HSBC Bank (UK) Pension Scheme HSBC Bank plc · HSBC Bank plc Section 1 Scope This is my report on...

HSBC Bank (UK) Pension Scheme HSBC Bank plc Section Actuarial valuation as at 31 December 2018 17 December 2019

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Summary

Actuarial valuation as at 31 December 2018 HSBC Bank plc Section

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The HSBC Bank plc Section was segregated from the HBUK Section with effect from 1 July 2018. This report contains the results of the first actuarial valuation of the HSBC Bank plc Section. The main results of this actuarial valuation are as follows:

§ The technical provisions funding level as at 31 December 2018, taking into account only assets and liabilities in respect of defined benefit liabilities is 111% against the assets stated in the annual report and accounts, which corresponds to a surplus of £8 million.

§ The Trustee has agreed with the sponsor that the liabilities for all non-actives who left service or whose pension came into payment before 31 December 2018 will be transferred to the HBUK Section. In addition, an asset transfer has been made in relation to all members who transferred employment before that date.

§ Since the HSBC Bank plc Section’s technical provisions fall below the value of the assets stated in the annual report and accounts, a recovery plan is not required.

§ The Scheme Actuary’s estimate of the cost of discharging a scheme's liability to pay benefits through the purchase of insurance policies in respect of each member’s full benefit entitlement under the Scheme as at 31 December 2018 is 100% of the assets.

§ Accrual of defined benefits ceased prior to the segregation of the Scheme although salary linkage was retained. No contributions are required to be paid in respect of benefit accrual in the HSBC Bank plc Section. The sponsor has agreed to pay contributions 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 £1.372 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 Bank plc Section of the Scheme.

§ 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 could result in significant volatility of the Section’s funding level over time.

Contents

Summary Introduction Scope Next steps Limitations

Funding Statutory funding objective Contribution requirements Projections and sensitivities

Solvency

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 Summary of assumptions

Statutory Certificate Glossary Throughout this report the following terms are used: Scheme HSBC Bank plc Section of the HSBC Bank (UK) Pension Scheme Trustee HSBC Bank Pension Trust (UK) Limited 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 Bank plc. Employers Participating Employers of the Scheme Trust Deed & Rules The Scheme’s Trust Deed and Rules as adopted by 60th Deed of Variation dated 16 December 2019

Introduction

Introduction Funding Solvency Additional Information


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Scope

This is my report on the actuarial valuation of the HSBC Bank plc Section of the HSBC Bank (UK) Pension Scheme as at 31 December 2018 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 2004. 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 Bank plc Section 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 2018 using several different measures of its liabilities. It also describes the strategy that has been agreed between the Trustee and Principal Employer for financing the HSBC Bank plc Section in future and provides projections of the funding position at the expected date of the next valuation.

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 Bank plc Section of the Scheme and the level of Employers’ contributions to be paid will be reviewed at the next actuarial valuation, which is expected to be carried out at 31 December 2019.

C G Singer Fellow of the Institute and Faculty of Actuaries Towers Watson Limited, a Willis Towers Watson Company 17 December 2019

Watson House London Road Reigate Surrey RH2 9PQ

Authorised and regulated by the Financial Conduct Authority

http://eutct.internal.towerswatson.com/clients/616641A/NRFBTRVal31Dec18/Documents/7.%20Reporting%20(CO)/7.1%20Valn%20report/HSBC%20Bank%20plc%2031%20December%202018%20valuation%20report.docx

http://eutct.internal.towerswatson.com/clients/616641A/NRFBTRVal31Dec18/Documents/7.%20Reporting%20(CO)/7.1%20Valn%20report/HSBC%20



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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 of the member data (such as date of birth and salary) required for the running of the Scheme, including for paying out the right benefits, is known as ‘personal data’. The use of this data is regulated under the Data Protection Act (DPA) and the General Data Protection Regulation (GDPR), which places certain responsibilities on those who exercise control over the data (known as ‘data controllers’ under the DPA and GDPR). Data controllers would include the Trustee of the Scheme and may also include the Scheme Actuary and Willis Towers Watson, so we have provided further details on the way we may use this data on our website at http://www.willistowerswatson.com/personal-data.

