Like many of its FTSE 100 counterparts, HSBC has to contend with a large maturing defined benefit pension scheme. Although closed to new members since 1996, it remains open to future accrual for existing members.

Currently valued at £17.1bn, the final salary section caters for 13,500 active members, 72,500 deferreds and 30,000 pensioners. There is also a defined contribution section with 37,000 actives, 23,000 deferreds and around 1,000 pensioners. Crucially, unlike the pension funds of many banks and other financial institutions, HSBC’s scheme assets have been managed externally since 2005-06, with only a residual amount invested internally (consisting of a small amount of legacy private equity and the bank’s Amanah fund which is a fund option within its defined contribution section).

Managed by the pension trust's Chief Executive Officer, Lesley Alexander (ex-Motorola and Reed Elsevier pension schemes), together with Chief Investment Officer, Mark Thompson, (a former Prudential M&G fund manager), the HSBC scheme is split across three portfolios: strategic, cash generating and swaps.

The £12.8bn strategic portfolio is split 65% into matching assets and 35% into return seeking assets. Fund managers include Genesis, Lazard, Loomis Sayle, Standard Life Investments, M&G, Aviva and Wellington. The £8.4bn matching assets are largely invested in UK and global credit, gilts, ABS and cash. Alexander says: “The matching assets are largely around credit. For a pension scheme this size, we hold less in gilts than a number of our peers.” The £4.4bn return seeking portfolio is principally allocated to global equity, emerging market equity and debt, property, private equity and leveraged loans.

The £1bn cash generating portfolio comprises two asset transfers from the bank which were made over to the pension scheme in the last 18 months as part of an accelerated recovery plan, whereby the pension fund would hold the assets, harvesting the coupons until redemption. The transfers include a range of distressed assets, comprising property loans, US mortgages, ABS, CLOs and RMBS, which the bank wanted to get off its balance sheet and which the pension fund was in a better position to hold. To date, the cash generating portfolio has generated over £900m of cash for investing in the strategic portfolio. The third portfolio, a £3.1bn swap portfolio, hedges out a significant proportion of the pension fund’s inflation and interest rate risk.

With the scheme currently undergoing its triennial valuation, the trustees will be undertaking an investment review in Q3 to ascertain whether the strategic portfolio’s 65% matching/35% return seeking split remains appropriate.

Favoured asset classes to date have included global equities and alternatives, particularly private equity, which Alexander says have performed well. Use of passive funds to date has been largely in the DC section, although the CEO is looking at smart indices, for both its DB and DC sections. The trustees have steered clear of hedge funds and structured products due to poor performance, high fees and governance issues.

On infrastructure, Alexander says she can see its potential merits “providing it can be accessed correctly. There have been problems with the transition mechanism, but for a pension scheme with a horizon as long as ours, infrastructure can potentially generate better returns than gilts.”

That said, the scheme has not yet signed up to the NAPF’s infrastructure initiative, because it requires more detailed information about the proposed fund. “We have a positive attitude towards infrastructure, but remain unclear as to how it will work,” she says.

Fee negotiations with fund managers are largely conducted by chief investment officer, Mark Thompson. The scheme expects to have more discussions on fees in future, but they are willing to pay for outperformance. “I am not a believer that fees are the great evil. If the fund manager can generate alpha, we are willing to pay for it,” says Alexander.

The scheme’s 20-plus fund managers are monitored regularly and visited at least once a year to ensure they are delivering to their mandate, with most on three to five year performance targets. Alexander says that it would be rare for a fund manager to be released mid-mandate, given the scheme’s long horizon in terms of liabilities. “We are very long term investors. We would only sack a fund manager if there had been a failure in the people, philosophy or process. There can be valid reasons for a fund underperforming over the short term.”

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