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Financial Times: Shell UK halts pension fund contributions

By Maggie Urry and Norma Cohen in London
Published: October 2 2007 03:00 | Last updated: October 2 2007 03:00

Shell UK, part of the Royal Dutch Shell oil group, is taking the unusual step of halting its contributions to its pension scheme for at least a year.

This is to take advantage of a combination of increasing equity values and rising interest rates this year.

In an announcement to scheme members on the company’s website, Shell UK said its latest actuarial valuation, completed last March, showed the £12.1bn scheme to be heavily in surplus.

Employees will continue to make contributions to the scheme as normal.

Shell declined to comment on its scheme. However, the scheme is understood to be close to fully funded on a “full buy-out” basis, the most conservative valuation basis used by schemes and one which is close to the cost of securing all benefits with an insurance company.

Trustees to the scheme are understood to have submitted plans for the contributions holiday to the Pensions Regulator earlier this year and to have received ap-proval. It is under continuing annual review, according to those familiar with the scheme.

The Pensions Regulator has discouraged companies from taking contributions holidays, in part because they are seen to delay full funding of schemes until later years when it is not clear the employer will be able to meet all promises in full.

Schemes that are as well funded as that of Shell UK are unusual, and the move is not likely to be followed by many other employers.

In a recent interview, June Mulroy, head of scheme funding at the regulator, said of contributions holidays: “A number of companies have raised it. I can assure you that has not been greeted well.”

The 46,000 members of the Shell UK scheme were told of the move in a report from the trustee dated “summer 2007”, which also said the fund had substantially cut investment in equities, shifting into bonds, in the second quarter of this year, before the market turbulence. Last year Shell put £67m into the scheme in contributions, while employees paid in £16m. The company’s contributions stopped from July 1.

Shell confirmed that the fund “has agreed to a temporary reduction in company contributions to zero”. The decision is thought likely to be reviewed in a year’s time.

Pension fund contribution holidays were commonplace in the 1980s and 1990s as rising stock markets and relatively high interest rates produced fund surpluses.

However, stock market reverses and the stricter actuarial assumptions which followed the implementation of the FRS 17 accounting standard in the early 2000s and the establishment of the Pensions Regulator, were adopted, and many pension funds fell into deficit. That largely ended the practice of contributions holidays.

Stephen Hodge, chairman of the trustees, said in the report: “We all recognise that financial market volatility is likely to continue and it is possible that at some time company contributions will have to start again. For the moment though my feeling is that the fund is in a strong enough position to withstand most of the changes financial markets might bring to us.”

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