HSBC Holdings PLC · LSE:HSBA
HSBC — HSBC Actuaries and Consultants — Investor Presentation (November 2005)
33 slides from HSBC's investor presentation, November 2005
Slide 1: A Third Way for Pensions
PENSIONS & FINANCE A Third Way for Pensions HSBC Actuaries and Consultants Limited Breakfast Seminar November 2005
Slide 2: Introduction
Introduction • Current state of the UK pensions scene – Deficits, closures, reviews and DC trend • But is it terminal? – Employee welfare – Support for low cost DB – Move away from two ends of the pension design spectrum • Our ‘Third Way for Pensions’ – Past and future • Why Now? – Best opportunity
Slide 3: A Third Way for Pensions (1)
A Third Way for Pensions (1) • Things you can do now. Reduce accrual rate Increase member contributions Raise retirement ages Extend scheme waiting periods Cap pensionable salary growth Increase life assurance in lieu of survivor pension Allow members to convert more pension to cash Introduce flexib
Slide 4: A Third Way for Pensions (1)
A Third Way for Pensions (1) • Things you can do now. Reduce accrual rate Increase member contributions Raise retirement ages Extend scheme waiting periods Cap pensionable salary growth Increase life assurance in lieu of survivor pension Allow members to convert more pension to cash Introduce flexib
Slide 5: Case Study - Enhanced Transfer Values
Case Study 1 - Enhanced Transfer Values An Example of Liability Management • Active members a reducing proportion of membership • Deferred pensioners increasing • Trustee/company have limited control over liabilities • Contribution rates as a % of payroll become extremely volatile • Can we reduce de
Slide 6: Look at value of pensions by age
Look at value of pensions by age Illustration of value on various bases per £1 of def erred benef it 20 18 16 14 12 Present Value(£) TV Basis Ongoing 10 IAS/FRS PPF 8 Buy Out 6 4 2 0 25 35 45 55 Age
Slide 7: The idea
The idea • Offer members enhanced transfer values • Company injects enhancement into scheme OR pays cash direct to member • Member gets improved offer • Company benefits from risk being passed to member and hence has reduced risk DB commitments going forward • Improved FRS/IAS, PPF, on-going and buy
Slide 8: Key issues
Key issues • Modelling of enhancement and savings • Selecting target population • Separate legal advice for company/trustee • Clear and careful communications
Slide 9: Illustrative Ages
Illustra tive Age s Gender Age NRA PUP at Doc Pre97 % Post97 % Full TV Ongoing FRS17 PPF Buyout A ge Band M 20 65 £2,000 50% 50% £3,481 £4,863 £11,368 £22,578 £28,574 15 Under 30 M 30 65 £2,000 50% 50% £5,729 £7,474 £14,466 £24,774 £31,184 30 30 to 39 M 40 65 £2,000 50% 50% £9,430 £11,485 £18,408 £2
Slide 10: Illustrative Reserves at various ages
TV Ba sis Ongoing funding FRS17 PPF Buyout Pre retirement interest rate 8.0% 7.0% 5.0% 1.0% 3.4% Pos t retirement interest rate (ppf: pre97) 5.5% 5.0% 5.0% 4.5% 3.4% Pos t retirement interest rate (ppf: post97) 1.0% Revaluation in Deferment 2.75% 2.50% 2.50% n/a 2.50% Pension increases in pay ment S
Slide 11: Scheme Specific Illustrations
Scheme Specific Illustrations Tota l Re se rve s Re duce d TV Full TV Ongoing FRS Sav ings on liabilitie s Under 30 8,141 10,177 13,459 27,054 8,000,000 30 to 39 609,511 761,889 954,568 1,655,946 40 to 50 1,608,871 2,011,089 2,379,751 3,530,118 7,000,000 Scenario 1 50 to 59 1,506,795 1,883,494 2,073
Slide 12: Key issues
Key issues • Modelling of enhancement and savings • Selecting target population • Separate legal advice for company/trustee • Clear and careful communications
Slide 13: Results of exercise
Results of exercise • Approached members aged up to 54 • % respondents – no reply 12% – seeing IFA/considering 8% – tracing member 10% – declined offer 23% – accepted enhanced TV 16% – accepted cash sum 31% • In total 47% have accepted enhancement
Slide 14: Results of exercise
Results of exercise FRS17/IAS19 liability for members £6.0m Amounts paid to transferring members: – pension scheme transfer £2.5m – company enhancement £2.0m – total £4.5m Improvement in company balance sheet (FRS) £1.5m Improvement in scheme funding 60% to 65%
Slide 15: A Third Way for Pensions (2)
A Third Way for Pensions (2) • Going from one extreme to the other is not always necessary • What about somewhere ‘in between’? – Simplifies closure of final salary scheme – Mitigates two tier workforce risk – Control of costs with extra benefits • A proper partnership between employer and employee
