The illustration below shows the impact of charges and transaction costs on the projected value of an example member’s pension savings. In preparing this illustrative example, the Trustee has had regard to the relevant statutory guidance.

As each member has a different amount of savings within the Scheme and the amount of any future investment returns and future costs and charges cannot be known in advance, the Trustee has had to make a number of assumptions about what these might be. The assumptions are explained below:

• The “before costs” figures represent the savings projection assuming an investment return with no deduction of member-borne charges (ie the additional expenses) or transaction costs. The “after costs” figures represent the savings projection using the same assumed investment return but after deducting member-borne charges and an allowance for transaction costs.
• The transaction cost figures used in the illustration are those provided by the managers over the past two years, subject to a floor of zero (so the illustration does not assume a negative cost over the long term). We have used the average annualised transaction costs over the past two years as this is the longest period over which figures were available and should be more indicative of longer-term costs compared to only using figures over the Scheme Year.

Illustrations are provided for the default option for DC only members (the Flexible Income Strategy) since this is the arrangement with the most members invested in it, the Lump Sum Strategy (which is the default for most Hybrid members), as well as four funds from the Freechoice fund range. The four Freechoice funds shown in the illustration are:

• the fund with the highest before costs expected return – this is the Emerging Markets Equities – active Fund.
• the fund with the lowest before costs expected return – this is the Cash – active Fund.
• the fund with highest annual member borne costs – this is the Diversified Assets – active Fund.
• the fund with lowest annual member borne costs – this is the Fixed Annuity Tracker – passive Fund.

Notes

• Values shown are estimates and are not guaranteed. The illustration does not indicate the likely variance and volatility in the possible outcomes from each fund. The numbers shown in the illustration are rounded to the nearest £100 for simplicity.
• Projected pension pot values are shown in today’s terms, and do not need to be reduced further for the effect of future inflation.
• Annual salary growth and inflation is assumed to be 2.5%. Salaries could be expected to increase above inflation to reflect members becoming more experienced and being promoted. However, the projections assume salaries increase in line with inflation to allow for prudence in the projected values.
• The starting account (pot) size used is £2,000. This is the average (median) pot size for HSBC scheme members aged 25 years and younger (we’ve used the average of the under 25s rather than the average of the whole Scheme to allow for a more representative 40-year projection). This assumption, and others mentioned, are as at 31 December 2019, the Scheme Year end.
• The projection is for 40 years, being the approximate duration that the youngest Scheme member has until they reach the Scheme Normal Pension Age.
• The starting salary is assumed to be £19,500. This is the median salary for HSBC scheme members aged 25 years and younger.
• The contribution rate is assumed to be 10.0% (includes employee and employer contributions). This is the median contribution rate for HSBC Scheme members aged 25 years and younger.
• The projected before charges annual returns used are as follows:
  • Flexible Income Strategy: 3.0% above inflation for the initial years, gradually reducing to a return of 0.1% below inflation at the ending point of the lifestyle.
  • Lump Sum Strategy: 3.0% above inflation for the initial years, gradually reducing to a return of 0.9% below inflation at the ending point of the lifestyle.
  • Emerging Markets Equities – active fund: 4.3% above inflation
  • Cash – active fund: 2.0% below inflation
  • Diversified Assets – active Fund: 1.5% above inflation
  • Fixed Annuity Tracker – passive Fund: 2.0% below inflation

• No allowance for active management has been made in the return assumptions (e.g. assumed return for a passive and active global equity fund is equal).