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UK - The £10.5bn Shell UK pension fund has completed a strategic review of its investment strategy which is likely to see the fund invest another 5% of its assets in alternatives.

A newsletter sent to members of the UK defined benefit Shell contributory pension fund revealed the strategic asset allocation is being altered over the coming months to reduce strategic holdings in equities and fixed income in favour of alternative investments such as hedge funds.

The pension fund is already invested in private equity and real estate but the intention now is to create another asset class labeled ‘alternatives' - leaving private equity and property as standalone asset classes.

"Following the 2009 review, the Trustee is considering investing a small part (5%) of the fund in alternatives investments," said the Trustee board in its newsletter.

"Well-chosen hedge funds can provide diversification benefits for the fund in volatile markets. The Trustee has agreed changes to the underlying asset in each asset class and to invest a larger proportion of the fixed income in asset that will give some protection from the effects of inflation," authors added.

A breakdown of assets held at 31 December 2008 showed Shell's UK defined benefit scheme now had a strategic asset allocation targeting 40% equities, 40% fixed income, 5% private equity 10% property and 5% alternative investments.

The actual break of assets to the end of 2008 showed the £10.5bn fund was 102% funded - having fallen from 135% funded at the end of 2007 - and was 56% invested in fixed income as a result of recent gains in the bond market, alongside 32% in equities, 7% in private equity and 5% in property.

Shell has in the past sought to maintain high funding levels but was hit hard last year, during the economic crisis, as its asset lost 16.5% in value and left a surplus of £182m against previous years.

That said, Shell does contribute a high sum into its pension fund, as the employer pays 31% of members' pensionable salaries while employees contribute 2% of earnings on salaries of up to £30,000 and 6% per annum thereafter.

The UK pension scheme fared better than its counterparts in other countries in 2008, as Samco, the Shell Asset Management Company, revealed earlier this year that Shell's Dutch scheme had seen its cover ratio drop from 180% in 2007 to 80% in 2008, to hold assets worth €10.6bn. (See earlier IPE story: Shell scheme saw assets dive by 43%)

It all paid a high price through its alternative investments at that time as Samco admitted it had lost $45m through indirect investments with Bernie Madoff and his fraudulent ‘Ponzi' scheme. (See earlier IPE story: Madoff fraud costs pension funds €44m so far)

The UK scheme now has over 29,000 pensioners and dependents, alongside 6,719 employed and 92,50 deferred members.

If you have any comments you would like to add to this or any other story, contact Julie Henderson on + 44 (0)20 7261 4602 or email julie.henderson@ipe.com

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