HSBC - Default Investment Strategy

Default Investment Strategy

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.

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.

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 active DB 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 main default strategies continue to de-risk after the member’s target retirement date. 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.

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 Fund as the member nears retirement. The objective of the Lifecycle is to be appropriate for members seeking to take their entire pot as a cash lump sum at retirement.

Additional default 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 a separate fund (i.e. one which members could not self-select into) was available to allocate members’ contributions in the event of a fund closure (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 was during the Scheme Year, and 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’ (“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 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.

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 22 June 2021. The Trustee concluded that drawdown remains an appropriate retirement target. The growth phase of the default strategy outperformed inflation over the last 5 years to 31 December 2021.

As part of this review the Trustee confirmed that the Scheme's lifecycles were adequately and appropriately diversified between different asset classes and that the Freechoice options provide a suitably diversified range to choose from.

The Trustee has investigated the potential for further diversification within the growth phase. The review led to a decision to explore the possibility of introducing an allocation to illiquid assets. This will be progressed in 2022.

The Trustee reviewed its investment beliefs in April 2021 at Investment Day. Since then, following advice from its investment advisor, it has reviewed the investment arrangements for consistency with the beliefs and has agreed to take the following actions, which are due to be implemented in 2022:

• within the Emerging Market Equities – active fund, to replace the Schroder Life QEP Emerging Markets Fund with the JP Morgan Emerging Markets Sustainable Equity Fund. This fund also forms part of the Global Equities – active Freechoice option;

• restructure the Property – active Freechoice option, which involves replacing the LGIM Managed Property Fund with the Invesco Global Property Fund and adjusting the strategic allocations to the underlying component funds; and

• explore the possibility of introducing an allocation to illiquid assets within the growth stage of the default strategy, also potentially to be reflected in the Lump Sum Strategy and in the Annuity Purchase Strategy.

In addition to the above, the Trustee has replaced the two multi-asset funds within the Diversified Assets – active fund with the bespoke Schroder Life HSBC Sustainable Diversified Growth Fund, which operates within criteria set by the Trustee, including Responsible Investment credentials. This change to the Diversified Assets – active fund was implemented over five tranches from 29 July 2021 to 26 August 2021.

On 10 June 2021, the Trustee reviewed all legacy lifecycles and agreed to move all members from Lifecyle 2 into a default lifecycle based on whether they are a DC or DB/Hybrid member unless they elect to stay where they are. 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 is expected to be implemented in Q4 2022.

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 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 and that the performance of the default arrangements remains consistent with their stated aims and objectives and the only changes to be made or explored further are intended to provide further benefits to members (e.g. increased growth / cost savings). The Cash – active (default) Fund was incorporated in this review given the underlying fund is the same as the Cash – active Fund which is a self-select option. It will be incorporated into future default strategy reviews where this is required given the Fund will not always hold assets.

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 over the period covered by this statement. As the sponsoring employer pays the Annual Management Charge (AMC), platform expenses and administration expenses, member charges are limited to the additional fund expenses incurred by the underlying managers in the day-to-day running of the funds

Value for money for members

The Trustee carried out a full value for members assessment, looking back over the Scheme year to 31 December 2018, to assess the extent to which the investment options and the benefits offered by the Scheme represent good value for members, compared to other options available in the market.

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 ad four funds from the Freechoice range.