Shell fund assets take centre stage
Like one of its fleet of oil tankers, Royal Dutch Shell has steered a straight course in the management of its pension fund assets. Last year it announced that it planned to centralise the in-house management of its worldwide pension fund assets, totalling some €50bn, mostly from the Netherlands, the UK and the US. To this end, it has created a new asset management company, the Shell Asset Management Company (SAMco), which operates out of Rijswijk near the Hague.
The announcement came, coincidentally, in the wake of the decision by the Dutch electronics giant Philips to alter course dramatically and outsource the management of its entire pension fund assets to the US-based Merrill Lynch Asset Management.
Shell’s move is a vote of confidence for in-house asset management skills, says Peter Bronkhorst, the former head of Shell Pensioenfonds Beheer (SPB), the management company that administered and managed the assets of Shell’s pension funds in the Netherlands, and now the chief executive of SAMco.
“Shell has a long experience in managing pension fund assets in-house, both in the UK and the Netherlands, for some considerable time, and in general that has been a very positive experience. So when we looked at the options, continuing the in-house management came out top.”
The primary motive for consolidating the management of Shell’s pension fund assets was to increase the robustness and sustainability of the in-house management, thereby ensuring that Shell retained its position as an attractive place for people to work, Bronkhorst says
“Our aim is to make sure that, going forward, we remain an attractive employer. Pensions asset management is essentially a people business and if it has sufficient size, it is perceived as an even more attractive place to work.”
Shell’s move also echoes, to some extent, the decision of some of the Netherlands’ largest corporate pensions schemes to create pensions competence centres as repositories of pensions expertise.
“The secondary purpose of the exercise was to leverage the best practice which exists within Shell,” Bronkhorst says. “The idea is that SAMco will be Shell’s centre of expertise for pensions fund investment management.”
By the end of last year, SAMco had added €20bn of European pension fund assets, including €15bn from the UK, to a similar amount already managed by SPB. A further €2.5bn from smaller schemes is expected to be added in due course.
“The advantage of this operation was that we could make a step change in assets to a substantial size quite quickly, ” says Bronkhorst. “It was important that it could be done rather fast because, because when you change things in asset management, people get nervous and your risks increase.”
Yet SAMco is not merely an enlargement of SPB. Unlike SPB, SAMco will not handle the administration of Shell’s pensions funds. Its sole job will be to manage their assets, says Bronkhorst.
“The asset management is being centralised, not the pension funds. Centralising the pension administration of Shell’s pension schemes would have been impractical because they are driven by local regulations and their administrations are different,” he says.
In the new arrangement, eventually each of the 200 local pension schemes is expected to outsource the management of its assets to SAMco. The assets themselves will remain the legal property of the local pension schemes.
Local pension schemes will decide the strategic allocation of assets, says Bronkhorst. “The pension fund decides the strategy and SAMco advises and executes. Obviously we will offer ideas and advice to the trustees and give them the benefit of our experience, both in the Netherlands and the UK.
“The beauty of the model is if you are in dialogue with one set of trustees and you have some ideas and they are accepted, you can put them into practice. Then you can demonstrate to other trustees that this is not just theory but it has actually been done. In that sense we can act as an accelerator for ideas. But the final
decision will remain with the trustees.
Shell wants to build on its existing strengths, says Bronkhorst, and Rijswijk was chosen as SAMco’s headquarters because of concentration of skills and the strong team concept that existed in SPB.
“The team concept is something that we have developed at Rijswijk over the years. It is not unique but it is fit for our purpose and serves us very well. It is also very resilient because it means we are not dependent on a few stars. In that sense it helps us build the robustness and sustainability we are looking for.
“I’m a firm believer that if you get the working environment right and enough skills and dedication then you get an organisation in which people’s creativity is at a maximum and where they will produce the best results.”
Currently some 30% of Shell's pension assets are managed externally. SAMco is unlikely to change this allocation significantly, says Bronkhorst. “Our goal is to add as much value as we can to the funds and we take a rather pragmatic approach to achieve that. We ask ourselves whether this is something that we could or should do ourselves, and whether we can do it in a sustainable way, or whether there are there others who could do it better or more sustainably. Then, on a case-by-case basis, we decide whether or do it ourselves or to outsource it.”
Centralising asset management activities will produce a critical mass which will enable SAMco, in time, to expand its in-house expertise. “It will be possible, perhaps, because of our large size, to take on the management of new products ourselves, which we could not have done before.
“It will also become a more global operation than it was before. That, again, is attractive for people working there, because there is more scope for growth for them. All things being equal there will be more opportunities than there were before.”
A possible next step will be pooling pension fund assets in a tax transparent vehicle, SAMco is currently considering establishing an FGR, the Dutch equivalent of Luxembourg’s FCP and Dublin’s CCF, Bronkhorst says. “We are certainly looking at that. The advantages are that its gives you better options for diversification, especially for the smaller funds. For the big funds it’s not a problem, but there are many smaller funds that would benefit from a more diversified portfolio. Pooling would help by enabling us to provide them with superior products at lower costs.”
SAMco‘s workforce currently totals around 70 people, fewer than the aggregate of the Netherlands and UK operations. Only three people from the 40 in the UK operation have transferred to SAMco. Bronkhorst says the main reason was family ties and a reluctance to relocate in another country.
He expects the numbers to rise during the year. “We are growing, and we are not there yet. We have been recruiting successfully and we are still recruiting.”
The challenge will be to motivate and reward people sufficiently in the face of stiff competition for personnel from the asset management arms of the international investment banks, he says.
“We have quite some experience with that. It’s not only about money; it’s about the atmosphere you create. We can carry out what you might call controlled experiments. People have room to develop ideas and test them out on a small scale. That gives them a lot of satisfaction. Also working for Shell is something to be proud off. SAMco is an interesting place to work, and Shell is seen as an attractive employer.”
In the end, SAMco will have to prove to the Shell pension funds and to the parent company that it can do the job batter than anyone else. “There’s a world outside there of asset managers, so if people become unhappy with Samco
and Samco is not able to remedy that then there are plenty of alternatives.”
Bronkhorst understandably feels this is an unlikely scenario. “The decision has been taken to centralise the asset management and I am very confident it will be a success.”