HSBC BANK (UK) PENSION SCHEME

Statement of Investment Principles August 2016

HSBC BANK (UK) PENSION SCHEME

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Table of Contents

Section 1 : Introduction .........................................................................................................................1 Section 2 : Governance ..........................................................................................................................3 Section 3 : Objectives of the Scheme ..................................................................................................4 Section 4 : Strategic asset allocation and manager structure ...........................................................9 Section 5 : Corporate governance and Socially Responsible Investing ....................................... 10 Section 6 : Risk Management ............................................................................................................. 12 Appendix A : Defined Benefit Bank Section – Asset allocation and structure ............................. 16 Appendix B : Defined Benefit HSBC Global Services (UK) Ltd (HGSU) Section – Asset allocation and structure ...................................................................................................................... 20 Appendix C : Defined Benefit Bank Section – Cash Generating Portfolio (Main Element) asset allocation and structure............................................................................................................ 21 Appendix D : Defined Benefit Bank Section – Cash Generating Portfolio (Re-REMIC Element) asset allocation and structure ........................................................................................... 22 Appendix E : Defined Contribution benefits ..................................................................................... 23 Appendix F : Risk and return assumptions ...................................................................................... 30 Appendix G : Value at Risk ................................................................................................................. 31

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HSBC BANK (UK) PENSION SCHEME

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HSBC BANK (UK) PENSION SCHEME

Section 1: Introduction Background 1.1

Under Section 35 of the Pensions Act 1995 (Pensions Act) and as amended by the Pensions Act 2004 and the Occupational Pension Schemes (Investment) Regulations 2005 (“the Investment Regulations”), trustees of a pension fund are required to prepare a statement of principles governing their investment decisions. This is that statement for the HSBC Bank (UK) Pension Scheme (“the Scheme”). The Trustee of the Scheme is HSBC Bank Pension Trust (UK) Limited (“the Trustee”).

1.2

The Scheme operates for the exclusive purpose of providing retirement benefits and death benefits to eligible participants and beneficiaries. The Scheme consists of two sections; the Bank Section and the HSBC Global Services (UK) Ltd (HGSU) Section. Defined Benefit and Defined Contribution benefits are provided by each section.

1.3

In preparing this statement, the Trustee has consulted the person performing the role of the bank (the “Principal Employer”) in relation to both the Bank Section and the HGSU Section and the Scheme Actuary and has sought written advice from the Scheme's investment consultant. At the date of this document, the Principal Employer in relation to the Bank Section is HSBC Bank plc and the Principal Employer in relation to the HGSU Section is HSBC Global Services (UK) Limited. It is the intention of the Trustee to review this statement annually or sooner following any unscheduled actuarial valuation or any other material change in the asset or liability position of the Scheme. It will also be reviewed following any material change to the Scheme’s investment strategy.

1.4

The Trustee will consult: a

the Principal Employer of the Bank Section on changes to this statement that apply to the Bank Section; and

b

the Principal Employer of the HGSU Section on changes to this statement that apply to the HGSU Section.

The ultimate power and responsibility for deciding investment policy, however, lies solely with the Trustee. 1.5

In accordance with the Financial Services and Markets Act 2000, the Trustee sets general investment policy, but delegates the responsibility for selection of specific investments to appointed investment managers. The investment managers shall provide the skill and expertise necessary to manage the investments of the Scheme competently.

1.6

In preparing this statement, the Trustee has had regard to the requirements of the Pensions Act 1995 (as amended) and the Occupational Pensions Schemes (Investment) Regulations 2005 concerning the exercise of its investment powers and, in particular, concerning diversification and the specified criteria to be applied in choosing investments. The Trustee will consider those requirements on any review of this statement or any change in its investment strategy. These requirements were also taken into account in determining the benchmark, permitted asset classes and the investment restrictions applicable to the investment managers.

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HSBC BANK (UK) PENSION SCHEME

1.7

The Scheme is a Registered Pension Scheme for the purposes of Chapter 2 Part 4 of the Finance Act 2004.

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HSBC BANK (UK) PENSION SCHEME

Section 2: Governance 2.1

The Trustee has ultimate responsibility for decision-making on investment matters. The Trustee appoints an Asset and Liability Committee to which it has delegated responsibility for certain investment functions such as developing investment strategy for the Defined Benefit assets, assessing the quality of performance and processes of the investment managers and identifying potential future asset classes and investment managers. These delegations are set out in a Terms of Reference for each Committee.

2.2

The Asset and Liability Committee handles the majority of investment matters in relation to the Defined Benefit and Defined Contribution assets. The Committee then makes recommendations to the Trustee where decisions are required to be taken by the Trustee.

2.3

When making decisions about the Scheme’s investment arrangements, the Trustee takes advice as appropriate from the investment consultant, the Scheme Actuary and/or the Trustee’s other advisers. To improve the efficiency of this decision-making process, the Trustee has appointed a Chief Investment Officer to the Pension Scheme Executive. It is the responsibility of the Chief Investment Officer to liaise with the advisers of both the DB and DC sections of the Scheme to ensure that the procurement of legal and investment advice and their input to the Trustee’s decision-making process are optimised from the Trustee’s perspective. It is also the responsibility of the Pension Scheme Executive, and especially the CIO, to provide oversight to the Scheme’s consultants, advisers and investment managers, on behalf of the Trustee.

2.4

Only persons or organisations with the necessary skills, information and resources are actively involved in taking investment decisions affecting the Scheme. The Trustee of the Scheme draws on the skills and expertise of external advisers including the investment managers, custodians, legal advisers, accountants, investment consultant and Scheme Actuary, as well as that of the Pension Scheme Executive, especially the Chief Investment Officer.

2.5

The Trustee has appointed investment managers who are authorised under the Financial Services and Markets Act 2000 to undertake investment business. After gaining (and reconfirming, at least as frequently as annually) appropriate investment advice, the Trustee has specified asset allocation guidelines for each manager. Investment choice has been delegated to the managers subject to defined tolerances relative to their respective benchmarks. In this context, investment advice is defined by Section 36 of the Pensions Act 1995 (as amended).

2.6

Monitoring is carried out by having regular meetings with the investment managers and the Defined Contribution benefits’ fund platform provider to ensure that they continue to carry out their work competently and have the appropriate knowledge and experience to manage the investments of the Scheme. The appointment of the investment managers and the platform provider will be reviewed from time to time, based on the results of monitoring of performance and process and after gaining (and reconfirming, at least as frequently as annually) appropriate investment advice. This includes, where applicable, the investment managers’ compliance with the requirements of the Pensions Act 1995 (as amended) and the Occupational Pension Schemes (Investment) Regulations 2005.

