The €22.5bn pension fund of Shell Netherlands (SSPF) has reduced its risk profile after its funding improved from 119% to 131% last year, on the back of an investment return of 8.1%. 

Over the second half, the scheme cut its equity allocation to 33.5%, while increasing its fixed income allocation by 7.5% to 47.5%, according to its 2013 annual report.

The improved financial position allowed the Shell scheme to grant full indexation of 1.5%.

However, it said it was still unable to grant the indexation target of 2.2% it missed in 2012.

SSPF attributed the strongly improved funding in part to rising long-term interest rates – up from 2.4% to 2.74% – the criterion for discounting liabilities.

However, the rising rates came at the expense of 1.1% of its return, due to the scheme’s 20% hedge of the interest risk on its liabilities.

Rising interest rates also contributed to a 2.1% loss on its fixed income holdings, it said, adding that the negative result had been exacerbated by the depreciation of local currency on emerging market bonds.

SSPF does not hedge this risk due to high costs, as well as the fact returns on government paper in local currency is in part driven by currency effects, it said.

Equities, with a return of 19.6% – an outperformance of 1.8 percentage points – produced the best result, with European small caps performing particularly well.

Private equity returned 9.6% over the period.

SSPF’s hedge fund investments returned 4.7%, falling 2.8 percentage points short of the peer group benchmark.

The scheme attributed the result to its market-neutral strategy – a low correlation with the returns of equities, for example – as well as the negative performance of the funds of funds in its portfolio.

Indirect property returned 13.4%, almost double its benchmark.

The Shell scheme also indicated that it had lowered its fixed income benchmark, including a reduction of its allocation to euro-denominated government bonds.

In addition, it fully divested from financial institutions in the EMU area, citing the nationalisation of banks, such as in Cyprus, which had lead to a debt write-off for senior unsecured creditors.

The SSPF board also said it would allocate assets to finance government-backed export credit, and that it would keep pension contributions at 45% of combined salaries in 2014.

The scheme has 11,325 active participants, 19,645 pensioners and 6,320 deferred members.