Assumptions

The choice of long-term assumptions, as set out in the Scheme’s Statement of Funding Principles dated 17 December 2019, 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 Scheme’s experience 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 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.

http://www.willistowerswatson.com/personal-data.

Funding


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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 Scheme’s technical provisions.

For the HSBC Bank plc 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 membership of, and transferred from, the Defined Benefit Section of the HSBC Bank Section of the Scheme attributable to hybrid members who are members of the HSBC Bank plc Section, as stated in the audited accounts for this section of the Scheme as at the valuation date, plus

§ the accumulated balances held in respect of the members of the Defined Contribution Section of the HSBC Bank plc Section of the Scheme, and other assets held in respect of that defined contribution section which are not designated to members, 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 2018 to provide for the death in service pensions, and the defined benefits of hybrid members provided under this section of the Scheme arising from service completed up to 30 June 2015 based on assumptions about what the future will bring. The assumptions used will be based on the principles set out in the Statement of Funding Principles dated 17 December 2019. 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 expected future 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 Additional Information section of this report.

The projections allow for benefit payments being made from 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 2018 have been agreed between the Trustee and HSBC Bank plc and are documented in the Statement of Funding Principles dated 17 December 2019.

The main assumptions used to calculate the HSBC Bank plc Section’s technical provisions are set out in the Additional Information section of this report. These assumptions are consistent with those adopted for the actuarial valuation of the HBUK Section (as it is now known as) of the Scheme as at 31 December 2016.



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Valuation Statement The following table shows the aggregate defined benefit liability payable from the Scheme as a whole for members of the HSBC Bank plc 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 Bank plc Section as at the date of the actuarial valuation (31 December 2018), together with the defined contribution liabilities at that date. It compares this Section’s “technical provisions” with the market value of the Section’s assets.

HSBC Bank plc Section of the HSBC Bank (UK) Pension Scheme Valuation statement (Technical Provisions)

31 December 2018 £m

Aggregate defined benefit liability payable from the Scheme as a whole (including that payable from both the HBUK Section and HSBC Bank plc Section):

Employed active members 327 Deferred pensioners 16

Pensioners and dependants 12 Underpin defined benefit liability met from the HBUK Section:


Pensioners and dependants 5 Net defined benefit liability to be met from the HSBC Bank plc Section:


Pensioners and dependants 7 Total Defined Benefit liabilities 71 Defined Contribution liabilities 345 Liabilities total 416 Defined Benefit assets in audited accounts 79 Defined Contribution assets in audited accounts 345 Assets total 424 Surplus / (Shortfall) (technical provisions less assets) 8 Funding level (assets ÷ liabilities) 102% Defined Benefit funding level (defined benefit assets ÷ defined benefit liabilities)

111%

Post-valuation events

Transfers across

When a hybrid member leaves service with an employer in the HBUK Section, the HSBC Global Services Section or the HSBC Bank plc Section of the Scheme and enters employment with an employer in one of the other sections, there is an automatic transfer of liability (in respect of that part of the member’s total defined benefits that exceeds the member’s underpin pension) from the transferring section to the receiving section. In this circumstance the Trustee may, with the consent of the persons performing the role of the bank in relation to each of the transferring and receiving sections to the relevant basis of calculation, transfer assets from one section to the other in respect of the liability referred to above.

Transfers back

The Trustee may, with the consent of the persons performing the role of the bank in relation to each of the transferring and receiving sections to the relevant basis of calculation, transfer liabilities and assets from



