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11 Dec 2008

The financial crisis that started in the United States last year has gained considerable momentum during the last few months and has spread around the globe. Many financial institutions have run into trouble, leading to various rescue measures by national governments including nationalisation, but also bankruptcy. The value of listed equities and other asset classes has fallen dramatically worldwide. As a consequence, pension funds too have been impacted. 

The financial position of the Dutch Shell Pension Fund

The long-term active investment strategy of the Pension Fund has generated strong average returns on investment over the last twenty years. As a consequence, the Pension Fund had been able to build up significant financial buffers prior to and since the previous crisis (2000 to early 2003). The credit crisis, however, this year has had a negative impact on most asset classes other than on the government bonds of the big Western countries. The investments of the Pension Fund are broadly diversified, including geographically. Based on higher growth expectations for these countries, the Pension Fund has an above average allocation to emerging markets investments. Non fixed-income type investments, notably listed equities, have for many years accounted for some 70% of the Pension Fund’s asset mix.  Under the recent extreme market conditions and as a result of the general flight to virtually risk-free investments in 2008, the specific long term investment strategies of the Pension Fund, which had been successful over a period of many years, have suffered. All in all, the total value of the Pension Fund’s investments has declined by some 40% since the start of this year. At the same time, lower interest rates have resulted in a significant increase of the pension obligations, i.e. the amount required to cover the pension obligations, both now and in the future, has increased.

This combination of events has required the Board to notify the Nederlandsche Bank (DNB), the Dutch regulator of pension funds, that the Pension Fund is in an underfunded position. This means that the current market value of the net assets of the Pension Fund has dropped below 105% of the present value of the pension obligations. The funding ratio of the Pension Fund was 85% at the end of November 2008. A long-standing agreement is in place with  Shell regarding support of the Pension Fund in such a situation. The agreement states that the employer will provide additional funding up to a funding ratio of 105%, if the funding ratio regularly is below 105% over a six-month period. 

What does this mean for the (former) participants and pension beneficiaries? 

There will be no change in pensions granted. These will be paid, as usual, at the beginning of each month. Also the accrual of pension for active participants will continue unchanged. Participants will continue to pay a pension contribution of 2% of pensionable salary up to the normal maximum of salary group 5. 

The reduction in the participant contribution relating to the salary above the normal maximum of salary group 5, which came into effect from 1st January 2008, will be discontinued. These contributions will be restored to their regular level of 8% with effect from 1st January 2009. The reduction of the employer contribution will also be discontinued. As from 1st January 2009, this contribution will increase from 5% to 23.6% of pensionable salaries. 

A decision regarding the indexation of pensions in payment and deferred pensions as per 1st July 2009 will, as usual, be made in the second quarter of next year. The development of consumer prices and the then prevailing financial position of the Pension Fund will be taken into account by the Board in making that decision. 

Other measures

When funding falls below 105%, the Board of a Dutch pension fund is obliged to submit a short-term recovery plan to DNB, indicating how it expects the pension fund to recover to a funding position of 105% within a period of three years. The Board will submit the short-term recovery plan before the end of this month. DNB will be kept informed of developments in the funding position. 

Furthermore, against the background of the financial crisis and its impact on the economy and the Pension Fund’s investments, the Board has taken additional risk-reducing measures. The strategic asset allocation has been adjusted temporarily by reducing the allocation to listed equities in favour of other asset classes, notably government bonds. In addition, a new study has been commissioned in order to establish whether the long-term strategic asset allocation needs to change. The results of this study will be incorporated in a long-term recovery plan which the Pension Fund will submit to DNB by 1st April 2009. 

In conclusion

It is clear that the financial position of the Pension Fund has been impacted in the near term. The Board wishes to emphasize, however, that it maintains a long term view, whilst paying urgent attention to the necessary immediate actions. We will keep you informed of developments.

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