Shell Pensioenfonds has reduced risk by increasing its interest rate hedge from 30% to 50% in 2022 as it is aiming for an inflation-corrected real funding ratio of more than 100%, according to the pension scheme’s director Kenan Yildirim.
Earlier, the pension fund had also announced plans to reduce its private equity exposure by not making any new commitments.
According to Yildirim, Shell Pensioenfonds adopted a new goal in late 2021 to achieve a real coverage ratio of 100% by 2035 at the latest. The decision, Yildirim said, was linked to the fact that the pension fund is a “soft-closed” fund: it is closed for new members, but existing members still accrue pension there.
Yildirim said: “This means that our member population is slowly ageing and that we will gradually need to take a little less risk over the next 10 years. That way we can maximise the chance of achieving a pension that matches inflation.”
By the end of 2022, Shell Pensioenfonds had nearly 31,000 members, of whom only 5,500 currently accrue pensions with the fund. Assets under management stand at €26bn, according to the fund’s annual report that published last week.
Shell Pensioenfonds currently has a real funding ratio of 88%, up from 84% in 2021.
“As we edge closer to reaching our goal of 100%, we increase the interest rate hedge and reduce investment risk,” said Yildirim, who added the fund wants to lock in the tailwind it enjoyed from the increase in nominal interest rates by upping its interest rate hedge from 30% to 50%.
Even though Shell Pensioenfonds reduced the share of the return portfolio in its strategic allocation to 40% of assets from 50%, its real exposure still stood at 47% at the end of 2022.
Moreover, the pension fund now has a higher allocation to private equity (12.9% of assets) than to listed equities (11.6%).
Fewer private equity investments
“Private equity did very well relative to other investments in 2021,” Yildirim explained.
“Partly because of that, the illiquid investment sleeve in our portfolio was heavily overweight. That was a reason for us to temporarily not enter into any new commitments for private equity in 2022. To be able to do the right transactions in the future, the fund also needs sufficient liquidity. We are now focusing more on investments that are easier to sell,” he said.
DB or DC?
Shell Pensioenfonds does not yet know whether it will make the transition to the new defined contribution-based pension system or whether it will ‘hard close’ and keep accruals in the current defined benefit system.
“The latter is a possibility,” Yildirim said. “It requires a decision by social partners. We are repeatedly urging them to do so as soon as possible.”
This article originally appeared on Pensioen Pro, IPE’s Dutch sister publication. It has been adapted for IPE by Tjibbe Hoekstra.