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Section 3: Objectives of the Scheme Defined Contribution and Defined Benefit Sections 3.1

The Trustee recognises the different investment requirements of the assets held in respect of members’ Defined Contribution entitlements and the remaining assets, which are held in respect of the Defined Benefit entitlements of the Scheme. There are two Defined Benefit entitlement investment strategies, one for the Bank Section and one for the HGSU Section.

Objectives for Defined Benefit Bank Section assets 3.2

The objectives for the Defined Benefit Bank Section are: a

Maintain a portfolio which, together with an agreed schedule of contributions from the Principal Employer, will enable the Trustee to meet the cost of current and future benefits that the Defined Benefit Bank Section of the Scheme provides;

b

Limit the VaR95* measures of the portfolio to the levels specified in Appendix F;

c

Within the constraints of (b) above, and with the prudent investment of any contributions from the Principal Employer, attain a funding level not less than the Scheme's Technical Provisions in accordance with the Scheme's Statement of Funding Principles.

3.3

The Scheme Actuary is responsible for carrying out a full investigation into the financial position of the Defined Benefit Bank Section and certifying the Technical Provisions on a triennial basis. As an actuarial investigation could give rise to changes in investment policy, it is intended that this statement will be comprehensively reviewed within a reasonable timeframe of the date as at which any such triennial investigation is made. It would also be reviewed following an unscheduled actuarial investigation, or where the Trustee considers a review is needed for other reasons. The Trustee will consult the Scheme Actuary and the Principal Employer when deciding upon the appropriate response to any shortfall identified by any actuarial investigation.

3.4

In order to achieve its objectives, the Trustee has agreed a General Framework (GF) with the Principal Employer. This includes the concept of a Target Matching Portfolio (TMP), consisting primarily of UK Government and UK Government guaranteed bonds which are assumed in aggregate to yield LIBOR plus 50bps (but it is recognised that in practice this will vary with prevailing market conditions). The Trustee has a current objective of having sufficient assets by 2025 which, when invested in the TMP, will result in the Defined Benefit Bank Section being fully funded on a technical provisions basis.

3.5

The Trustee considers that the investment policy set out in this statement is consistent with it meeting its overall long-term investment objectives.

VAR95 : The minimum expected deterioration in the Scheme’s deficit one year in twenty (compared with the expected position) *

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Policy for Defined Benefit Bank Section assets 3.6

The Trustee’s policy is to seek to achieve the objectives through investing in a Return Seeking Portfolio and a Matching Portfolio as detailed in Appendix A. It recognises that the returns on the Return Seeking Portfolio, while expected to be greater over the long term than those in the Matching Portfolio, are likely to be more volatile relative to the liabilities of the Scheme.

3.7

The Matching Portfolio (MP) This is expected to consist of a subset of the assets that could form part of the TMP described above, ie a low risk investment portfolio consisting primarily but not exclusively of UK Government and UK Government guaranteed bonds. The portfolio may also include unfunded hedging instruments; the extent to which these are used will depend on the level of hedging provided by the funded element of the MP. The composition of the MP, funded and unfunded, and ultimately the TMP, will be reviewed regularly to ensure it remains effective in meeting its objectives.

3.8

The Return Seeking Portfolio (RSP) This is expected to consist of assets that will generate returns in excess of that expected on the MP over the period to when the TMP is reached. It will also incorporate the management of the Scheme’s currency hedging strategy and the Cash Generating Portfolio (CGP), which was funded from the special contributions made by the Bank in 2010 and 2011. The CGP is a run off portfolio with its proceeds expected to be invested in the general assets of the RSP and/or MP as they materialise.

Objectives for Defined Benefit HGSU Section assets 3.9

The objectives for the Defined Benefit HGSU Section are: a

Maintain a portfolio which, together with an agreed schedule of contributions from the Principal Employer, will enable the Trustee to meet the cost of current and future benefits that this Section of the Scheme provides;

3.10

The Scheme Actuary is responsible for carrying out a full investigation into the financial position of the Defined Benefit HGSU Section and certifying the Technical Provisions on a triennial basis. As an actuarial investigation could give rise to changes in investment policy, it is intended that this statement will be comprehensively reviewed within a reasonable timeframe of the date as at which any such triennial investigation is made. It would also be reviewed following an unscheduled actuarial investigation, or where the Trustee considers a review is needed for other reasons. The Trustee will consult the Scheme Actuary and the Principal Employer when deciding upon the appropriate response to any shortfall identified by any actuarial investigation.

3.11

The Trustee considers that the investment policy set out in this statement is consistent with it meeting its overall long-term investment objectives.

Policy for Defined Benefit HGSU Section assets 3.12

Given the small size of the Section relative to the Bank Section, the Trustee’s policy is to invest the assets in a strategy that: 5

3.13

a

Is easy to implement

b

Minimises costs

c

Utilises the scale from the Bank Section

d

Is liquid.

The Trustee has decided that an investment strategy utilising an off-the-shelf passively managed diversified growth strategy is appropriate for this Section.

Objectives for the Defined Contribution benefits 3.14

The objectives for the Defined Contribution benefits are: a

The acquisition of secure assets of appropriate liquidity that will generate income and capital growth which, together with new contributions, will provide a fund at retirement with which the members can fund retirement benefits.

b

To provide members with a selection of pre-set investment strategies that invest in assets that target above inflation returns during members’ younger years and then switch into assets that target their preferred method of withdrawing benefits in later years.

c

To make available appropriate default investment arrangements aimed at members who consider themselves unable to make investment decisions.

d

To provide the members with a range of investment options to meet their reasonable requirements for risk-efficient growth, inflation protection, annuity conversion protection and capital preservation..

e

To take reasonable steps to ensure that the funds are invested and managed with the aim of maximising the return commensurate with an acceptable level of risk.

Investment strategy for Defined Contribution benefits assets 3.15

The Trustee has determined an investment strategy so as to meet a range of member needs including capital growth, inflation protection, capital preservation and annuity conversion protection. This provides growth funds aimed at providing long term returns in excess of price and average earnings inflation and defensive funds aimed primarily at members who are approaching retirement. The Trustee periodically reviews its fund range to ensure an appropriate mix between growth and defensive assets in both the default and Flexicycle strategies such that members have sufficient opportunities to achieve good outcomes at retirement. Members can choose between active and passive investment styles in most asset classes. The Trustee provides three Lifecycle options that switch member funds from growth to defensive funds on a pre-determined basis. It uses two of its Lifecycle options as default investment strategies for members who do not wish to take their own investment decisions, with one Lifecycle option aimed at hybrid members who default. Hybrid members are those members who have both DB and DC benefits in the Scheme. The range of funds utilised to meet the Defined Contribution benefits’ objectives and their benchmark/target return are set out in Appendix E.