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the HSBC Bank plc Section to the HBUK Section in respect of the liabilities payable to or in respect of a hybrid member’s pensionable service in the DBS when a hybrid member leaves service or, if earlier, when any benefits become payable from the scheme to or in respect of a hybrid member such that the whole benefit becomes a liability of (and is paid from) the HBUK Section. Further, when a member of the HSBC Bank plc Section dies in service with an employer participating in the HSBC Bank plc Section, it may be that pension death benefits become payable in respect of the member under the dcs rules. In such circumstances, subject to the agreement of the persons performing the role of the bank in relation to each of the HBUK Section and the HSBC Bank plc Section to the basis for calculating the assets to be transferred, the Trustee may transfer assets and liabilities from the HSBC Bank plc Section to the HBUK Section, in respect of the pension death benefits that become payable in respect of the member under the dcs rules, so that the whole of such benefits become a liability of (and are paid from) the HBUK Section. The value of the liabilities in respect of those members who left, retired or died in service between the segregation of the Section and the effective date of this valuation amounts to £12 million as at the effective date of the valuation. Post valuation date transfers At the time of writing this report, the Trustee has agreed with the sponsor that the liabilities for all non-actives who left service or whose pension came into payment before 31 December 2018 will be transferred to the HBUK Section and that a transfer of assets on the agreed basis will also be made. This transfer is expected to be made shortly after the date of this report. In addition, an asset transfer equivalent to £0.4m as at 31 December 2018 was made in 2019 in relation to all members who transferred employment before that date. We have set out in the following table a summary of the defined benefits assets and liabilities of this Section, as at 31 December 2018, had these transfers taken place as at the valuation date.

The funding position as at the actual date of transfer will depend on the section’s experience up to the date of transfer and, in particular, changes in market conditions over that period. Contribution requirements

Recovery plan

As there were sufficient assets to cover the Scheme’s technical provisions at the valuation date, a recovery plan is not required.

Contributions for risk benefits and expenses

Employer contributions will be paid at the rate of 1.00% of DC members’ DC pensionable salaries to provide for the cost of providing defined benefit risk benefits to members of this Section. In addition, employer contributions of £1.372m will be paid in each calendar year to provide for the expenses of administering defined benefit payments and defined contribution payments to be made from the HSBC Bank plc Section of the Scheme.

HSBC Bank plc Section of the HSBC Bank (UK) Pension Scheme Valuation statement (Technical Provisions following transfers back and across)


Total Defined Benefit liabilities 59 Market value of Defined Benefit assets 68 Past service (deficit)/surplus (technical provisions less assets) 9 Funding level (assets ÷ technical provisions) 115%



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Projections and sensitivities

Based on the assumptions underlying the calculation of the Scheme’s technical provisions as at 31 December 2018 and allowing for contributions to be paid to 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 sensitivity of the technical provisions surplus as at 31 December 2018 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.)

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 is currently mitigated by the purchase of insurance.

81

21

-0.0

5.0

10.0

15.0

20.0

25.0

Technical provisions Discount rate0.40% pa lower

Active membersleave employmentas at 31 December

2018

CPI assumption0.5% lower (giving

larger RPI-CPI gap)

Tech

nica

l pro

visi

ons

surp

lus

(£m

)

Solvency


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Discontinuance

In the event that the HSBC Bank plc 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 Bank plc 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 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 Bank plc 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 Scheme would be admitted to and members compensated by the PPF. Otherwise the HSBC Bank plc Section of the Scheme would be required to secure 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 Bank plc 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 Bank plc Section of the Scheme at the valuation date. Due to the nature of the benefits in the HSBC Bank plc 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 Bank plc Section of the Scheme are set out in the Additional Information section of this report.

My estimate of the solvency position of the HSBC Bank plc Section of the Scheme as at 31 December 2018 (before allowing for transfer of assets and liabilities to the HBUK Section as discussed earlier in this report) is that the assets stated in the report and accounts as relating to the defined benefits for the HSBC Bank plc Section would have met 100% of the cost of buying insurance policies to secure the defined benefit liabilities at that date, based on the assumptions described above. Further details are set out in the table below:



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HSBC Bank (UK) Pension Scheme – HSBC Bank plc Section Valuation statement (Solvency)


Aggregate defined benefit liability payable from the Scheme as a whole (including that payable from both the HBUK Section and HSBC Bank plc Section):


Pensioners and dependants 16 Underpin defined benefit liability met from the HBUK Section:


Pensioners and dependants 7 Net defined benefit liability to be met from the HSBC Bank plc Section:


Pensioners and dependants 9 Total estimated cost of defined benefit liabilities 79 Market value of Defined benefit assets in audited accounts 79 Solvency (deficit)/surplus (total estimated cost less assets) 0 Solvency level (assets ÷ total estimated cost) 100%

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 Bank plc Section of the Scheme as a closed fund or winding up this Section of the Scheme.

