The Shell International group has an impressive pedigree and scale when it comes to pensions provision for its 90,000 employees across the globe. To put this into context, at the end of 2000, the group had pension assets of around $50bn (E51bn).
There are in excess of 40 funded schemes operating in its different subsidiaries, providing mainly defined benefits (DB), though there are some defined contribution(DC) arrangements. “The DB structure has proved an important component of our employee value proposition,” says Alan Davies of the pensions investment policy and advice division, based in London. “The schemes in the UK, the Netherlands and the US account for around 80% of the assets. In general, these are well-funded schemes, with significant allocations to equities and which have historically had strong performance – in many cases both employer and employee have been able to enjoy total or partial contribution holidays.”
The other schemes range in size from $1.5bn to $10m, he notes. The funds are usually structured as a separate trust or similar arrangement, so that the pension funds are run independently, and reflect local constraints and regulations. On the investment side, local restrictions on overseas investment or on the asset allocation in relation to the proportions of equities to bonds or on other asset classes can apply.
“Historically, there was little cross fertilisation between the different schemes, so countries ended up with different investment processes and strategic asset allocations,” says Davies. The result had been underperformance within some funds, which needed to be improved. “We sensed a significant opportunity to share experience of running pension funds across all of the funds”. This means sharing the knowledge and expertise within the group on best investment management processes. It also entails building, as far as possible, common management tools for the schemes and to ‘leverage’ the group’s significant collective buying power for services.
The aim was to provide these capabilities to the different pension schemes as support and advisory services. “We are very aware of the fact that we do not own these local schemes, but that we are providing a service to them. Our approach is to work together to do things better. This is seen as a win-win situation for all concerned and, happily, the concept has been embraced,” says Davies.
The overall focus is to improve each fund’s performance by addressing the areas of the investment process and service costs, and, in particular, enhancing risk management and control. Continuity was an important issue to be addressed as finance staff turnover locally can lead to a gap in professional experience. “We now have a full time team operating out of nine countries with a small group based in London.” Some are former asset managers and together they act as a network of investment management professionals able to deliver solutions on a local basis worldwide. “We started rolling out our services at the beginning of 2001 and expect to complete the process by the end of this year.”
A key part of this programme is to establish ‘best practice processes’, based on “what a well-functioning pension fund should be doing”, says Davies. “We try to start our analysis at the heart by asking ‘what are we doing in the investment management activity’ and ‘how could we improve?’” This typically starts with looking at what trustees of a local fund feel they need by way of training and support so that they are able to take on their governance responsibilities. “We find that skills are not always up to the right levels.” The team has developed a range of tools to assist this process. He mentions as an example a self appraisal tool for trustees based on the principles of the trustees’ role contained in the Myners report in the UK. This is used with trustee boards to enable them to assess their function and their level of performance. “It is often a matter of examining the basics with people and clarifying what the role entails.” The system leads to an action plan of steps that need to be taken, including training, both internal and external, he adds.
The best practice process covers all aspects of the investment activity, with the aim of introducing a high level of practice across all the key areas of investment management such as liability data collection, asset classes, modeling and risk budgeting, strategic asset allocation, the role and choice of benchmarks, reporting procedures and and finally a statement of investment principles. Every DB scheme should undergo an asset liability study every three years. This is provided by the network team, who have the external modeling support tools and techniques to implement this work.
On working with external consultants, particularly actuaries, Davies notes that 60% of the costs involved can be in the collection and preparation of data. “This is not a very efficient use of their time and it is something we can do ourselves. We now work with them on an agreed basis and have the process working efficiently.” It just takes a few weeks now to get an asset liability study done.
In addition to its in-house investment activities, Shell works with over 70 asset managers worldwide, but has found it has had patchy experience with external active managers. “We have not always been good at selecting external managers,” he admits. Also when it came to fees, the group found some managers were receiving different fees in different countries. “This information was not being shared across the group internationally.”
“Our focus is now to ensure there is a match between the mandate requirements and the skill base of the manager,” observes Davies. “The current approach is very much along the lines of playing to managers’ strengths and to ask what would be the best conditions to enable them to perform better. Some can work on this basis and others find they cannot. We are getting a group of managers together whom we understand. But some organisations are good in Europe, but poor on the West Coast, so we are working to see how best to ensure consistent standards across the globe.”
Referring to custodians, he says the aim is to have standard reporting and attribution analysis. “We are working towards dealing with fewer service providers here.”
The objective of his team is clear to deliver pension funds investment management support and advisory services across the group, in order to enhance each fund’s performance and benefiting from the scale and expertise within the Shell group.
Based on a recent talk to the European Pensions & Investment Summit in Scotland