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Suitability (Defined Benefit and Defined Contribution benefits) 3.16

The Trustee has taken advice from the investment consultant to satisfy its aim that the default and Flexicycle investment arrangements provided for members with Defined Contribution benefits are suitable for their needs, and that the other fund strategies and options are suitable to be offered to members who wish to choose them. The Trustee reviews the suitability of its default investment strategies at least every three years having regard to factors such as membership demographics and how the Trustee expects members to withdraw benefits at retirement. The Trustee has also taken advice that the Total Portfolio asset allocation for the Defined Benefit benefits (for both Bank and HGSU Sections) are suitable, given their liability profile and the level of risk the Trustee is prepared to take. The Trustee will continue to monitor, and take advice on, the strategy and funds used/made available on an ongoing basis.

Realisation of Investments (Defined Benefit and Defined Contribution benefits) 3.17

The Trustee’s policy is that there should be sufficient investments in liquid or readily realisable assets to meet cashflow requirements in the majority of foreseeable circumstances so that realisation of assets will not disrupt the Scheme's overall investment policies where possible.

3.18

The members' defined contribution accounts are held in funds that can be realised to provide pension benefits on retirement, or earlier on transfer to another pension arrangement.

3.19

The Trustee has delegated responsibility for the selection, retention and realisation of investments to the investment managers, within certain guidelines and restrictions.

3.20

The Trustee and investment managers that have delegated discretion, are required to exercise their powers in a manner calculated to ensure the security, quality, liquidity and profitability of the Scheme. The Trustee invests the assets in a manner it believes to be appropriate to the nature and duration of the expected future retirement benefits payable under the Scheme and makes funds available for the Defined Contribution benefits to realise the same goals for individual members. The Trustee aims to invest the majority of the assets in regulated markets and any allocation to unregulated markets is maintained at a prudent level.

Diversification (Defined Benefit and Defined Contribution benefits) 3.21

The need for adequate diversification is taken into account in the choice of asset allocation and manager structure in the Defined Benefit Bank and HGSU Sections. For the Defined Contribution benefits, the range of investment options allows members to achieve adequate diversification. In addition, the investment restrictions agreed with each investment manager (and the way that the investment options provided for the Defined Contribution benefits are structured) ensure that the Scheme and investment options avoid undue concentration at the stock selection level. For Lifecycle members, including those who invest in the default investment strategies, diversification is achieved by packaging funds together so members are less exposed to the risk of one manager or asset class. The switch from Global Equities to Diversified Assets during the growth phase is designed to reduce volatility and help deliver less variation in outcomes for cohorts of members who have similar contribution histories.

Derivatives 3.22

The Trustee may use, or permit the investment managers to use derivative instruments if they contribute to a reduction of risks or facilitate efficient portfolio management (including the reduction of cost or the generation of additional capital or income with an acceptable level of risk). 7

Borrowing 3.23

The Trustee does not borrow money and does not allow investment managers of its segregated portfolios to borrow money except for purposes of temporary liquidity.

Additional Voluntary Contributions 3.24

The Scheme provides a facility for the receipt of additional voluntary contributions by Defined Benefit and Defined Contribution members to enhance member benefits at retirement. The Scheme has undertaken a large project to significantly reduce the number of legacy funds available to Defined Benefit members who pay voluntary contributions or bonus sacrifices and provide them with access to the fund range offered to members with Defined Contribution benefits. The majority of members’ assets held through the range of legacy funds have been transitioned to the Defined Contribution fund range. With certain exceptions, all future voluntary contributions and bonus sacrifice payments will be directed to the Defined Contribution fund range. The Asset and Liability Committee will continue to monitor the remaining legacy funds.

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Section 4: Strategic asset allocation and manager structure Defined Benefit Bank Section 4.1

The Scheme’s Defined Benefit Bank Section investments consist of two parts, a Return Seeking Portfolio and a Matching Portfolio.

4.2

The Scheme’s Defined Benefit Bank Section strategic asset allocation has been set following an asset and liability study that has considered the full range of investment opportunities available to the Scheme. Asset allocation is reviewed on an annual basis. The asset allocation is detailed in Appendix A.

4.3

The Defined Benefit Bank Section asset allocation is driven by the financial characteristics of the Scheme, in particular the Scheme liabilities and the risk tolerance of the Trustee and the Principal Employer of the Bank Section. The allocation takes account of the need to adequately diversify the Defined Benefit Bank Section’s investments and to avoid undue concentration of investments.

4.4

The Cash Generating Portfolio within the Return Seeking Portfolio has two elements (a Main Element and a Re-REMIC Element) which were acquired as part of two special contributions from the Principal Employer of the Bank Section, although they may also be supplemented with other assets from time to time. They are generally managed on a hold/realisation basis, although the Trustee may utilise risk management techniques where appropriate. It is expected that the Main and Re-REMIC Elements of the Cash Generating Portfolio will generate the majority of their cashflows over a seven year period ending 2017 and a six year period ending January 2018 respectively. The cashflows will be reinvested across the other asset classes in the Return Seeking Portfolio and/or the Matching Portfolio, and the target allocation to the Cash Generating Portfolio will reduce over time.

Defined Benefit HGSU Section 4.5

Given the nature of the liabilities within the HGSU Section (largely covering the effects of salary increases), the Scheme believes that a diversified portfolio of growth assets is appropriate. In the interest of simplicity and cost minimisation, the Scheme has invested these assets in a passive diversified growth pooled fund.

General 4.6

The Trustee has considered the use of both passive and active investment management when reviewing the Scheme's strategy, in each of the sections of the Scheme. The resultant use of active and passive management is formed following consideration of the efficiency, liquidity and level of transaction costs likely to prevail within each market as well as the impact of the investment manager fees on future expected returns.

Rates of return 4.7

In setting the strategic asset allocations, the Trustee has regard to the historical rates of return earned on the various classes of asset available for investment. The Trustee’s expectations for the future long-term returns on the asset classes in which the Scheme's assets are principally invested are set out in Appendix F. 9

Section 5: Corporate governance and Socially Responsible Investing Environmental, social and corporate governance issues 5.1

The Trustee expects the investment managers to take steps to ensure environmental, social and corporate governance factors are implicitly incorporated into the investment decisionmaking process. This principle applies to all asset classes, although a greater emphasis is given to listed and unlisted equities, property and infrastructure assets. The Trustee also ensures the consideration of environmental, social and corporate governance factors are incorporated into the selection process for new investment managers. This principle is applied to both Defined Benefit and Defined Contribution assets. The Trustee does not take into account ethical factors in making its investment decisions, except to the extent set out in section 5.

