Interview – HSBC Pension Scheme


tive easing and monetary tightening on asset values. We have been trying to understand if there is a benefit to members in terms of risk-adjusted returns from introducing illiquid assets to our existing default strategies. It is a research project for the moment. There are quite a number of challenges to think about before we make a real commitment. As far as we are concerned, the big ques- tions are how to structure such assets within the overall liquidity mix to provide genuine diversification and to mitigate their impact on being able to provide daily liquidity to members. During Covid, a lot of property funds had to close to invest- ments and redemptions because those funds could not be accurately priced. That gating issue is a real one. You do not want to have people looking to retire not being able to access their savings. So, there are structural questions you need to think about.


What other issues do you face when decid- ing if to include illiquids in your DC portfolio?


A related issue with illiquid investments is that they do not normally price daily. So, you have an issue making sure mem- bers are transacting based on fair prices. You also need to have an operational pro- cess to manage cashflows and drawdown requests,


which can be challenging


depending on what resources you have. A lot of these illiquid asset classes have contractual illiquidity, maybe 10 or 20 years in the case of infrastructure. So, you have to be comfortable that that contrac-


There is the question of inter- generational fair- ness, which is a big issue for our trustees.


tual illiquidity fits with the age profile of your membership.


Then there is the question of inter-gener- ational fairness, which is a big issue for our trustees. The J curve in private equity returns means members who invest in the early years tend to get a negative return. They are investing for a number of years before investments mature and are realised, paying investment returns back to investors. You can imagine a situation where the J curve will have a negative impact for members who are invested in the early years but retire before the investment returns are realised. Other members are there for the lifespan of these assets and then reap the rewards at the end. So, the question is: how do you build these assets in to your portfolio whilst trying to miti- gate those different return impacts on dif- ferent members.


HSBC BANK PENSION TRUST (UK) SCHEME Defined benefit: £30bn Defined contribution: £6.7bn


DB asset allocation: 44% Investment grade credit 47% Government securities 9% Illiquid assets


14 | portfolio institutional | May 2022 | issue 113


And the last one, which is important, is to achieve the diversification that illiquid as- set classes tend to show in portfolio modelling. This is influenced by them not pricing daily and, therefore, are not subject to the up and down volatility that dai- ly markets tend to exhibit. So, some of that perceived diversification can be mod-


elled diversification, as opposed to genu- ine underlying economic diversification. In other words, are you really investing in different types of companies than you would in the listed space to get real diversification? So, you need to be clear that you are get- ting real economic diversification. There is a prevalence now for companies to stay in private markets for longer than they are used to, with some not listing at all. So, you are seeing different types of com- panies in listed or unlisted markets. If you are going to do this, it is important to work with your listed equity manager to ensure that your unlisted or alterna- tives manager builds a portfolio that is different and complements the


listed


exposure. It is all those structural ques- tions and questions of design that trus- tees need to get comfortable with before you embark on that strategy. And that is where we are right now.


Moving on to another topic, you have announced a commitment to a net-zero target. How are you implementing that? This is a huge topic. We are using the IIGCC [Institutional Investor Group on Climate Change] net zero investment framework to frame how we approach this question. It is widely accepted as best practice among institutional investors. We are using it to design our climate dashboard and understand what metrics we should be using.


What does that mean in practice? HSBC’s focus is on reducing real economic emis- sions. What we mean by that is the trustee will not be immediately selling high emit- ting stocks to reduce the carbon footprint of their portfolio. What we want to do is reduce real economic emissions over time. Just selling the stocks makes it somebody else’s problem. Instead, we want to work with companies to continue to provide capital to help them on that decarbonisa- tion journey.


In practice, that means we are building a


Page 1  |  Page 2  |  Page 3  |  Page 4  |  Page 5  |  Page 6  |  Page 7  |  Page 8  |  Page 9  |  Page 10  |  Page 11  |  Page 12  |  Page 13  |  Page 14  |  Page 15  |  Page 16  |  Page 17  |  Page 18  |  Page 19  |  Page 20  |  Page 21  |  Page 22  |  Page 23  |  Page 24  |  Page 25  |  Page 26  |  Page 27  |  Page 28  |  Page 29  |  Page 30  |  Page 31  |  Page 32  |  Page 33  |  Page 34  |  Page 35  |  Page 36  |  Page 37  |  Page 38  |  Page 39  |  Page 40  |  Page 41  |  Page 42  |  Page 43  |  Page 44  |  Page 45  |  Page 46  |  Page 47  |  Page 48  |  Page 49  |  Page 50  |  Page 51  |  Page 52  |  Page 53  |  Page 54  |  Page 55  |  Page 56  |  Page 57  |  Page 58  |  Page 59  |  Page 60