Shell warns of need to plug €6.3bn deficit

GLOBAL - Royal Dutch Shell plc, the parent sponsor of several European funded and unfunded pension schemes, today warned shareholders it may have to contribute a further $5-6bn (€3.8bn-€4.56bn) to its pension funds over the coming years to fill a deficit of $8.3bn.

Details of the energy giant's 2008 annual report revealed the company has moved from having a $13.67bn surplus on its liabilities in 2007 to a $8.33bn deficit by 31 December 2008.

Similarly, Shell said the plan assets - covering several pension schemes across the globe - held in trust and priced at fair value to December 31 were worth approximately $44.3bn in 2008 compared with $76.2bn in 2007, as the plans had moved from an actuarial gain of $1.26bn in 2007 to an actuarial loss of $27bn last year.

The firm recognized it had pre-paid pension costs of $6.2bn in 2008 compared with $5.6bn in 2007, and had contributed $1.6bn last year against $1.2bn in 2007.

That said, officials warned in the report today that it could be required to contribute even higher sums over the coming years should volatility and turbulence in the markets continue to lower investment returns and the value of existing assets.

"Volatility in capital markets, such as occurred in 2008, and the resulting consequences for investment performance and interest rates, may result in significant changes to the funding level of future liabilities.

"As the crisis spread throughout the financial markets, however, sharply lower government bond yields and equity values, coupled with continuing tight liquidity and the global economic slowdown, have adversely impacted pension asset values. As a consequence in 2008, the value of the assets in our pension plans decreased and at year-end the present value of pension obligations exceeded plan assets by $8.3bn.

"Shell is expecting to make significant cash contributions to the pension plans, in addition to the regular contributions of $1-2bn per annum in recent years. The additional amounts, currently estimated to be in the range $5-6bn, will depend on agreements to be made with local regulators and/or trustees as well as future market and exchange rate developments," said the report.

The company declared in December 2008 its investment operation, Shell Asset Management Co (Samco), estimated it had lost $45m (€32.2m) through investments with Bernie Madoff, recently found to have defrauded billions of dollars through a 'Pnzi' scheme. (See earlier IPE story: Madoff fraud costs pension funds €44m so far)

Its global asset allocation was broken down by the end of 2008 as 49% equities, compared with a target allocation of 56%, along with 48% debt securities against a 39% target, while 2% was held in real estate and 1% was in other assets.

The value of its defined benefit pension plan liabilities were made using a 6% discount rate at 31 December along with a 4.4% expected rate of increase in pensionable salaries, while benefits were calculated using a 5.7% discount rate, as well as a 6.9% expected rate of return on assets and a 4% expected rate of increase in pensionable salaries.

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