5.2

An investment option that explicitly combines investment return with social, environmental and corporate governance factors in the selection, retention and realisation of assets is provided to the Defined Contribution members of the Scheme.

5.3

Within the context of its fiduciary responsibility, the Trustee is supportive of the United Nations Framework Convention on Climate Change (UNFCCC) agreement to limit temperature rises to 2 degrees centigrade above pre-industrial levels. In this context, the Trustee: a

Expects its appointed investment managers to be cognisant of climate change risks and opportunities within their investment processes as applied to the assets of the Trustee. Investment managers are further expected to annually report on how these risks and opportunities have been incorporated into the investment process.

b

Has a preference for ‘Engagement’ rather than ‘Exclusion’ as a method of incorporating climate change risks into an effective fiduciary framework. However, the Trustees expect investment managers to independently consider whether exclusion or engagement is more appropriate within their investment process.

c

Encourages the further development of asset classes that are supportive of obtaining the 2 degree target provided they are all based within the primary fiduciary framework.

d

Supports the further development of effective climate change risk metrics to enhance the ability of all stakeholders in the investment chain to assess and minimise such risks.

e

Recognises that ‘Climate Change’ will be subject to much further analysis and subsequent policy changes in the coming years. The Trustee is supportive of adopting an evolving policy in order to ensure all relevant developments are captured.

f

Is supportive of policy initiatives that, in its opinion, contribute towards achieving the 2 degree target.

Active ownership

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5.4

The Trustee has delegated the exercise of rights (including voting) to the investment managers.

5.5

The investment managers are encouraged to operate in accordance with the guidance outlined in The Stewardship Code and to report their adherence to The Stewardship Code under the ‘comply or explain’ principle on an annual basis.

5.6

This principle relates primarily to listed equities.

Monitoring and review 5.7

The Trustee undertakes regular reviews to ensure the policy is being carried out effectively and in line with evolving good practice.

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Section 6: Risk Management Defined Benefit benefits 6.1

The Trustee recognises a number of risks involved in the investment of the Defined Benefit benefits of the Scheme: a

b

c

d

Solvency risk and mismatching risk: i.

are measured through a qualitative and quantitative assessment of the expected development of the liabilities relative to the current and alternative investment policies

ii.

are managed through assessing the progress of actual growth of the assets relative to the amounts expected to be required to meet the projected liabilities by reference to various assumptions as to future investment returns.

Investment manager risk: iii.

is measured by the expected deviation of the prospective risk and return, as set out in the manager objectives, relative to the agreed benchmark

iv.

is managed by monitoring the actual deviation of returns relative to the objective as well as factors supporting the manager investment process for each investment manager. It is further managed through the diversification of the Scheme’s assets between active and passive investment managers and negotiation of appropriate investment management agreements.

Concentration risk: v.

is measured by the level of concentration of any one investment manager, strategy or asset class leading to the risk of an adverse influence on investment values arising from poor performance in that particular manager, strategy or asset class

vi.

is managed by diversifying the set of investment managers within any given strategy and setting and monitoring appropriate limits for assets within each of the mandates that have been given.

Currency risk: vii.

is measured by the level of concentration of assets denominated in any foreign currency and the translation effect of currencies leading to the risk of an adverse influence on investment values arising from unfavourable conditions affecting that particular currency

viii. is managed by reducing the translation risk of investing overseas by pursuing and monitoring an appropriate level of hedging of the overseas investments’ currency translation risk for those overseas currencies that can be hedged efficiently.

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e

f

g

Liquidity risk: ix.

is measured by the level of cashflow required for the Scheme over a specific period

x.

is managed by the Scheme’s administrators assessing the level of cash held in order to limit the impact of the cashflow requirements on the investment policy.

Custodian risk: xi.

is measured by assessing the custodians and the ability of the organisations to settle trades on time and provide secure safekeeping of the assets under custody

xii.

is managed by monitoring the custodians’ activities and discussing the performance of the custodians with the investment managers where appropriate. In addition, restrictions are applied as to who can authorise transfers of cash and the accounts to which transfers can be made.

Political risk: xiii. is measured by the level of concentration in any one market leading to the risk of an adverse influence on investment values arising from political intervention or other events xiv. is managed by regular reviews of the actual investments relative to policy and through regular assessment of the levels of diversification within the existing policy.

h

Derivatives risk: xv.

is measured through the monitoring of the activities of the investment managers

xvi. is managed through the use of standard ISDA documentation, appropriate Credit Support Annexes and collateral management. i

Sponsor risk: xvii. is measured by the level, ability and willingness of the sponsor to support the continuation of the Scheme and to make good any current or future deficit xviii. is managed by assessing the interaction between the Scheme and the Principal Employer’s (for both the Bank Section and HGSU Section) businesses, as measured by a number of factors including the creditworthiness of the Principal Employers and the size of the pension liability relative to a number of metrics reflecting the financial strength of the Principal Employers. The risks highlighted in this section are considered and monitored on a regular basis by the Asset and Liability Committee or Trustee, which includes a qualitative review of the factors as set out above as well as regular quantitative reviews of investment performance over various periods against benchmark, performance targets and the Scheme actuarial assumptions.

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Defined Contribution benefits 6.2

The Trustee recognises that, in a defined contribution arrangement, members assume the investment risks.

6.3

The Trustee further recognises that members are exposed to different types of risk at different stages of their working lifetimes. Broadly speaking, five types of risk can be identified, as noted below. While different asset classes will help to mitigate certain risks, the Trustee believes that providing members with clear information on the potential suitability of different investments to different types of member need is one of the most important ways of ensuring that risk-taking is appropriate. a

Capital risk This is the risk that investments may drop in value. This can happen with all funds but the magnitude of the potential ‘falls’ will differ. The younger a member is, the less worried they might be about short-term ups and downs. Instead they might want to look for long-term investment growth. It is measured by examining periodically the volatility of returns of different asset classes. It can be managed by investing in Diversified Assets, and/or lower risk assets available within the Lifecycle and Flexicycle strategies and relevant funds within the range of funds offered for members to select.

b

Inflation risk There is a risk that a member’s investments won’t grow quickly enough to sufficiently outpace inflation (the cost of living). Even if they do grow in value, if they don’t grow quicker than inflation then their real value goes down. This can happen with low capital risk funds, like a cash fund. It is measured by examining periodically the long-term performance of different assets relative to inflation. It can be managed by investing in growth assets that are expected to produce returns that exceed long term inflation within both the default and Flexicycle arrangements and the range of funds available to members to choose

c

Annuity conversion risk When a member retires, they may use at least 75% of their account to secure an annuity. The cost of buying an annuity varies from time to time and depends partly on the price of bonds. It is measured by examining periodically the correlation of different assets to annuity prices. It is managed in the default strategy by the Income Lifecycle switching funds into Fixed Income Bonds as the member approaches retirement.

