HSBC - Default Investment Strategy

Default Investment Strategy

The Trustee has made available a range of investment options for members. Each member is responsible for specifying one or more options for the investment of their account, having regard to their attitude to the risks involved. If a member does not choose an investment option, from the range available in the Scheme, their DC pension pot and any future contributions are automatically invested In the Scheme’s default arrangement applicable to them. This is managed as a ’targeted’ strategy (i.e. it automatically combines assets in proportions that vary according to the time to retirement age). The targeted strategies are 100% invested in equities until twenty years from a member’s target retirement age from which time they switch gradually in to lower risk assets appropriate to the type of retirement income targeted.

The Scheme has different default arrangements for members, depending on the type of benefits they have. The default options have been designed, with support from the Scheme’s advisors, 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.

Your default arrangements

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 members with only a DC pension pot - the Flexible Income Strategy is the default arrangements. It is designed for members, at their retirement or beyond, to take 25% of their DC pension pot as a cash lump sum and the balance to provide a flexible income (e.g. income drawdown), spreading the amount and timing of withdrawals. Members can do this by transferring their DC pension pot out of the Scheme. This strategy works by switching the investment mix of members’ DC pension pots 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 whilst continuing to hold an allocation to the Diversified Assets – active Fund as the members near retirement. This design is based on the demographic profile of the membership and the generous contribution structure combined with the belief that members are likely to both accrue large pots and choose to take a flexible income. Market trends and Scheme experience since the introduction of Pension Freedoms in 2015 also indicate that members with larger DC pension pots are moving away from purchasing annuities and are choosing flexible income instead.

For members with Hybrid benefits - the Lump Sum Strategy is the default arrangement. It is designed for members to use their DC pension pot for a cash lump sum at their target retirement age or beyond. This strategy works by switching the investment mix of members’ DC pension pots from the Global Equities – passive Fund into the Diversified Assets – active Fund and the Global Bonds – active Fund and then partially (50%) de-risks into the Cash – active Fund as the member nears retirement. The rationale for this design is the belief that many members with Hybrid benefits are expected to use their DC pension pot as part of their overall Scheme tax-free cash lump sum at retirement.

As a material proportion of members continue to leave their DC pension pots invested past retirement, the Trustee has ensured that both the Flexible Income Strategy and the Lump Sum Strategy continue to de-risk after members’ target retirement age. This was introduced following the triennial investment strategy and performance review in 2017 and confirmed as remaining appropriate as part of the triennial investment strategy and performance review which began on 4 June 2020 and ended on 22 June 2020, following which agreed actions were taken forward for further review. The latest triennial strategy review has also begun in 2023 following the end of the Scheme Year, which confirmed the Trustee continues to support this view. This review was ongoing at the time of publishing this Statement.

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

The Annuity Purchase Strategy is designed for members to take 25% of their DC pension pot as a cash lump sum and the balance to buy an annuity (a regular income for life) at their target retirement age. This strategy works by switching the investment mix of members’ DC pension pots from the Global Equities – passive Fund into the Diversified Assets – active Fund and then de-risks into the Fixed Annuity Tracker – passive Fund and Cash – active Fund as the member nears retirement. The objective of the Annuity Purchase Strategy is to be appropriate for members intending to take their benefits in the form of an annuity at retirement.

The Cash Lifecycle is designed for members to use all of their DC pension pot for a cash lump sum at their target retirement age. This strategy works by switching the investment mix of members’ DC pension pots from the Global Equities – passive Fund into the Diversified Assets – active Fund and then de-risks into the Cash – active Fund as the member nears retirement. The objective of the Cash Lifecycle is to be appropriate for members seeking to take their entire pot as a cash lump sum at retirement. All members invested in the Cash Lifecycle are within 5 years to target retirement age.

Additional default investment arrangement

The Scheme also makes use of an additional default fund called the Cash - active (default) Fund (previously named the Cash – active (ex-Property) Fund). This fund was introduced in March 2020 (and held a small amount of assets from March 2020 to early December 2020) as a result of a decision taken to ensure that there was a fund where members’ contributions could be allocated if their selected fund closed (as was the case for the Property – active Fund in 2020). This fund invests in the same underlying fund as the Cash - active Fund. As members’ contributions can be directed into this fund without them making an active selection, this fund will continue to be, treated as a default for the purpose of fulfilling legislative requirements.

The objective of the Cash – active (default) 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 its benchmark.

Statement of Investment Principles

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 - Defined Contribution’ ('SIP'). The Scheme’s most recent DC SIP covering the default arrangements is attached to this Statement.

