UK - Global banking group HSBC has slashed the equity allocation of its main UK pension fund and moved into interest-rate and inflation-swaps.
Its target allocation to equities is now just 12.5% - compared to an actual allocation to the asset class of 46% at the end of 2005, the company's latest annual report reveals. The $20.6bn (€15.3bn) HSBC Bank (UK) Pension Scheme was $3.7bn in deficit at the end of 2006.
"In order to mitigate the risk of investments under-performing and the adverse effect of changes in long-term interest rates and inflation, the Trustee has agreed to a programme of initiatives including changing the asset mix and entering into long-term interest-rate and inflation swaps," the report states.
"In 2006, HSBC and the trustee of the principal plan agreed to change the investment strategy in order to reduce the investment risk," the report states.
"This involved switching from a largely equity-based strategy to a strategy largely based on holding bonds together with a more diverse range of investments.
"At the same time the principal plan entered into swap arrangements whereby the principal plan is committed to making LIBOR [London Interbank Offered Rate] related interest payments in exchange for cash flows paid into the plan, based on a projection of the future benefit payments from the principal plan."
The new asset allocation is: equities (12.5%), bonds (50%), alternatives (12.5%), property (10%) and cash (15%). Alternative assets include emerging market bonds, loans and infrastructure.
HSBC also disclosed it plans to make $1.2bn of contributions to its DB schemes during 2007.
The annual report also discloses the various mortality tables the company uses around the world to measure its defined benefit pension assumptions.
Meanwhile consulting firm Mercer Human Resource Consulting said that UK pension funds' equity exposure continues to drop. It found the average allocation is now at 61% compared to 68% in 2003.
Exposure to active currency and tactical asset allocation is likely to increase this year, as funds seek to diversify their risk
Around 6% of UK funds now invest in hedge funds compared with 9% in Continental Europe and Ireland
The structure of bond portfolios and associated benchmarks are increasingly being used as a risk management tool in Europe.