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d

Market switching risk The risk is that, where members choose to switch between investment funds, they are exposed to a cost of switching which is variable according to the conditions prevailing in the relevant markets at a particular point in time. It is measured by looking at the underlying spreads of the fund options. It is managed by the fund managers looking for best execution when implementing trades.

e

Currency risk The risk that investments held in non-sterling currencies are adversely affected by fluctuations in those currencies compared to sterling (the currency in which benefits are paid).

It is measured by looking at the returns on overseas investments both in local currency and sterling terms. It is managed by the Trustee periodically reviewing whether currency hedging is appropriate in the default arrangements. 6.4

The Trustee considers that the risks assumed by members who have Defined Contribution benefits are managed by offering a range of investment options in which members can choose to invest their accounts and by communicating this investment range appropriately. Each of these risks will be considered in the context of member demographic information to observe trends in the membership. The range of investment options provides various potential mixes across asset classes, reflecting the different requirements as members progress towards retirement. This range is set out in Appendix E. In addition, in relation to currency risk, this is addressed through diversification of the overseas assets across a range of currencies and partial hedging in the Global Equities – passive fund (see Appendix E for further details).

Signed by:

……………………………………. Name: Date:

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Appendix A: Defined Benefit Bank Section – Asset allocation and structure Asset allocation

Based on advice from the investment consultant and Scheme Actuary, the Trustee has agreed to target the asset allocation contained in the table below which segments the assets into a Return Seeking Portfolio and a Matching Portfolio. The Trustee will undertake to review the asset allocation on a regular basis and at least once every three years taking account of prevailing market conditions, investment opportunities and feedback from the Sponsor. It should be noted that some of the classifications below, namely the smart beta and elements of the Matching Portfolio, will be built up over time as opportunities present themselves. 1

Core portfolio of high quality sovereigns, sub-sovereigns and Asset class Target allocation (%) Return Seeking Portfolio Global developed equities 13.2 Emerging market equities 3.8 Private equity 2.0 UK commercial property 3.5 Leveraged (secured) loans 3.0 Cash Generating Portfolio 2.0 Asset backed securities (actively managed) 4.0 Sterling credit 8.6 Global credit 11.2 Global sovereign credit 5.4 Smart beta (Volatility premium) 1.1 Matching Portfolio Liability matching portfolio (core portfolio1,gilts2, swaps, cash2) 38.9 Index linked Sterling credit3 1.2 UK matching property3 1.1 Infrastructure debt3 1.0 Total physical assets 100.0

Equity derivative exposure Synthetic equity exposure4 3.8 Equity options5 13.8 supranationals. 2 Gilts and cash to satisfy collateral and liquidity needs. 3 High quality illiquid assets to offset return drag of Liquids. 4 Synthetic equity exposure increases the overall allocation to global developed equities (total Scheme exposure to equities is 17.0%). 5 The target allocation shown represents the amount of equities protected expressed as a percentage of total Scheme assets. Please see the section on hedging later in Appendix A for further information.

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The table overleaf identifies the current managers appointed, indices used as a performance measurement benchmark for each asset class and each manager’s target performance. The manager line-up will change as the Scheme moves towards the benchmark allocation shown above. The Liability matching portfolio maintains liquid assets at a level considered sufficient to meet the Scheme’s cashflow requirements with respect to on-going benefit payments and other investment commitments. This portfolio is also used as initial repositories of cash generated by the Cash Generating Portfolio.

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Mandate

Manager

Return Seeking Portfolio Global equities ex Legal & General HSBC Investment Management Global equities Legal & General (Non –price Investment Management weighted) Global equities State Street Global (Non –price Advisors weighted) Equity derivatives Insight Investments Infrastructure Lazard Asset (listed) Management Emerging market Genesis equities Emerging market Schroder Investment equities Management Emerging market Trilogy Global Advisors equities Emerging market Ashmore Special Situations Private equity Pathway Capital Management3 UK commercial LaSalle Investment property Management Leveraged M&G Investments (secured) loans UK corporate bonds UK corporate bonds (screened) UK corporate bonds Global credit Global corporate bonds (screened) Global sovereign credit (screened) Global sovereign credit Asset-backed securities (US) Multi-Asset Volatility premium Matching Portfolio Liquid Matching Assets (indexlinked gilts and swaps) Cash – liquidity Cash

Standard Life

Benchmark/Index

Performance target (for active management)

FTSE World Index

N/A

FTSE RAFI All World 3000 Index

N/A

SSgA Global Low Volatility/High Quality Screened Index

N/A

Custom mandate1 UBS Global Infrastructure and Utilities Index (GBP hedged) 2 FTSE All World Emerging Index (GBP unhedged)2 MSCI Emerging Markets Index

N/A N/A

MSCI Emerging Markets Index

N/A

N/A

N/A

30% FTSE All-Share, 70% S&P 5002

4.0% per year over the long term 1.0% per year over rolling three years 1.25% per year

IPD Pension Funds and Life Companies4 (£0.3 to £2.0 billion) Credit Suisse Western Europe Institutional Leveraged Loan Index (GBP unhedged)2 iBoxx Sterling Non Gilts

N/A N/A

0.75% per year over rolling three years N/A

BlackRock Investment Management (UK) Limited M&G Investments

iBoxx Sterling Corporates Index (Customised)

Loomis, Sayles & Company BlackRock Investment Management (UK) Limited BlackRock Investment Management (UK) Limited Brandywine Global Investment Management Wellington Management

Barclays Capital Global Aggregate Credit Index, (GBP hedged) Barclays Global Agg 500MM Index limited to USD/EUR/GBP Corporate Issue Components with a 1% Issuer Cap Barclays 60/40 Sovereign Credit Index

Barclays 60/40 Sovereign Credit Index (GBP Hedged) Composite5 (GBP unhedged)2

[N/A]

Fulcrum Asset Management

GBP 3-month LIBOR2

4% per year over the long term2

Insight Investments

Custom mandate6

N/A

HSBC Global Asset Management Legal & General

GBP 7-day LIBID

N/A

GBP 7-day LIBID

N/A

iBoxx Sterling Non Gilts

18

0.8% per year over rolling three years 1.2% per year over rolling three years N/A