As stated in the SIP, the Trustee aims to provide default arrangements that the Trustee believes to be in the best interests for those members that do not wish to make their own investment decisions. As at the end of the Scheme Year, the Scheme’s Flexible Income Strategy and the Lump Sum Strategy’s objectives were 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 in the applicable sections above.

Review and monitoring of the default arrangements

The Trustee formally reviews the strategy and performance of the default arrangements (and other investments) in detail at least every three years or immediately following any significant change in investment policy or the Scheme’s member profile. The last formal triennial investment strategy and performance review took place on 4 and 22 June 2020 (a review has taken place in March 2023 following the end of the Scheme Year).

The Trustee, with the help of its investment advisor, LCP, carried out an interim annual review of the default arrangements alongside all available options to members over the Scheme Year on 8 June 2022. The Trustee concluded that a flexible income remains an appropriate retirement income target. The growth phase of the DC default arrangement outperformed inflation over the last 5 years to 31 December 2022.

As part of this review the Trustee confirmed that the Scheme's targeted strategies were adequately and appropriately diversified between different asset classes and that the self-select options provide a suitably diversified range to choose from. Members also have the choice to invest into any of the 18 DC funds available in the self-select range (known as ’Freechoice’). These options were also included in the latest review.

As part of the triennial DC investment strategy review in June 2020, the Trustee agreed to introduce illiquid assets into the growth phase of the targeted strategies in order to improve the expected risk adjusted returns for members. Over the Scheme Year, the Trustee has further investigated how to most effectively introduce an illiquid allocation. This has been reviewed throughout the year and remains under consideration by the Trustee.

The Trustee started to review its investment beliefs in April 2022 at its investment training day. The Pension Scheme Executive ('PSE') held one on one sessions with each of the Trustee Directors to discuss their investments beliefs, which the PSE collated and used to identify key system-wide risks - climate change, biodiversity and nature related losses (including antimicrobial resistance) and diversity, equity and inclusion. The Trustee reworked its investment beliefs which were further discussed as part of the ‘Net Zero and Beyond’ day in July 2022. The SIP was updated to reflect the agreed investment beliefs in September 2022.

In addition to the above, the Trustee replaced the Schroder Life QEP Emerging Markets Fund with the JP Morgan Emerging Markets Sustainable Equity Fund within the Emerging Market Equities – active Fund. This fund also forms part of the Global Equities – active Fund. This change happened over 5 tranches between 24 May and 9 June 2022. The Trustee also agreed to restructure the Property – active Fund, which involved replacing the Legal and General Investment Management (‘LGIM’) Managed Property Fund with the Invesco Global Real Estate Fund and adjusting the strategic allocations to the underlying component funds. An allocation to the Invesco Global Real Estate Fund began being built up in April 2022, with the remaining assets due to be transitioned later in 2023.

On 10 June 2021, the Trustee reviewed all legacy targeted strategies and agreed to move all members from Lifecyle 2 into a default targeted strategy based on whether they are members with only a DC pension pot or Hybrid benefits unless they elect to retain their Lifecycle 2 investment. This was agreed following formal written advice from the investment advisor and given concerns that the legacy strategy design may not be aligned with the retirement outcome targeted by this member cohort. This transfer has been delayed to later in 2023 due to heightened market volatility and property fund liquidity issues. At the time of writing, the Trustee was reviewing the suitability of carrying out this transition during 2023.

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 advisors. This review includes an analysis of DC fund performance and member activity to check that the risk and return levels meet expectations. The Trustee monitors both short- and long-term performance on a quarterly basis and has further reviewed attribution over the Scheme Year given the challenging market conditions experienced in 2022. The Trustee reviews that took place during the Scheme Year concluded that over the long-term the default arrangements were performing broadly as expected given the market backdrop and the assets held and that the performance of the default arrangements remains broadly consistent with their stated aims and objectives.

View the DC Statement of Investment Principles

If you would like to view the full DC Statement of Investment Principles here

DC Statement of Investment Principles

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Member Charges

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

Value for money for members

The Trustee carried out a value for members’ assessment, looking back over the Scheme year to 31 December 2019. The Trustee is required to assess the extent to which member borne charges and transaction costs for the Scheme Year represent good value for members.

Illustration of charges and disclosure costs

Illustration of charges and disclosures costs

The Sponsoring employer currently pays the AMC platform expenses and administration costs. Additional expenses (“AE”) are covered by members and are those costs incurred in the management of the underlying funds which are, by nature, flexible and therefore fall outside of the AMC. The Trustee has provided an illustration of the impact of the charges and costs on members pension pots for the default options and four funds from the Freechoice range.