Slide 16: A Third Way for Pensions (2)
A Third Way for Pensions (2) • Risk-sharing options – Shared-cost final salary – Final Salary / money purchase hybrid – ‘CARE’ (average salary) – Cash Benefit/Balance – Plus endless variations on these themes
Slide 17: Cash Benefit
Cash Benefit • A defined benefits scheme that expresses the intended benefit in lump sum terms • For example – 20% of final pensionable salary for each year of service (final salary cash benefit); or – 20% of each year’s pensionable pay (average salary cash benefit) • Genuine sharing of risk
Slide 18: Cash Benefit
Cash Benefit • The pensions ‘cake’ – Whole cake = cash benefit
Slide 19: Cash Benefit
Cash Benefit • The pensions ‘cake’ – Slices of Cake = final salary
Slide 20: Design: Allocation of Risk
Allocation of Risk Design Final Salary Cash Benefit Money Purchase Risk Investment Employer Employer Employee Longevity Employer Employee Employee Earnings Progression Employer Employer/Employee Employee
Slide 21: Cash Benefit
Cash Benefit • Optimum DB design for single tax regime? – Allowances replace limits – Flexible retirement allowed • If only pensions law was as scheme-design friendly as prospective tax law … • Case study
Slide 22: Case Study - Cash Benefit Scheme
Case Study 2 - Cash Benefit Scheme • Company wishes to contribute 10% of salaries • No compulsory employees’ contributions • On reasonable assumptions, this would support - final salary pension of 0.85% salary for each year of service - expected defined contribution pension of same amount, on averag
Slide 23: Investment Return 1% pa lower
Investment Return 1% pa lower Base line Employer contribution Employee pension Defined Benefit
Slide 24: Investment Return 1% pa lower
Investment Return 1% pa lower Base line Employer contribution Employee pension Defined Benefit Defined Contribution
Slide 25: Investment Return 1% pa lower
Investment Return 1% pa lower Base line Employer contribution Employee pension Defined Benefit Defined Contribution Cash Benefit
Slide 26: Investment Return 1% pa higher
Investment Return 1% pa higher Base line Employer contribution Employee pension Defined Benefit Defined Contribution Cash Benefit
Slide 27: Under cash benefit mortality risk is all with employee
Under cash benefit mortality risk is all with employee Base line Employer contribution Employee pension Defined Benefit Defined Contribution Cash Benefit
Slide 28: Under cash benefit employer investment risk depends on potential period of employment
Under cash benefit employer investment risk depends on potential period of employment Base line Employer contribution Employee pension Age 30 Age 45 Age 60
Slide 29: The Future of Retirement
The Future of Retirement • Global research commissioned by HSBC • A new vision of later life • Global rejection of mandatory retirement age • A second life encompassing work, leisure and education • Flexibility needed
Slide 30: Flexibility is the future!
Flexibility is the future! • Final salary scheme produces a pension of, say, £8,500 pa (ie 40 x .85% x £25,000) • This may not now fit pattern of expenditure in old age • Depends on work, property, travel, long term care, etc. • Corresponding cash benefit is a fund of £150,000 • Fits with flexible d
Slide 31: Pensions: A Third Way?
Pensions: A Third Way? • The first limb: Managing existing liabilities • Options that you may not have thought of – From the practical opportunities provided by A-Day – To the less obvious options such as enhanced TVs or contingent funding arrangements – The main point is that it is ‘horses for cour
Slide 32: Pensions: A Third Way?
Pensions: A Third Way? • The second limb: scheme designs of the future • More to pensions than traditional FS and conventional MP – Possible market advantage for risk-sharing employers – Turner Report expected to promote risk-sharing – Greater flexibility – Opportune time for scheme review – complia
Slide 33: Conclusions
Conclusions • If you are an existing client – We will be in touch to discuss how our ideas affect you • If you are not – We would be delighted to come and speak to you • Don’t forget our next seminar – Defined contribution schemes
HSBC Actuaries and Consultants — Investor Presentation (November 2005) on 6ix