NETHERLANDS - The €18.2bn Dutch pension fund of energy giant Shell returned 6.5% over 2011 due mainly to a 24% interest hedge of liabilities.

Without this cover, according to its annual report, it would have made a loss on investments of 0.8%.

A large part of the negative return was due to the 40% equity allocation, which lost 10.5%.

The scheme attributed this loss in part to its relatively large allocation to emerging markets and small caps, which had "suffered from de-risking by investors" over the last six months of 2011.

In contrast, its 40% fixed income holdings outperformed its benchmark by 1.4% and returned 3.6%, due mainly to falling interest rates, the Stichting Shell Pensioenfonds said.

Private equity returned 3.6%, underperforming by 2.5%, whereas the scheme's hedge fund portfolio generated a loss of 0.5%.

With a profit of 14.3%, the 4% property holding fell 6.3% short of its benchmark, which the scheme attributed to its portfolio of non-listed real estate under construction and the lack of a representative and reliable benchmark.

The scheme's board said it would gradually reduce its securities allocation from 60% to 52.5%, as well as introduce a dynamic nominal interest hedge of 20-70% to reduce risk.

In addition, it will further diversify through investments in low-volatility equity, infrastructure and commodities.

The pension fund said it had fully hedged its currency risks on fixed income and property investments in developed countries, and that it had also fully covered its currency risks on equity and hedge funds in US dollars and Japanese yen.

Last year, the Shell scheme saw its coverage ratio drop from 123% to 111% due to decreasing long-term interest rates, the criterion for accounting liabilities.

Nevertheless, it granted its participants a 1.9% conditional indexation as of 1 July and paid an additional 1.5% to its deferred participants and pensioners, who had missed out on inflation compensation in 2009.

Last February, the scheme announced a contribution increase from 35.5% to 45% of the pensionable salary, of which 41.6% is to be paid by the employer.

It also raised the minimum coverage ratio for conditional indexation to 115% and set the minimum funding level for indexation repairs at 125%.

The scheme reported total costs of €40m, of which it attributed €29m to asset management, €4m to custody services and €7m to pension management and administration.

The Shell Pensioenfonds has 10,880 active participants, 19,520 pensioners and 7,715 deferred members.