N/A

0.5% over market cycle

Illiquid Matching Assets (indexlinked corporates) Illiquid Matching Assets (property)

Investment Management Standard Life

LaSalle Investment Management

Custom mandate

N/A

Custom mandate

N/A

1) The mandate consists of a synthetic equity strategy and a downside protection strategy. 2) Included only for performance measurement, the Manager being required to manage to a different agreed benchmark. 3) Pathway also manages (on a monitoring basis) the legacy HSBC and Montagu private equity investments. 4) IPD monthly. 5) Barclays ABS Auto (Fixed) 10%, Barclays ABS Credit Card (Fixed) 10%, Barclays ABS Floating Rate Home Equity 10%, Barclays CMBS 25%, Barclays MBS Fixed Rate Index ex Hybrid ARMs 25% and JP Morgan Non-Agency Universe Model 20%, duration adjusted based on the Barclays US Treasury 3-7 year benchmark. 6) This is a buy and hold portfolio of index-linked swaps designed to partly fulfil liability-hedging requirements.

Hedging The Trustee also operates three hedging policies designed to mitigate risk (some rewarded, some unrewarded), as follows: 

Currency hedging: The Trustee’s policy is that a proportion of the Scheme’s foreign currency exposure generated by its overseas investments should be hedged back to sterling. The amount of foreign currency exposure hedged varies according to the characteristics of the asset class in question. Less volatile asset classes (such as bonds) have higher proportions of currency exposure hedged, whilst more volatile asset classes (such as equities) have lower proportions hedged. Legal & General Investment Management (LGIM) operates a significant proportion of the currency hedging programme, by managing a portfolio of foreign exchange forwards designed to overlay unhedged portfolios, where desired. In addition, some of the bond portfolios are operated against currency hedged benchmarks, in which case the manager in question will undertake the currency hedging of its own portfolio.



Liability hedging: The Trustee considers that the volatility of the Scheme’s funding level brought about by changes in the present value of the liabilities caused by changing inflation and interest rates, is, in large part, an unrewarded risk. Therefore it is the Trustee’s policy that a significant proportion of the interest rate and inflation risk generated by the Scheme’s liabilities should be hedged. In order to do so, the Scheme holds a portfolio of derivatives and gilts which, in aggregate, hedge a proportion of the interest and inflation sensitivity of the Scheme’s liabilities. It is also anticipated that a portion of the illiquid matching assets (such as property) and corporate bonds held in the Return Seeking Portfolio will have some matching characteristics over the long term, but to a lesser extent than gilts and derivatives.



Equity downside hedging: The Trustee views a substantial decline in the value of equities to be a material risk to the Scheme’s funding level that could well coincide with both poor returns from other return seeking asset classes and difficult business conditions for the Sponsor. The Trustee's policy is to implement a protection strategy to help mitigate this risk, which currently is implemented by using derivatives (eg purchasing put options on equity indices). As part of this downside protection strategy, options (both calls and puts) may be written to help fund the purchase cost of any put options. By protecting against substantial declines, the Trustee is comfortable to hold a higher equity allocation than might otherwise be the case which helps increase the overall expected return after accounting for net premium cost of the downside protection strategy.

19

Appendix B: Defined Benefit HSBC Global Services (UK) Ltd (HGSU) Section – Asset allocation and structure Asset allocation Based on advice from the investment consultant and Scheme Actuary, the Trustee has agreed to invest the HGSU Section assets in a Diversified Growth Fund. The Trustee will undertake to review the asset allocation on a regular basis and at least once every three years taking account of prevailing market conditions, investment opportunities and feedback from the Sponsor. Mandate

Diversified Growth Fund

Manager

Legal & General Investment Management

Benchmark/Index

N/A

20

Performance target (for active management) N/A

Appendix C: Defined Benefit Bank Section – Cash Generating Portfolio (Main Element) asset allocation and structure Asset allocation The Cash Generating Portfolio (“the Portfolio”) initially comprised of assets as set out in the table below: Cash Generating Portfolio

Initial allocation (June 2010)

Asset-Backed Securities

47.2%

Subordinated Bank Debt

29.4%

Auction-Rate Securities

3.4%

Supranational/Government bonds

20.0%

Total

100.0%

Note: The table above sets out the initial composition of the Cash Generating Portfolio, by market value. As the market values of each asset change over time, the portfolio composition will also change. Asset-Backed Securities comprise portfolios of loans, backed by assets which are “securitised” into bonds. Subordinated Bank Debt comprises debt securities issued by banks, which are subordinated to more senior claims on their assets. Auction-Rate Securities are bonds which are similar to other debt securities, but the coupon rate paid is agreed by an auction process (these may be asset backed). Supranational bonds comprise bonds issued by government backed entities.

Manager Structure The intention is that this portfolio will normally be managed on a hold/realisation basis. Cash produced by the Portfolio (through sales, interest income and repayments) will be transferred to Aviva Investors on a monthly basis, before a decision is made to use the cash to rebalance and enhance the Scheme’s assets. The Portfolio will be managed by BlackRock Investment Management (UK) Ltd (“the Manager”). Approximately 100% of the value of the US dollar and euro exposures of the Portfolio will be hedged to sterling by Legal & General Investment Management. The Portfolio’s investment objective will be to maximize the long-term values of the acquired assets by seeking to realize their “intrinsic values” (as defined below) in excess of their market values, in each case, as evaluated over the course of the Portfolio’s term. Maximising long-term asset values will require the Manager to engage in a series of ongoing sell versus hold decisions. These decisions will be informed by comparisons of the following key criteria: 

the estimated market value of the assets (“market value”);



the estimated net present value of the assets using a discount rate of the target rate (“target rate”) (or such other rate as communicated to the Manager from time to time by the Trustees) (“intrinsic value”); and



idiosyncratic, event or other material risks. 21

Appendix D: Defined Benefit Bank Section – Cash Generating Portfolio (Re-REMIC Element) asset allocation and structure Asset allocation The Re-REMIC Section of the Cash Generating Portfolio (“the Re-REMIC Section”) as at December 2011 initially comprised only re-securitisations of Real Estate Mortgage Investment Conduits (“ReREMICs”). The Re-REMIC Section will comprise a separate section within the Cash Generating Portfolio (“the Portfolio”). Real Estate Mortgage Investment Conduits (REMICs) are bonds created from cash flows derived from pools of residential mortgage loans. These are also often called Residential Mortgage Backed Securities (“RMBS”). Re-REMICs are securities created from the underlying cash flows of existing senior RMBS bonds. Note: As at December 2011 this portfolio comprised only Re-REMICs. As the portfolio matures (and subject to further asset purchases by the Scheme) the portfolio composition may change.

