash Accumulation Fund 1.24% 0.09%

Scottish Widows With-Profit Fund n/a**** n /a****

*TER = Total Expense Ratio. The TER encompasses charges made to / by funds, typically including the Annual Management Charge, custody fees and other expenses **Annual Management Charge only. TER varies depending on performance/day to day running costs ***Data as at 31 March 2020. The Scheme’s investment advisers are working with the provider to get information for the Scheme Year period. ****TER and/or Transaction cost is implicit. The Scheme’s investment advisors are working with the provider to confirm this cost over the period.

***** Transaction costs were not provided to the Trustee from the fund provider. The Scheme’s investment advisors are working with the provider to confirm this cost over the period.


Illustration of charges and transaction costs

Over a period of time, the charges and transaction costs that are taken out of a member’s pension savings can reduce the amount available to the member at retirement. The following table sets out an illustration of the impact of charges and transaction costs on the projected value of an example member’s pension savings. In preparing this illustrative example, the Trustee has had regard to the relevant statutory guidance.

As each member has a different amount of savings within the Scheme and the amount of any future investment returns and future costs and charges cannot be known in advance, the Trustee has had to make a number of assumptions about what these might be. The assumptions are explained below:

The “before costs” figures represent the savings projection assuming an investment return with no deduction of member-borne charges (ie the additional expenses) or transaction costs. The “after costs” figures represent the savings projection using the same assumed investment return but after deducting member-borne charges and an allowance for transaction costs.

The transaction cost figures used in the illustration are those provided by the managers over the past two years, subject to a floor of zero (so the illustration does not assume a negative cost over the long term). We have used the average annualised transaction costs over the past two years as this is the longest period over which figures were available and should be more indicative of longer-term costs compared to only using figures over the Scheme Year.

Illustrations are provided for the default option for DC only members (the Flexible Income Strategy) since this is the arrangement with the most me

hsbc bank (uk) pension scheme...a new segregated section, the hsbc bank plc section (or “hbeu...

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