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 Scheme before 6 April 1997 (of which I understand there are none for the Scheme);

§ category 2 – the cost to the Scheme of securing the compensation that would otherwise be payable by the PPF if the Employer became insolvent;

§ category 3 – benefits in respect of defined benefit AVCs not dealt with above ;

§ category 4 – all other pensions and benefits due under the Scheme, including pension increases (where these exceed those under the PPF).

As the assets of the HSBC Bank plc Section covered the Section 179 (PPF) liabilities as at 31 December 2018, this Section of the Scheme is unlikely to have qualified for entry to the PPF had the Principal Employer become insolvent at 31 December 2018. Instead, there would have been sufficient assets to run as a closed fund with members’ entitlements expected to be met in full.



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Relationship between the cost of securing benefits and the technical provisions

My estimate of the cost of securing benefits with an insurance company of £79 million is £8 million higher than the Scheme’s technical provisions of £71 million.

The technical provisions are intended to be a prudent assessment of the assets required under the HSBC Bank plc Section of the Scheme’s investment strategy to meet future benefit payments as and when they fall due but with reliance placed on the Employers being able to support the Section of the Scheme in future if the assumptions are not borne out in practice. By contrast the estimated cost of securing benefits with an insurance company is based on the price that an insurer might be likely to charge to take on the risks associated with operating the Scheme without having recourse to future contributions from the Employer.

If the statutory funding objective had been exactly met on 31 December 2018 (ie there had been no funding surplus or deficit), I estimate that the solvency level of the Scheme would have been 90%.

Projections and sensitivities

Based on the assumptions underlying the calculation of the HSBC Bank plc Section of the Scheme’s technical provisions as at 31 December 2018 and allowing for contributions to be paid to the Scheme as summarised in the Funding 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 a 10% or more fluctuation in market pricing relative to gilt markets. Thus, fluctuations of this nature could lead to solvency coverage of perhaps between (or even beyond) 90% to 110%.

Additional Information


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Risks

The table below summarises the main risks to the financial position of the HSBC Bank plc 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 Approach taken to risk

Employers unable to pay contributions or make good deficits in the future

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 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 seeks to insure against this risk.

Legislative changes could lead to increases in the HSBC Bank plc Section of the Scheme’s liabilities

The Trustee takes legal and actuarial advice on changes in legislation and consults with the Employer, where relevant.

Economic risk Demographic risk Legal risk



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Benefits summary The HSBC Bank (UK) Pension Scheme is a registered pension scheme under the Finance Act 2004. 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 (if any) will be at least as large as the underpin pension. For members of the HSBC Bank plc 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 Bank plc 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 2018.

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: www.futurefocus.staff.hsbc.co.uk The details of the benefits modelled for this valuation have been discussed with the Trustee separately.

www.futurefocus.staff.hsbc.co.uk



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Discretionary benefits

Section 4 of the Statement of Funding Principles dated 17 December 2019 sets out the treatment of the material discretions in this valuation.

Changes to the benefits

Since the inception of the Section no changes have been made to the HSBC Bank plc 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 provisions in respect of Guaranteed Minimum Pensions do not unlawfully discriminate between male and female members.



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Membership data A summary of the data provided for this valuation is presented below.

Active summary statistics 31 December 2018

Number of members 229

Average age 48.5

Total salary-related pension £8.6m pa

Average salary-related pension £37,600 pa

Average final pensionable salary £86,800 pa

Total underpin pension as at 30 June 2015 £7.1m pa

Average underpin pension as at 30 June 2015 £31,200 pa

Deferred summary statistics 31 December 2018

Number of members 7 Average age 57.1 Total salary-related deferred pension £410,000 pa

Average salary-related deferred pension £58,700 pa Total underpin deferred pension as at 30 June 2015 £300,000 pa

Average underpin deferred pension as at 30 June 2015 £43,000 pa

Notes on data tables:

■ Average age is weighted by the value of the liability in this Section of the Scheme.