Manager Structure The intention is that this portfolio will normally be managed on a “low activity” basis (see description below). Cash produced by the Re-REMIC Section (through sales, interest income and repayments) will be transferred to Aviva Investors on a monthly basis, before a decision is made to use the cash to rebalance and enhance the Scheme’s assets. The Re-REMIC Section will be managed by BlackRock Investment Management (UK) Ltd (“the Manager”). The currency risk inherent in the Re-REMIC Section will be incorporated into the currency hedging arrangements and managed by Legal & General Investment Management. The Re-REMIC Section’s investment objective will be to maximize the long-term values of the acquired assets. The Re-REMIC Section will be managed on a “low activity” basis with the expectation that many of the assets therein will be held to maturity, with the remainder potentially being sold before that where the Manager has concerns about a deterioration in their credit quality or believes that the market value of the assets has reached their intrinsic value. Maximising long-term asset values will require the Manager to engage in a series of ongoing sell versus hold decisions. These decisions will be informed by comparisons of the following key criteria: 

the estimated market value of the assets (“market value”);



the estimated net present value of the assets using a discount rate of the target rate (“target rate”) (or such other rate as communicated to the Manager from time to time by the Trustees) (“intrinsic value”); and



idiosyncratic, event or other material risks.

22

Appendix E: Defined Contribution benefits Investment management The investments are managed through a platform arrangement operated by Fidelity through FIL Life Insurance Limited (“the platform provider”). This arrangement provides members with a range of thirteen different funds that can be accessed through three separate strategies; Lifecycle, Flexicycle or Freechoice. Lifecycle The Income Lifecycle aims to manage some of the risks around retirement investing through a pre-set investment strategy and is broadly defined by two phases: the accumulation phase and the consolidation phase. When a member is younger, their account is invested in funds that aim for long-term growth (accumulation phase). As the member approaches retirement, their account is switched automatically into lower-risk, lower-growth funds (consolidation phase). Switching a member’s account like this helps to provide a member with security and stability as a member approaches retirement for the following two reasons:  The cost of buying an annuity varies from time to time and depends partly on the price of bonds. Moving a member’s account into a bond fund when they are closer to retirement can help to protect the buying power relative to an annuity of their account.  Moving some of a member’s account into a cash fund protects any cash lump sum they might want to take. The Income Lifecycle is therefore aimed primarily at members who wish to buy an annuity at retirement. The Income Lifecycle is summarised in the graph below:

.

23

Note: Previously the Scheme offered a second, primarily active lifecycle strategy called Lifecycle 2. This strategy is no longer available to new investors but has been retained for those members already invested in it. An additional Cash Lifecycle is currently available and targeted at Defined Benefit benefits members who pay Additional Voluntary Contributions or make bonus sacrifices. The Cash Lifecycle option targets a 100% allocation to cash at retirement and is therefore aimed at members who wish to withdraw all of their benefits as cash at retirement.

The Capital Lifecycle is also available and aims to give members wishing to make use of income drawdown in retirement a suitable strategy. The Capital Lifecycle targets a 25% allocation to cash and a 75% allocation to diversified assets at retirement.

24

Flexicycle Flexicycle uses a similar strategy to Lifecycle but allows members some flexibility to choose between a number of funds to invest in during the accumulation phase and the consolidation phase, and decide when to switch between the phases. The Flexicycle enables members to spread their investments across all five accumulation phase funds, rather than being restricted to 100% in any one of the five. The Flexicycle options are summarised in the chart below. Choose one or more funds for the accumulation phase

Choose when the consolidation phase starts

Global Equities passive

Global Equities active

5 years from retirement

Freechoice Choose the fund for the consolidation phase

Index-Linked Bonds passive

If a bond fund is chosen, choose how much to invest in cash in the consolidation phase. Moving into a cash fund protects any tax-free cash lump sum a member might want to take

0%

Diversified Assets active

Sustainable & Responsible Equities active

15 years from retirement

10 years from retirement

Fixed Income Bonds – passive

Emerging Markets Equities active

Diversified Assets – active

25%

This can be any age (in complete years) from 55 to 75

Choose a target retirement age

A number of the funds are packaged together in order to provide a bespoke range of investment options to the members. Funds are managed using passive and active investment management. The ‘packaging’ allows active investment options to be provided that are less exposed to the fortunes of one manager as would be the case if individual active manager funds were made available. In addition, the use of bespoke investment options that are not specifically branded by reference to the manager makes it potentially easier to change the underlying managers when appropriate. The next two pages provide further detail on the bespoke funds.

25

Cash – active

It is intended to review the range of investment options available to members at least annually. Default investment strategy The Trustee’s policy is to provide clear information to members so that they can take appropriate investment decisions. However, it recognises that many members will not be willing or able to make investment decisions and therefore provides default investment strategies aimed at such members. The Income Lifecycle is the Scheme’s primary default strategy. This was selected by the Trustee because it believes that the automatic switching from growth to lower risk investments is a particularly useful feature for members who don’t take active investment decisions. In the accumulation phase, the switch from Global Equities to Diversified Assets as the member gets older recognises that investment losses will have a greater impact on members’ outcomes as their pot size grows. The switching of investments during the consolidation phase into Fixed Income Bonds helps protect the amount of pension (or annuity) that a member can purchase at retirement while the switch into Cash helps protect their tax free cash sum amount. This reflects the Trustee’s belief that the majority of members save into the Scheme in order to receive a stable income in retirement, albeit will likely withdraw their maximum tax free cash sum. The Cash Lifecycle is the default strategy chosen by the Trustee for hybrid members. This is because the Trustee believes that the defined benefits accrued by many such members will satisfy their requirement for a stable retirement income and their defined contribution savings will therefore be used to fund their tax free cash sum at retirement. Current rules on tax free cash allow members to withdraw defined contribution savings in that way. The Trustee is aware that the pension freedoms introduced on 6th April 2015 may alter members’ patterns of benefit withdrawals and therefore will monitor the suitability of its default strategies on a regular basis.

Current fund range Details of the bespoke range of investment options available to members of the Defined Contribution benefits of the Scheme are given below: Bespoke fund name

Fund Managers

Emerging Market Equities active

50% - Trilogy

UK Equities – active

33.4% Artemis

50% Schroders

Objective

Description

Benchmark/ Target

Capital Risk

Inflatio n Risk

Pension Conversion Risk

To provide longterm capital growth in excess of UK price inflation.

Invests in shares predominantly listed in developing countries. The fund aims to outperform the benchmark over the long-term.

