Discussion about pensions reform in the Netherlands are paying insufficient attention to the potential impact of the transition from average to degressive pensions accrual, according to the Dutch pension fund of Shell.
In its annual report for 2018, the €27bn SSPF argued that a new pensions contract – which is subject to negotiation between the government, employers and unions – was not relevant to every pension fund. However, the government’s decision to abolish the current pension accrual method would affect all Dutch schemes.
“Compensating older workers for the negative effects of degressive accrual through a new pensions contract won’t be feasible for many pension funds,” the closed pension fund said.
It concluded that, if the government’s plans were implemented, the scheme’s contribution rate of 23.5% last year would have to rise significantly, without delivering a better pension.
Therefore, the Shell scheme advocated granting schemes sufficient legal leeway in the transition to a new way of pensions accrual, to enable closed schemes to carry on with their existing pension plan.
Separately, the pension fund said it planned to decrease its investment risk when its funding was improving, and vice versa, based on a new asset-liablity management study.
As a consequence, it had reduced its allocation to return-seeking assets by 10 percentage points to 5.1% in 2018, while increasing its interest rate hedge from 10% to 25% of liabilities.
At year-end, the pension fund’s coverage ratio stood at almost 128%, enabling the scheme to grant a full 1.6% inflation compensation.
Private equity offsets listed losses
The Shell scheme posted a 0.6% loss on investments in 2018, according to the annual report. This would have been a 2.2% decline without its interest rate hedge position, the scheme said.
Private equity holdings and matching assets were Shell’s best performing asset classes, with returns of 13.4% and 14.9%, respectively. Real estate delivered 3.7% through positive revaluations as well as rental income.
In contrast, listed equity holdings fell 8.7%. Shell attributed a 4.1% loss on fixed income to rising risk premiums for emerging market debt and risk-bearing credit.
It described the 0.9% loss on hedge funds as disappointing, given its long-term return goal for the allocation was Libor plus 3%.
In its annual report, the Shell pension scheme also said it had decided to raise its allocation to Dutch residential mortgages by €1bn.
The board explained that, despite the asset class’s limited liquidity, the investment offered an attractive return, adding that mortgages’ long duration matched the scheme’s long-term liabilities.
It reported asset management and transition costs of 0.58% and 0.1%, respectively. Administration costs amounted to €267 per participant.
At year-end, the Shell scheme had 7,685 workers, 18,665 pensioners and 7,280 deferred members.