Shell’s Dutch defined benefit (DB) scheme sold some €700m in private equity investments on the secondary market in April, because the pension scheme’s board considered the allocation to the asset class had grown too large.

At the end of 2021, the €33bn pension fund’s private equity portfolio had grown to €4.1bn after a 42.1% return that year. The fund’s board believed this was too high an allocation and consequently decided to sell a part of the portfolio.

Shell paid a record €249m in performance fees to private equity managers in 2021, a four-fold rise compared with the previous year. Performance fees for (indirect) real estate investments also rocketed, from €3m in 2020 to €22 the year after. Altogether, performance fee payments rose from €96m to €326m. Total asset management costs more than doubled to €435m, or 1.36% of assets under management.

Separately, the Shell pension fund decided to refocus its strategy on preserving the purchasing power of its members for the next 15 years. The move followed an ALM study.

Concretely, the fund will from now on focus on its so-called ‘real funding ratio’ adjusted for inflation expectations, instead of its nominal counterpart. In order to increase inflation protection, the pension fund bought some German inflation-linked government bonds.

“What counts for us is the returns we need to generate in order to generate sufficient cash flows, including the desired inflation compensation,” the fund’s president Martin ten Brink said in the 2021 annual report.

The switch to protecting the real funding ratio has big implications for the fund’s investment policy. If the real funding ratio rises, the scheme will respond by reducing investment in risky assets and investing more in bonds. If it goes down, the fund will react in the opposite way.

Retroactive indexation for Shell workers

Active members of Shell’s DB pension fund will be awarded an additional, partly retroactive 2% indexation for 2022, 2023 and 2024 which will be paid by the firm. While pensioners and inactive members received 5% indexation back in February, the pensions of active members were not indexed because their pension tracks wages that remained flat in 2022 at Shell.

After protests from workers, Shell asked the pension fund to also award 2% indexation to its pension fund’s active members. The pension fund agreed to the request since it does not disadvantage pensioners or inactive members as the €70-80m costs per year are borne by Shell.