Pension and Other Postretirement Benefits

12 Months Ended

Dec. 31, 2012

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Pension and Other Postretirement Benefits

Pension and Other Postretirement Benefits

Defined Benefit Pension Plan Effective January 1, 2005, our previously separate qualified defined benefit pension plan was combined with that of HSBC Bank USA’s into a single HSBC North America qualified defined benefit pension plan (either the “HSBC North America Pension Plan” or the “Plan”) which facilitates the development of a unified employee benefit policy and unified employee benefit plan administration for HSBC companies operating in the U.S.

The table below reflects the portion of pension expense and its related components of the HSBC North America Pension Plan which has been allocated to us and is recorded in our consolidated statement of income (loss).

Year Ended December 31,	2012			2011			2010
	(in millions)
Service cost – benefits earned during the period	$	4		$	5		$	12
Interest cost on projected benefit obligation	47			33			39
Expected return on assets	(65		)	(39		)	(39		)
Recognized losses	33			18			23
Curtailment gain	(4		)	(1		)	—
Amortization of prior service costs	(1		)	—			—
Pension expense	$	14		$	16		$	35

Pension expense was flat during 2012 as higher expected returns on plan assets due to higher asset levels, including additional contributions to the Plan during 2012 of $181 million and the recognition of a curtailment gain as discussed more fully below, were offset by higher interest costs and higher recognized losses.

During the third quarter of 2012, a decision was made to cease all future contributions under the Cash Balance formula and freeze the Plan effective January 1, 2013. While participants with existing balances will continue to receive interest credits until the account is distributed, they will no longer accrue benefits beginning in 2013. This resulted in the recognition of a $4 million curtailment gain during 2012.

During December 2011, an amendment was made to the Plan effective January 1, 2011 to amend the benefit formula, thus increasing the benefits associated with services provided by certain employees in past periods. The financial impact is being amortized to pension expense over the remaining life expectancy of the participants.

During the first quarter of 2010, we announced that the Board of Directors of HSBC North America had approved a plan to cease all future benefit accruals for legacy participants under the final average pay formula components of the HSBC North America Pension Plan effective January 1, 2011. Future accruals to legacy participants under the Plan are now provided under the cash balance based formula which has been used to calculate benefits for employees hired after December 31, 1999. Furthermore, all future benefit accruals under the Supplemental Retirement Income Plan ceased effective January 1, 2011.

The aforementioned changes to the Plan have been accounted for as a negative plan amendment and, therefore, the reduction in our share of HSBC North America’s projected benefit obligation as a result of this decision is being amortized to net periodic pension cost over the future service periods of the affected employees. The changes to the Supplemental Retirement Income Plan have been accounted for as a plan curtailment, which resulted in no significant immediate recognition of income or expense.

The assumptions used in determining pension expense of the HSBC North America Pension Plan are as follows:

	2012		2011		2010
Discount rate	4.60	%	5.30	%	5.60	%
Salary increase assumption	2.75		2.75		2.90
Expected long-term rate of return on Plan assets	7.00		7.25		7.70

The accumulated benefit obligation for the HSBC North America Pension Plan was $4.4 billion and $3.9 billion at December 31, 2012 and December 31, 2011, respectively. As the projected benefit obligation and the accumulated benefit obligation relate to the HSBC North America Pension Plan, only a portion of this deficit could be considered our responsibility.

Estimated future benefit payments for the HSBC North America Pension Plan are as follows:

	HSBC North America
	(in millions)
2013	$	183
2014	186
2015	189
2016	193
2017	196
2018-2022	1,031

Supplemental Retirement Plan We also offer a non-qualified supplemental retirement plan. This plan, which is currently unfunded, provides eligible employees defined pension benefits outside the qualified retirement plan. Benefits are based on average earnings, years of service and age at retirement. The projected benefit obligation was $66 million and $85 million at December 31, 2012 and 2011, respectively. Pension expense related to the supplemental retirement plan was $17 million, $4 million and $7 million in 2012, 2011 and 2010, respectively.

Defined Contribution Plans We participate in the HSBC North America 401(k) savings plan and profit sharing plan which exist for employees meeting certain eligibility requirements. Under these plans, each participant’s contribution is matched up to a maximum of 6 percent of the participant’s compensation. Contributions are in the form of cash. Total expense for these plans for HSBC Finance Corporation was $4 million, $4 million and $6 million in 2012, 2011 and 2010, respectively.

Postretirement Plans Other Than Pensions Our employees also participate in plans which provide medical, dental and life insurance benefits to retirees and eligible dependents. These plans cover substantially all employees who meet certain age and vested service requirements. We have instituted dollar limits on our payments under the plans to control the cost of future medical benefits.

The net postretirement benefit cost for continuing operations included the following:

Year Ended December 31,	2012		2011		2010
	(in millions)
Service cost – benefits earned during the period	$	—	$	—	$	1
Interest cost	6		5		6
Net periodic postretirement benefit cost	$	6	$	5	$	7

The assumptions used in determining the net periodic postretirement benefit cost for our postretirement benefit plans are as follows:

	2012		2011		2010
Discount rate	4.25	%	4.95	%	5.20	%
Salary increase assumption	2.75		2.75		2.90

A reconciliation of the beginning and ending balances of the accumulated postretirement benefit obligation for both continuing and discontinued operations is as follows:

	2012			2011
	(in millions)
Accumulated benefit obligation at beginning of year	$	195		$	184
Service cost	1			1
Interest cost	7			9
Actuarial losses	26			13
Benefits paid, net	(21		)	(12		)
Plan curtailment	$	(11	)	$	—
Accumulated benefit obligation at end of year	$	197		$	195

Our postretirement benefit plans are funded on a pay-as-you-go basis. We currently estimate that we will pay benefits of approximately $18 million relating to our postretirement benefit plans in 2013. The funded status of our postretirement benefit plans was a liability of $197 million and $195 million at December 31, 2012 and 2011, respectively.

Estimated future benefit payments for our postretirement benefit plans for both continuing and discontinued operations are as follows:

	(in millions)
2013	$	18
2014	18
2015	18
2016	17
2017	17
2018-2022	77

The assumptions used in determining the benefit obligation of our postretirement benefit plans are as follows:

At December 31,	2012		2011		2010
Discount rate	3.35	%	4.25	%	4.95	%
Salary increase assumption	2.75		2.75		2.75

A 7.4 percent annual rate of increase in the gross cost of covered health care benefits for participants under the age of 65 and a 7.0 percent annual rate for participants over the age of 65 was assumed for 2012. This rate of increase is assumed to decline gradually to 4.5 percent in 2027.

Assumed health care cost trend rates have an effect on the amounts reported for health care plans. A one-percentage point change in assumed health care cost trend rates would increase (decrease) service and interest costs and the postretirement benefit obligation as follows:

	One Percent Increase		One Percent Decrease
	(in millions)
Effect on total of service and interest cost components	$	.1	$	(.1	)
Effect on postretirement benefit obligation	3.9		(3.5		)