■ Deferred pension amounts are revalued to the valuation date; accrued pensions are as at the valuation date and based on final pensionable salary

Pensioner and dependant statistics 31 December 2018

Number of members 8

Average age 54.5

Total aggregate pension £290,000 pa

Average aggregate deferred pension £35,800 pa

Total underpin pension as at 30 June 2015 £120,000 pa

Average underpin pension as at 30 June 2015 £15,300 pa



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Asset information

Movements in the market value of assets

The audited accounts supplied as at 31 December 2018 show that the market value of the Scheme’s assets was £79 million.

The change in the Scheme’s assets from nil from inception to £79 million as at 31 December 2018 is detailed in the Trustee's Report and Financial Statements over that period. The table below summarises a broad reconciliation of the change.

£m Assets at inception 0.0 Contributions and income received 3.4 Benefits and expenses paid -0.3 Net transfer between sections 76.9 Changes in market value of investments and investment income

-0.9

Assets at 31 December 2018 79.1

Investment strategy

A summary of the Scheme’s strategic investment benchmark at 31 December 2018 is set out below:

The assets, excluding AVCs, were invested as summarised below as at 31 December 2018:

Current benchmark Market value as at 31 December 2018

% £m %

L&G - Diversified assets 75.0% 57 72%

L&G - Index-linked 25.0% 19 24% Cash - 3 4%

Total 100.0% 79 100%

L&G - Diversified assets75%

L&G - Index-linked25%



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Summary of assumptions adopted as at 31 December 2018

Financial assumptions Technical provisions Statutory estimate of solvency

Discount rate 0.7% pa above the yield on a matching portfolio of gilts of

approximate nature and duration as at 31 December 2018 for defined

benefit liabilities

0.2% pa below the yield on a matching portfolio of gilts of

approximate nature and duration as at 31 December 2018 for defined

benefit liabilities RPI inflation In line with gilt market terms as at

31 December 2018 In line with gilt market terms as at

31 December 2019 CPI inflation 0.5% pa below RPI price inflation In line with RPI Pension increases* RPI based increases 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

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.



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Technical provisions Statutory estimate of solvency Mortality The assumptions for mortality depend on the level of the member’s deferred pension, accrued pension or pension in payment as at 1 January 2019, 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 <£11,953 pa 104%

SAPS S2 All pensioner Male amounts

102% SAPS S2 All pensioner

Male amounts >£11,953 pa 93%

SAPS S2 Normal health pensioner Male amounts light

93% SAPS S2 Normal health

pensioner Male amounts light

Female pensioners <£11,953 pa 100%

SAPS S2 Normal health pensioner Female amounts


pensioner Female amounts

>£11,953 pa 112% SAPS S2 All pensioner Female amounts light

107% SAPS S2 All pensioner Female amounts light

Female dependants <£11,953 pa 93%

SAPS S2 Dependant Female amounts

92% SAPS S2 Dependant

Female amounts

>£11,953 pa 88% SAPS S2 Normal health pensioner

Female amounts


pensioner Female amounts Male dependants As Technical Provisions

All members 114% SAPS S2 Normal health pensioner

Male amounts heavy


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.

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.



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Technical provisions Statutory estimate of solvency

In service mortality As above for technical provisions Allowance used for risk benefits is

as set out in the tables of demographic assumptions below

n/a

Salary increases 0.25% pa above RPI price inflation (up to an assumed maximum of

£300,000 pa)

n/a

Commutation 25% pension commuted at retirement on terms 10% below

aggregate reserves

No allowance made

Early Retirement - voluntary 15% pa at ages 55 to NPA, 100%

at NPA n/a

- 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

Increases in Scheme earnings cap

In line with CPI price inflation n/a

Allowance for members to take transfer values

None None

Expenses None None



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Tables of demographic assumptions used

Specimen rates adopted for the calculation of the technical provisions are set out below.

