The bank’s new improved benefits package sweetens the pill of scheme closure, writes David Blackman
The end of this month sees the HSBC defined benefit scheme close to future accrual. However, in spite of threatened strike action by the bank’s main union Unite, when the move was announced early last year, the change has happened relatively smoothly.
What could have been a depressing landmark has been sweetened by the delivery of an improved package of benefits for the bank’s defined contribution scheme members.
First of all though it’s necessary to backtrack to February last year when HSBC announced that it was closing to future accrual, having already shut its door to new DB members in 1996. The bank said the changes were designed to level the benefits playing field between its DB and more than three times as large DC memberships.
The bank’s claim was bolstered by a significant boost to what was already a relatively generous DC contributions package.
Mark Thompson, the HSBC fund’s chief investment officer, says contributions are the key to determining members’ retirement income.
“It’s important to have a well thought through default strategy, but investment isn’t everything. In terms of good member outcomes, what is more important is a good contribution structure,” he says.
Every member of the bank’s £1.4bn DC scheme currently receives a contribution equivalent to 8% of salary irrespective of whether they put in any money themselves. The bank will then match any additional contributions from the member up to a ceiling of 5%. This means that a 5% contribution translates into 18% of salary.
From the beginning of next month, to tie in with the closure of the DB scheme to future accrual, DC members will be able to receive matching contributions of up to 7% of salary.
For the more modestly paid employee the bank put in 10% of their first £20,000 of earnings
Then from 1st July 2015, the 8% contribution will rise to 10% on the first £20,000 of salary, tailing back to 9% for the rest.
The lowest paid employees therefore could receive up to 24% of their salary on the back of a 7% contribution.
The scheme’s chief executive officer Lesley Alexander, who recently announced that she is stepping down from the role, says: “For the more modestly paid employee the bank put in 10% of their first £20,000 of earnings, which is intended to help them save as much as possible for retirement, recognising that they will have less disposable income to save of their own accord.
“This was a conscious decision by the bank that saving for retirement is an important aspect of people’s pay and benefits and that therefore they want to be at the top of the market for providing benefits.”
Another benefit is that DC members don’t have to pay any annual management charges.
The revamp of the scheme’s contribution structure follows a recent overhaul of its default fund, which just under 90% of its DC membership is signed up to.
DIVERSIFYING TO REDUCE VOLATILITY
HSBC used to offer a standard default - a low cost global equities tracker with members moved into lower risk bonds and cash ten years prior to their planned retirement date.
However in 2011 the scheme introduced a diversified growth fund into the later stages of the accumulation phase. About 20 years before retirement, funds start being transferred from the equity fund into the DGF, and are then shifted into fixed income ten years before retirement.
Thompson says: “If there was a nasty shock in the market and equities fell by 30%, moving [members] into a DGF protects them from the worst of the downside.”
It’s not diversification for diversification’s sake
Alexander adds: “It’s not diversification for diversification’s sake. We’ve done it where there is downside risk attached, which is a different emphasis.”
The remaining tenth of members have signed up to investment packages that offer more choice.
“We were trying to stratify members into types of member and broadly put them into three buckets”, says Alexander.
Around 6% of members, those who Thompson says “want to go on the pensions journey on their own,” have opted for the scheme’s roster of ‘Freechoice’ or selfselected funds.
This offers a pick of a dozen funds, which range from the relatively conventional global and UK passive and active equities to the more specialised, such as a Sharia law option. “It’s deliberately not a wide range although we increased it a few years ago. It will never be 60,” says Thompson.
The third option is a halfway house for members between full lifestyle and self-selection. The 4% of members who have taken this route have more flexibility than what Thompson describes as the ‘true defaulters’, being able for example to choose the funds in their decumulation phase.
However the scheme’s offer is constantly evolving. One recent change was triggered by the scheme’s observation that DB members were using the DC scheme to make additional voluntary contributions.
Thompson says: “We found that the vast majority of them, over 90%, actually take that DC pot as their tax free cash.”
IMPACT OF THE BUDGET
Much more profound changes look set to be triggered by the government’s Budget Day liberalisation of retirement income.
The scheme’s response to Chancellor George Osborne’s announcement is still a work in progress, but Alexander expresses concerns over how schemes will implement their new duty to provide guidance on retirement income options.
“The idea of the guidance guarantee is all well and good but how it’s going to be delivered?
“It’s got to be free, it’s got to be impartial and it’s got to produce the right outcome for members. That’s actually quite a high hurdle and the government has put in £20m in to help develop it, but nobody really understands how it’s going to be carried forward. Having that conversation at the point of retirement is too late for a lot of people - they need to be thinking about it much earlier.”
When developing the scheme’s communication strategy, HSBC has already been pinpointing the milestones on the road to retirement. “We don’t know about their past service history and whether they have a DB scheme from elsewhere, but what we can do is to get them focusing 15 years before, five years before, get them thinking about what they are likely to use this money for.”
Nevertheless, she admits that she is a little nervous.
“How much protection as trustees do we have in law to prevent a member coming back five years later and saying all their money’s gone? Understandably trustees would be nervous. For me, it doesn’t provide sufficient protection for the trustees or the member.”