The High Court is set to decide if the trustees of the £19bn HSBC pension fund can change the scheme rules, around a power on using surplus to make contributions to the money purchase scheme. The move is expected to go ahead but risks creating further discontent among some defined benefit members. 

The DB schemes of HSBC boast a sizeable surplus. The largest section, HBUK, was overfunded to the tune of £4.4bn, with a funding ratio of 130% at the end of 2024. Even on a low risk measure, the surplus stood at £2.8bn, with a funding level of 118% – thought to have improved further since late 2024. 

HSBC has now asked its UK pension trustees to make DC contributions – about £152m a year based on 2024 – from the large DB surplus on its behalf. This is allowed under the scheme rules, but the trustees have said that the rules need updating and are proposing to do this, initially for four years. They are seeking court approval to do so, noting that “this is a normal approach to take in these circumstances”.

The hearing is scheduled for 6 March with chief master Karen Shuman. 

The application that will be heard in March “seems pretty open and shut to an outside view, that they'll get the approval of the court”, said Anna Rogers, a senior partner at Arc Pensions Law. 

“It's obviously all been very carefully constructed to make sure it takes account of DB members’ interests,” she said.

Rogers noted that the actual rules of the scheme concerned are crucial in this kind of situation, as well as the trustees following the proper fiduciary process.

She pointed out that in this case, the scheme rules already allowed the trustees to use surplus for the DC scheme, but only as long as there were active members in the scheme. As that is no longer the case, the power has fallen away and needs to be updated. 

“They're building it back in a very balanced way for a short-term period,” she said, and DB members will remain well funded even if surplus is used for DC contributions.

“Trustees are using the scheme assets for other members of the scheme, in that the DC members are in the scheme or in the same section. So it's not like they're diverting it to pay the money outside of the scheme. It would be surprising if the court didn't approve it,” Rogers added. 

The bank would not be the first to receive court approval for using DB surplus to make DC contributions. In Barclays Bank plc v John M Holmes & Ors (2000), the court agreed with Barclays that it could create a DC section in the same trust as the DB scheme, using surplus in the latter for the former. Overturning a Pensions Ombudsman determination, the court had found that two schemes can be in the same trust and surplus can be used for either if the documentation permits it. As funding levels have improved in recent years, more employers are doing precisely that. 

Even if the legal case appears straightforward, DB members might take a different view. Scheme members have written in saying the surplus should be used to enhance DB benefits, something the bank has refused to do each time the trustees have requested it. The trustees have told members that they can continue to share their views on the matter by emailing the representative’s legal team. 

The representative member, Stephen Burnell, will defend the position of scheme members with legal input from Gowling WLG (UK) LLP and Fenner Moeran KC, paid for by the scheme. Burnell does not agree with the trustees’ application but, according to the scheme, will not oppose it because he has been advised by his team that there is no legal basis on which to do so, subject to further evidence. 

The plan to use scheme surplus to benefit the company’s cash flow comes amid existing resentment among some DB members against the global banking giant.  

Although not part of these proceedings, many of HSBC’s DB members have a ‘clawback’ or ‘state deduction’ of up to £2,500 applied to their pension which is based on length of service. Roughly 50,000 pensioners of the former Midland Bank, bought by HSBC in 1992, are affected, most of them women. The estimated cost of ending the integrated element of the scheme completely is £450m. The bank has so far declined to do this or to put a 5% cap on the clawback, despite repeated shareholder resolutions and public protests. Two further shareholder resolutions will be brought at this year’s AGM. 

HSBC’s ‘state deduction’ was debated in Westminster last April, as several MPs have constituents who are affected. Liberal Democrat MP Manuela Perteghella secured a debate in which she said members “were misled about the nature of their retirement income”. 

Steve Bradbury, from the Midland Clawback Campaign – a pensioner group calling for the abolition or at least a cap on the ‘clawback’ – shares this view, saying people were not aware of how the scheme works.

Bradbury is unhappy with the process being taken for the current court case, saying there has been no consultation about the selection of the representative member with either the Midland Clawback Campaign or Horizons, the association of former Midland and HSBC members. 

He wants to see the surplus used to eliminate the clawback going forward, and to increase the caps on inflation uprating from 3% and 5% to 7% and 9%. 

Given the small size of annual DC contributions in relation to the surplus and the scheme’s low-risk strategy, HSBC’s overfunding situation is likely to continue. DB members fear that the bank’s wish to access DB surplus to fund DC contributions is only the start, and that its real interest lies in exploring where any remaining surplus would go on winding the scheme up, although the trustees have said that there are “no current plans” for buying the scheme out. 

The HSBC pension fund evolved largely from the Midland Bank scheme and was non-contributory for members until 2009. It is unclear if its rules stipulate anything about where surplus should go on wind-up. 

HSBC has been contacted for comment.