1 Post retirement mortality (current and future pensioners)

Members with aggregate pensions from the Scheme greater than £11,953 pa

Rates of mortality per 1000 members at the effective date of the investigation and as at 31 December 2038

Age Current and future pensioners Dependants Male Female Male Female

2018 2038 2018 2038 2018 2038 2018 2038 50 2 1 3 2 2 1 2 1

55 2 2 4 3 3 2 2 2 60 4 3 5 4 5 4 3 3 65 7 5 6 5 8 6 5 4

70 11 8 10 8 13 10 8 6 75 20 14 17 13 24 18 13 10

80 36 26 32 24 44 32 25 19 85 70 49 66 48 85 60 52 37 90 135 97 136 103 166 119 106 80

95 234 185 246 206 286 227 192 161 100 342 302 383 349 419 370 299 273

105 425 403 494 474 521 494 387 372 110 494 494 584 584 605 605 458 458 115 551 551 661 661 675 675 519 519

Remaining life expectancy (years) for members - age 60 28.4 30.9 28.4 30.3 26.7 29.3 30.4 32.2

- age 65 23.4 25.8 23.6 25.4 21.8 24.2 25.5 27.2



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Members with aggregate pensions from the Scheme lower than £11,953 pa

Rates of mortality per 1000 members at the effective date of the investigation and as at 31 December 2038

Age Current and future pensioners Dependants Male Female Male Female

2018 2038 2018 2038 2018 2038 2018 2038 50 2 1 2 2 2 1 2 1 55 3 2 3 2 3 2 2 2

60 5 4 4 3 5 4 3 3 65 8 6 5 4 8 6 5 4 70 13 10 9 7 13 10 8 6

75 23 17 15 11 24 18 13 10 80 41 29 29 21 44 32 25 19

85 78 54 59 43 85 60 52 37

90 152 109 120 91 166 119 106 80

95 269 213 218 183 286 227 192 161

100 396 350 340 310 419 370 299 273

105 487 461 440 422 521 494 387 372

110 558 558 521 521 605 605 458 458

115 617 617 590 590 675 675 519 519

Remaining life expectancy (years) for members - age 60 27.2 29.8 29.4 31.3 26.7 29.3 29.5 31.4

- age 65 22.3 24.7 24.5 26.3 21.8 24.2 24.7 26.5



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2 In service mortality (used only to determine the expected cost of providing risk benefits (lump sum and spouse’s pensions on death in service))

Specimen rates in-service mortality per 1,000 members at each age Age Men Women 20 0.3 0.2

25 0.4 0.2 30 0.5 0.3 35 0.6 0.5

40 0.9 0.6 45 1.2 1.1

50 1.8 1.7 55 3.4 3.2 60 6.8 6.3

65 10.5 9.7

3 Ill health retirement

Specimen rates of incapacity per 1,000 members at each age Age Men Women 20 - - 25 - -

30 0.3 0.8 35 0.7 2.7

40 1.1 6.3 45 3.1 8.3 50 7.5 12.7

55 18.0 24.0 60 62.0 40.3

65 70.0 58.3

No allowance is made for DC members to retire on grounds of incapacity


21

Statutory Certificate Actuarial certification for the purposes of regulation 7(4)(a) of the Occupational Pension Schemes (Scheme Funding) Regulations 2005 Name of scheme: HSBC Bank plc Section of the HSBC Bank (UK) Pension Scheme

Calculation of technical provisions

I certify that, in my opinion, the calculation of the Scheme’s technical provisions as at 31 December 2018 is made in accordance with regulations under section 222 of the Pensions Act 2004. The calculation uses a method and assumptions determined by the Trustee of the Scheme and set out in the Statement of Funding Principles dated 17 December 2019.

C G Singer Fellow of the Institute and Faculty of Actuaries Towers Watson Limited, a Willis Towers Watson Company 17 December 2019

Watson House London Road Reigate Surrey RH2 9PQ



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Glossary This glossary describes briefly the terminology of the regime for funding defined benefit pension schemes as introduced by the Pensions Act 2004.

Actuarial report: A report prepared by the Scheme Actuary in years when an actuarial valuation is not carried out that provides an update on developments affecting the Scheme’s assets and technical provisions over the year.

Actuarial valuation: A report prepared by the Scheme Actuary that includes the results of the calculation of the technical provisions based on the assumptions specified in the Statement of Funding Principles and assesses whether the assets are sufficient to meet the statutory funding target.

Covenant: This represents an employer’s legal obligation and its ability to provide the financial support to a scheme that may be required now and in the future. The trustees’ assessment of the sponsor’s covenant will inform both investment and funding decisions.

