By Tom Bergin and Cecilia Valente

LONDON (Reuters) – Royal Dutch Shell’s (RDSa.L: Quote, Profile, Research) (RDSb.L: Quote, Profile, Research) Dutch pension fund has fallen into deficit as share market turmoil knocked 40 percent off the fund’s value, forcing the oil major and employees to increase contributions.

As a consequence, the defined benefit pension scheme is decreasing its equity investments and shifting into government bonds to reduce risk, the fund said in a letter sent to its members this week, seen by Reuters.

The Pension Fund’s funding ratio — a measure of how well a pension scheme can meet its liabilities — was 85 percent at the end of November 2008, the letter said.

The scheme’s annual accounts show that the funding ratio was 180 percent at the end of 2007, with the size of the assets at 19.2 billion euros (17.1 billion pounds), and liabilities at 10.6 billion euros.

At the time, equities investments accounted for 12.2 billion euros and bonds for 5.5 billion euros.

An agreement between Shell and the fund requires Shell to provide additional funding up to a funding ratio of 105 percent, if the funding ratio regularly is below 105 percent over a six-month period, the letter said.

A spokeswoman for Shell confirmed a letter had been sent by the pension fund to employees informing them the fund was underfunded but could not say how much the new arrangements would cost Shell.

“The strategic asset allocation has been adjusted temporarily by reducing the allocation to listed equities in favour of other asset classes, notably government bonds,” the fund said in the letter.

Under Dutch law, a pension scheme whose funding ratio is under 105 percent has three years to fill the deficit. The scheme must notify the regulator and submit a recovery plan.

Shell’s pension fund has commissioned a report to establish if its long-term strategy needs changing and will submit a recovery plan to the Dutch Central Bank, which is also the country’s pension regulator, next year.

The central bank responded to the current market downturn last month by allowing underfunded pension schemes to postpone recovery plan submission until April next year.

(Reporting by Tom Bergin and Cecilia Valente; Editing by Greg Mahlich and Hans Peters)