MSCI Emerging Markets Index

Very High

Medium / High

High

To provide longterm capital growth in

Invests predominantly in UK listed

FTSE All Share Index

High

Medium

High

26

Bespoke fund name

Fund Managers 33.4% Jupiter

Objective

excess of UK price inflation.

33.3% - RWC

Description

shares. The fund aims to outperform the benchmark over the long-term. Invests in UK listed shares. The fund aims to perform in line with the benchmark as closely as possible. Invests in Global listed shares. The fund aims to perform in line with the benchmark as closely as possible.

Benchmark/ Target

Capital Risk

Inflatio n Risk

Pension Conversion Risk

FTSE All Share Index

High

Medium

High

10% - FTSE All Share Index 55% - FTSE AW World (ex UK) Hedged Index 20% - FTSE AW World (ex UK) Index 15% - FTSE AW All Emerging Markets Index

High

Medium

High

UK Equities – passive

LGIM

To provide longterm capital growth in excess of UK price inflation.

Global Equities – passive

LGIM

To provide longterm capital growth in excess of UK price inflation.

Global Equities – active

50% - MFS

To provide longterm capital growth in excess of UK price inflation.

Invests in Global listed shares. The fund aims to outperform the benchmark over the long-term.

10% - FTSE All Share Index 75% - FTSE All World Index 15% - MSCI Emerging Markets Index

High

Medium

High

To provide longterm capital growth in excess of UK price inflation. The fund aims to have less capital risk than an equities based fund.

Invests in a broad range of asset classes including equities, bonds, and a range of alternative assets. The fund aims to achieve the benchmark, over the longterm.

Retail Prices Index + 4% per annum over a five year rolling period

Medium

Medium

High

To provide longterm capital growth in excess of UK

Invests in commercial property, directly (mainly)

IPD UK Pooled Property Fund All Balanced

Medium / High

Medium

High

25% - River and Mercantile 10% - UK Equities – active

Diversified Assets – active

15% Emerging Market Equities – active 40% BlackRock 60% - Investec

Property – active

40% Threadneedle 20% - LGIM

To be communicated as a long-term target rather than a shortterm performance benchmark

27

Bespoke fund name

Fund Managers Global Real Estate

Objective

price inflation.

40% - LGIM Property

Global Bonds active

Fixed Income Bonds – passive

H2O

LGIM

To provide longterm capital growth in excess of UK price inflation. The fund aims to have less capital risk than an equities based fund.

To mitigate against pension conversion risk (for nonincreasing and fixed increase annuities).

Description

Benchmark/ Target

in the UK and/or indirectly via property companies listed around the world. The fund aims to outperform the benchmark over the long-term. Invests to achieve exposure to global government and corporate bonds. The fund aims to achieve the benchmark over the long term.

Capital Risk

Inflatio n Risk

Pension Conversion Risk

Medium

Medium

Medium

Medium

Medium

Low (nonincreasing and fixed increase annuities)

Index

LIBOR + 2% per annum over a five year rolling period To be communicated as a long-term target rather than a shortterm performance benchmark A composite of gilts and corporate bonds

Invests in UK government gilts and sterling corporate bonds. By using passive underlying funds it aims to broadly match the changes in non-increasing and fixed increase annuity prices whilst using the benchmark only for performance monitoring purposes.

28

Bespoke fund name

Fund Managers

Objective

Description

Benchmark/ Target

Capital Risk

Inflatio n Risk

Pension Conversion Risk

Index Linked Bonds – passive

LGIM

To mitigate against pension conversion risk (for indexed annuities).

Invests in longterm inflation linked bonds issued by the UK Government and sterling corporate bonds. By using passive underlying funds it aims to broadly match the changes in indexed annuity prices whilst using the benchmark only for performance monitoring purposes.

A composite of gilts and corporate bonds

Medium

Low

Low (indexed annuities)

Cash – active

LGIM

To protect the absolute value of the investment.

Invests in deposits and other short-term money market instruments. The fund aims to perform in line with the benchmark.

7 Day £ LIBID

Very low

Medium / High

Medium

Sustainable & Responsible Equities – active

Jupiter

To provide longterm capital growth in excess of UK price inflation.

Invests in Global listed shares in companies that operate in a sustainable and responsible manner. The fund aims to outperform the benchmark over the long-term.

FTSE World Index

High

Medium

High

Shariah Law Equities – passive

HSBC Global Asset Management

To provide longterm capital growth in excess of UK price inflation.

Invests in Global listed shares in a Shariah compliant manner. The fund aims to perform in line with the benchmark.

Dow Jones Islamic Titans Index

High

Medium

High

29

Appendix F: Risk and return assumptions Risk and return assumptions The Scheme has transacted swaps in order to match a proportion of its liabilities. The Trustee therefore focuses on the expected risk and return of the Scheme’s investments relative to the floating rate LIBOR payments due under the swap contracts. The asset class assumptions for the Defined Benefit Sections are shown below and are those used in the latest asset allocation study (effective 31 December 2012).

Asset classes

10 year median real return

10 year median returns over LIBOR

% pa

% pa

10 year standard deviation (relative to RPI) % pa

Return Seeking Portfolio Global equities Emerging market equities (unhedged)

4.0 5.1

4.2 5.3

5.5 7.1

Private equity UK property Cash generating portfolio Loans UK credit Global credit Smart betas Global sovereign credit

3.4 3.5 1.7 2.0 0.8 0.6 1.8 0.9

3.6 3.7 1.9 2.3 1.0 0.9 2.0 1.1

7.6 3.5 1.5 1.5 0.8 0.8 1.8 2.7

Matching Portfolio Liquid (gilts/cash) Core (sovereigns, sub-sovereigns) Illiquids

0.7 0.6 3.5

0.9 0.9 3.7

1.0 0.8 3.5

LIBOR (real return)

-0.2

0.0

0.7

30

Appendix G: Value at Risk A key means by which the Trustee controls the risk of the Defined Benefit Bank Section portfolio relative to liabilities is through the liability hedging programme. This involves using derivatives and physical bonds to hedge the interest rate and inflation risks inherent in the Scheme’s liabilities. The Trustee considers a range of different risk measures in the context of different liability valuation bases. The Trustee’s medium-term objective is to ensure that the assets are managed such that the Technical Provisions (TP) VaR95 does not exceed 10% of the Scheme’s TP liabilities, and that the Solvency VaR95 does not exceed 12% of the Scheme’s solvency liabilities. The Trustee recognises that, in the short-term, VaR95 may exceed this medium-term objective due to short-term market conditions, and may not warrant an immediate change to the Total Portfolio, Consequently, the Trustee will keep this objective under regular review.

31