Demographic assumptions: Assumptions relating to social statistics for Scheme members, which can affect the form, level or timing of benefits members or their dependants receive. This can include levels of mortality experienced by the Scheme and the proportion of members electing to exercise benefit options.

Discount rates: Assumptions used to place a capital value at the valuation date on projected future benefit cash flows from the Scheme. The lower the discount rate the higher the resulting capital value.

Financial assumptions: Assumptions relating to future economic factors which will affect the funding position of the Scheme, such as inflation and investment returns.

Funding target/objective: An objective to have a particular level of assets relative to the accrued liabilities of the Scheme. See also statutory funding objective.

Pension Protection Fund (PPF): Provides compensation to members of an eligible occupational scheme in the event that it is wound

up with insufficient assets and the employer is insolvent. The level of PPF compensation provided would not usually be at the full level of the benefits that would otherwise have been due.

Prudence: Regulations require that assumptions are chosen prudently when assessing the level of technical provisions, although they do not define this term. I have interpreted prudence to be the level of conservatism in the assumptions. Where this is interpreted quantitatively, assumptions said to be prudent would result in higher technical provisions than a "best estimate" assumption (where a “best estimate” assumption is one where there is a 50% chance that the actual outcome will be higher or lower than assumed).

The Pensions Regulator: The regulatory supervisor for occupational pension schemes with statutory objectives to protect members’ benefits and the Pension Protection Fund, and statutory powers to take interventionist action.

Recovery plan: A document required where an actuarial valuation discloses that the statutory funding objective is not met (ie the assets held are less than the technical provisions). It is a formal agreement between the trustees and the employer that sets out the steps to be taken to achieve the statutory funding objective by the end of an agreed period (the “recovery period”).

Schedule of contributions: A document that sets out in detail the agreed contributions payable to a scheme by members and the employers and the dates by which such contributions are to be paid. It includes, but is not limited to, contributions agreed under a recovery plan.

Scheme Actuary: The individual actuary appointed (under the Pensions Act 1995) by the trustees to perform certain statutory duties for the Scheme.

Scheme-Specific Funding Regime: A term used to refer to the legislative and regulatory rules that stem from the Pension Act 2004 and which govern the funding of occupational defined benefit pension schemes in the UK.

Statement of Funding Principles (SFP): The SFP sets out the trustees’ policy for ensuring that the statutory funding objective and any other funding objectives are met and, in particular, the



23

assumptions for calculating the technical provisions at the effective date of the actuarial valuation. The trustees are responsible for preparing and maintaining this document, taking into account the advice of the Scheme Actuary and in many cases seeking the agreement of the employer.

Statement of Investment Principles (SIP): The SIP sets out the trustees’ policy for investing the Scheme’s assets. The trustees are responsible for preparing and maintaining this document, taking into account written investment advice from the appointed investment advisor and consulting the employer before any changes are made.

Statutory estimate of solvency: An estimate of the cost of discharging a scheme's liability to pay benefits through the purchase of insurance policies in respect of each member’s full benefit entitlement under the Scheme (unless the actuary considers that it is not practicable to make an estimate on this basis, in which case the estimate of solvency can be prepared on a basis that the actuary considers appropriate).

Statutory funding objective: To have sufficient and appropriate assets to cover the Scheme’s technical provisions.

Statutory priority order: The order in which the assets of a scheme must be applied in securing the benefits of different members in the event of it

being wound up. The order is consistent with the Pension Protection Fund (PPF) because benefits covered by the PPF are the highest priority class of defined benefit liabilities.

Summary funding statement: An update sent to members following the completion of each actuarial valuation or actuarial report informing them of the assessed financial position of the Scheme.

Technical provisions: The amount of assets required to make provision for the accrued liabilities of the scheme. The technical provisions are calculated using the method and assumptions set out in the Statement of Funding Principles.

Winding-up: This is a particular method of discharging a scheme's liability to pay benefits. It typically arises where the employer no longer provides financial support to it (for example if it becomes insolvent) and would usually involve using the scheme's assets to buy insurance policies that pay as much of the scheme's benefits as possible in accordance with the statutory priority order.

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