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The Wall Street Journal: Shell Suspends Payment To Its U.K. Pension Fund

October 1, 2007

Royal Dutch Shell has suspended payments to its £12 billion ($24.55 billion) U.K. pension fund for at least a year from the end of July. It is the first FTSE-100 company to take a so-called “pension holiday” since the Anglo-Dutch oil group took one in 2002, according to investment consultants.

Such suspensions were common in the 1980s and early 1990s when investment returns were good and surpluses large. These suspensions were a significant factor in the development of funding problems in U.K. pension plans when stock markets fell between the years 2000 and 2003.

Pension holidays have fallen from favor since pension-plan deficits ballooned. The establishment of the U.K.’s Pensions Regulator in 2004 further discouraged the practice, and since then billions of pounds have been paid by U.K. companies to cover shortfalls in plans.

These injections combined with rising interest rates have led to a dramatic improvement in pension finances, with the U.K.’s 200 largest funds moving into a collective surplus of £5 billion at the end of September under the FRS17 accounting standard, according to investment advisory firm Aon Consulting.

It is the first time plans have ended a month in the black since records began in 2001, according to Marcus Hurd, senior actuary at Aon, which prepares the monthly survey of deficits.

Shell’s U.K. fund has £11.9 billion in assets according to its latest actuarial report last December, and with a surplus of £2.9 billion it is one of the best funded plans in the U.K. It is one of a minority of big U.K. pension plans still open to new members. That has allowed Shell to claw back some of the excess by failing to make its usual payments to the plan while members continue to contribute.

The year’s pension holiday is unlikely to harm any of Shell’s current or former employees, since the surplus is so large. In the short term it is likely to mean that the year’s pension payments are met out of a combination of the surplus and the amounts paid in by employees during the year. The long-term effect will depend on investment returns.

Donald Duval, chief actuary at Aon, said: “I am certainly not aware of any other companies having done this in the past few years, and I think I would have been if it had happened. It is interesting because it shows the wide variation in pension schemes’ circumstances.”

Shell paid £67 million in ordinary contributions last year, according to the plan’s annual report. It has been putting money in since 2002, when it restarted payments because the plan had fallen to a 99% funding level. This level has since improved to exceed 100%. The legal minimum for a U.K. fund according to the Pensions Regulator is that schemes must be 100% funded according to their own actuarial standards, known as “technical provisions.”

Shell declined to comment beyond what was already included in its communications to members.

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