UK DB Plan Costs Take Toll on HSBC
10 August 2012 (PLANSPONSOREurope.com) – Operating expenses have risen at HSBC due to costs connected to its UK defined benefit pension obligations, according to the global banking giant’s 2012 Interim report.
The report reveals operating expenses increased by 13%, largely due to a credit of US$206m in the first half of 2011 relating to defined benefit pension obligations in the UK, while costs also rose due to the non-recurrence of a credit in 2011 of US$570m following a change in the inflation measure used to calculate the defined benefit obligation in the UK for deferred pensions.
The report also says the group’s DB plan could be adversely affected by market movements and interest rates.
“Market risk arises within our defined benefit pension schemes to the extent that the obligations of the schemes are not fully matched by assets with determinable cash flows,” says the report. “Pension scheme obligations fluctuate with changes in long-term interest rates, inflation, salary levels and the longevity of scheme members. Pension scheme assets include equities and debt securities, the cash flows of which change as equity prices and interest rates vary. There is a risk that market movements in equity prices and interest rates could result in asset values which, taken together with regular on-going contributions, are insufficient over time to cover the level of projected obligations and these, in turn, could increase with a rise in inflation and members living longer. Management, together with the trustees who act on behalf of the pension scheme beneficiaries, assess these risks using reports prepared by independent external actuaries, take action and, where appropriate, adjust investment strategies and contribution levels accordingly.”