The coverage ratio at SSPF, the €25bn Dutch pension fund of energy giant Shell, has dropped from 131% to 124% due to increasing liabilities last year. 

According to the scheme’s annual report for 2014, it temporarily scaled back its interest hedge to zero over the third quarter of last year, when interest rates were falling. 

Because rates continued to fall, the move came at the expense of the scheme’s funding level.

However, the pension fund’s ‘policy’ coverage ratio – the new criterion for indexation and rights cuts – improved to 126% over the first quarter of 2015, the scheme said.

SSPF posted an overall annual return of 13.4% in 2014, with its liability hedge providing 2.7 percentage points of performance. 

The equity portfolio generated 12%, with US, Pacific and emerging market holdings helping the portfolio to outperform its benchmark by 0.8%, while fixed income holdings returned 8.5%, underperforming their benchmark by 0.2 percentage points.

Private equity, despite producing a 22.1% return, fell 7.7 percentage points short of its benchmark.

The scheme attributed the underperformance to the “vintage year effect”, when funds and volumes of the actual portfolio fail to match the operational benchmark.

Hedge funds, real estate and other alternatives produced returns of 3.9%, 9.8% and 19.8%, respectively.

SSPF changed its final salary scheme to average-salary arrangements with unconditional indexation as of 1 January 2015.

The pension fund used the savings resulting from this change, as well as the increase of the official retirement age from 65 to 67, to reduce the employer’s contribution from 41.6% to 38% of the pensionable salary.

It kept the workers’ premium at 2%.

Last year, SSPF granted its participants a regular inflation compensation of 0.4%, as well as a 50% allowance for the 2.2% indexation in arrears over 2012.

Referring to new regulations and the reduction of tax-facilitated pensions accrual, SSPF chairman Garmt Louw said its board was worried that politicians were “hollowing out pensions as a labour condition”.

He noted that the fiscal rules for pension plans were now dictated chiefly by the government, rather than companies and their employees.

Louw also cited “the challenge of dealing effectively with the uncertainties posed by the financial markets, historically low interest rates and unique support measures of the European Central Bank”.