HSBC Pension Scheme – Interview
Effectively, it is hedged against interest rate and inflation risks and is focussed on our cashflow-driven investment strategy. We have a 44% allocation to high-quality credit, 47% to government securities and 9% to illiquid assets, which are traditional private equity assets, including renewa- bles such as solar power.
What does your DC allocation look like? The DC strategy is quite different. It is a typical standard offering of several default strategies which members are signed up to if they do not choose their own invest- ments. For the HSBC scheme, there are three default strategies, depending on what members want to do with their pen- sion savings at retirement. We have a default strategy for income drawdown, one for a cash lumpsum and one to buy an annuity, which, of course,
members no longer need to convert their pension savings into a lifetime income, so this option is less central to members than it may previously have been. Effectively, each of those default strategies will go through an accumulation phase where younger members are exposed to riskier and more growth-oriented assets, such as equities. As they approach retire- ment, they move to the consolidation phase which means progressively imple- menting higher allocations to diversified growth funds and fixed income, which is fairly standard.
The de-risking phase begins about 20 years from retirement, so it is a gradual process to move people to less riskier assets. It is not done over a concentrated period of time so that we dilute market risk across that consolidation phase. One interesting point is the global equity
exposure in the default growth phase. It is invested in the Future World fund, a global equity strategy provided by Legal & General Investment Management. This strategy was seeded by the HSBC Bank (UK) Pension Scheme in 2015. It is not a traditional index. It also embeds climate risk reduction targets such as greenhouse gas emission reductions, higher exposure to green revenues and less exposure to companies relying on thermal coal as a revenue source, com- pared with a standard market capitalisa- tion-weighted global equity index within the asset allocation. For example, the fund explicitly tries to mitigate climate change. The DC scheme has about £6.7bn in assets under management and the Future World fund holds £4bn of those total assets, so it is a material allocation. It has to deliver reductions in carbon emissions, so it excludes companies that generate 30% or more of their revenue from coal extraction or coal power and excludes con- troversial weapons. So, it is an example of ESG characteristics being built into a fund that is not overtly labelled as an ESG fund. We are getting more and more questions from our members on which funds are ESG friendly and which are best for cli- mate. Building ESG risk mitigation, including climate risk into our fund offer- ings to members is business as usual now. We are aiming for all portfolios we invest in to have ESG characteristics embedded in their strategy and the asset managers engaging with underlying investee companies to improve ESG risk management.
Do you plan to broaden the investment strategy of the DC fund to include illiquid assets? That’s an interesting question. This is a relatively new topic, but it has been gain- ing traction. Future investment returns from traditional asset classes are now generally expected to be lower than in the recent past due to the impact of quantita-
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