NETHERLANDS - The €17.5bn Dutch pension fund of energy giant Shell has decided to introduce a new strategic asset allocation of 65% securities and 35% fixed income, following an asset-liability management (ALM) study as part of its recovery plan.

Long-term government bonds will serve as the basis for its fixed income allocation, according to the fund's annual report for 2010.

Officials said the expected risk premium for long-term returns on developed market equities, emerging market equities and private equity was 3%, 3.5% and 4.5%, respectively, with an estimated long-term profit on its strategic investment mix of 6.6%, including a diversification effect of 0.7 percentage points.

The Stichting Shell Pensioenfonds reported an overall return of 14.8% for 2010, with all asset classes contributing to an outperformance of 1.4% relative to its benchmark.

The scheme attributed the result mainly to its strategic overweight position in emerging markets through active strategies in its equity and fixed income portfolio, as well as its overweight in small caps.

Its equity portfolio - 40% of the overall fund at year-end - returned 18.6%, while its fixed income holdings of 38% generated 11.7%. Alternatives and hedge funds yielded 15% and 7.5%, respectively.

The Shell pension fund saw its coverage ratio rise to 123% at year-end, up from a low of 107% in August, following a steep drop of long-term interest rates - the criterion for discounting liabilities - to 2.52%.

To increase its grip on contracted-out processes, the board said it had extended its governance bureau's responsibilities to include support on asset and risk management, and managing all contracts.

The scheme's asset manager, SAMCo, has been issued with detailed guidelines for the various investment portfolios and extended reporting, according to the board, which has also introduced an investment committee for advice.

The board added that, as part of a current ALM study for its policy for 2012-14, it would look into the de-risking options during a rising funding ratio.

It will also develop a crisis plan to deal with developments on financial markets, mapping out emergency measures and covering communication to its 37,000 participants.

Last year, the Shell Pensioenfonds granted a 0.8% indexation based on the consumer index, but decided against compensating for the 1.5% indexation it waived in 2009.