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Reuters: Shell takes UK pension fund contribution holiday

Mon Oct 1, 2007 12:22 PM BST

LONDON, Oct 1 (Reuters) – Oil giant Royal Dutch Shell (RDSa.L: Quote, Profile , Research) said on Monday it had temporarily suspended payments to its well-funded UK pension scheme.

“We can confirm that the Shell UK pension fund has agreed to a temporary reduction in company contributions to zero. The fund remains in a very strong position and is heavily in surplus,” a Shell spokeswoman said.

The company declined to say by how much its main pension fund is in the black, but Shell has one of the largest and most generously-funded schemes in the UK, into which it put 67 million pounds ($136.8 million) last year.

It had a surplus of 2.9 billion pounds on assets of 11.9 billion pounds, according to a report in the Wall Street Journal Europe.

The move by Shell — the first contribution holiday it has taken in five years — is a sign of the generally improving health of UK company defined-benefit pension schemes.

The largest 200 UK company pension funds showed an aggregate surplus of 5 billion pounds at the end of September, compared to a deficit of 10 billion pounds at the end of August, according a survey released on Monday by Aon Consulting.

A major factor driving the pension funds’ swing into the black is the falling value of AA-rated corporate bonds, which firms use as a benchmark measure for valuing their pension liabilities, Aon said.

As the value of these bonds has fallen, due to fears of default among investors, the cost of liabilities in firms’ pension schemes have also been reduced, Aon said.

Pension contribution holidays were a common feature among UK companies up until the late 1990s, as many heavily equity-invested funds showed healthy surpluses.

But the lack of cash injections from firms contributed to the crisis in company pensions when the value of equity holdings plummeted in the bear market of the early 2000s.

Subsequent regulatory changes made it much harder for companies to suspend payments into their pension funds unless their schemes showed healthy surpluses.

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