HSBC Pension Scheme banks on annuities amid DC investment shake-up
The £2bn (€2.6bn) defined contribution (DC) HSBC UK Pension Scheme is keeping an annuity lifestyle strategy as its default option as it shakes up investment offerings.
The scheme has created a new ‘capital lifestyle’ option for members to access income drawdown and will further utilise its ‘cash lifestyle’ for members moving from its defined benefit (DB) scheme.
As the bank’s schemes prepares for the DC freedoms announced in last year’s Budget, it still believes the annuity lifestyle system – which moves from equities to diversified growth to annuity-matching strategies – will remain key for employees.
The fund is also amending underlying investment funds offered to its DC members, increasing the total number on offer to 13, while amending six.
Mark Thompson, CIO at the fund, told IPE it plans to add a global bond fund to its options that is set to be managed by H2O Asset Management.
Its global equity funds will be adjusted towards emerging markets, which will now account for 15% of holdings.
Other non-UK equity holdings will increase to 75% of the fund, up from 60%.
The fixed income and index-linked bond funds are both changing to pre-retirement funds to allow a more flexible allocation between long-dated UK Gilts and long-dated corporate bonds, thus moving away from the current prescriptive 50/50 split.
Thompson said changes would allow its bond investments to better match annuities and with a duration hedge.
The scheme is also adding an emerging market fund from Schroders and a diversified growth fund (DGF) from Investec Asset Management to add capacity to current managers.
HSBC will add the choice of the capital lifestyle system from April 2015.
The option will be designed to invest 100% in equities until 20 years before retirement before swapping into a DGF.
Three years before retirement, funds will shift 25% into cash, allowing the member to access income drawdown.
Thompson said HSBC had no plans to offer income drawdown in-house but would consider its approach as the product developed as an offering in the market.
“We do not have predictions internally of how many people will use the capital lifestyle strategy, but it is important to have in there ready,” he added.
The default annuity lifestyle investment strategy will remain 100% allocated to passive global equities until 20 years before retirement, before gradually investing in the scheme’s DGF offering.
At 10 years before retirement, the strategy is equally split between global equities and DGF and begins moving into the fixed income bond fund.
It shifts to a 25% cash allocation five years prior to retirement.
The cash lifestyle option will be rejuvenated, becoming the default investment option for around 5,000 DB members transferring when the scheme closes to future accrual in July.
Cash lifestyle has been used for DB members using the DC scheme for additional voluntary contributions (AVCs) – with members generally taking DC savings as a tax-free cash lump sum.
The bank’s DB scheme closed to new members in 1996, meaning all current active members have significant built-up accrual rights in the final salary scheme.