DNB approves Shell recovery plan

The 10.6 billion ($15 billion) Shell Pension Fund’s recovery plan has been approved by De Nederlandsche Bank and includes a provision to increase employer contributions to 32 per cent, up from 5 per cent last year, on the back of a whopping -43.3 per cent return for 2008.

The funding ratio has plummeted to 80 per cent, after reaching about 180 per cent in 2007. The plan sets out how the pension fund expects to restore the funding ratio within three years to the statutory minimum level of 105 per cent and within 15 years to 127 per cent.

The recovery measures necessitated higher pension contributions. The employer’s contribution gradually increased
from 5 per cent, to 23.6 per cent and then 32.1 per cent as of July this year. In the second quarter of this year the employer also made an additional payment of 2billion ($2.96 billion).

If the funding ratio is lower than 105 per cent the employer will make further additional payments in up to 10 installments.

The fund is managed by the Shell Asset Management Company, which executes an active investment policy which allows for the ability to deviate from the strategic asset allocation.

In the fourth quarter of 2008 the fund made a temporary adjustment of its investment policy to reduce risk. Its new asset allocation for 2009-2011 is 45 per cent to listed equities, 20 per cent to alternatives, 35 per cent to fixed income, 0 per cent to cash.

The strategic asset allocation is set triennially, and for 2008 to 2010 its allocation was set at 55-63 per cent to listed equities, 7-15 per cent in alternative investments, 30 per cent to fixed income investments, 0 per cent to cash, 8 per cent to hedge funds, -8 per cent to loans concerning hedge funds.

The actively managed equities portfolio suffered heavy losses (-56.7 per cent) due mainly to the emphasis on small cap shares. Fixed income also suffered losses because of the exposure to government bonds in emerging markets.

An evaluation of its own performance by the board has resulted in a number of changes. The organisation has been extended and set up differently and processes and systems are being improved. It was revealed risk management must be improved.