Shell introduces reserve account to prevent contribution volatility

Employers have recently started to look at different approaches to funding schemes to avoid a situation where surplus contributions cannot be clawed back.

The UK subsidiary of oil giant Royal Dutch Shell will continue to make contributions to meet the scheme’s statutory requirements, while payments exceeding the requirements will go into the CRA. Trigger levels have been agreed between Shell and the scheme to determine when transfers are made.

The company and the trustees will review the arrangement every six years. “Periodic assessments will establish whether all or part of the funds held in the CRA need to be paid to the SCPF, or indeed if they can be returned to Shell companies in the UK,” said a Shell spokesperson.

The scheme reached a funding level of 111 per cent at the end of 2013, having been closed to new members from March 1 the same year. It had a deficit of £250m at the end of 2011.

“The Shell Group has carried out analysis which indicates there is a possibility of building a surplus within the SCPF beyond what is anticipated as necessary to meet future pension payments,” the spokesperson said.

The company has previously used contribution holidays to address large surpluses in the scheme, but it has decided against this option in order to minimise volatility in funding.

“The SCPF has had large pension surpluses in the past and in such circumstances the company has taken a contribution holiday,” said Erik Bonino, chair of Shell UK, in a letter to members of the scheme. “Whilst this has been effective in reducing surpluses, this approach has created great volatility in the level of contributions the company has paid.”

The use of contingent assets and alternative funding arrangements are becoming more popular as schemes increase their funding levels and different methods become more established. Last month, Pensions Expert reported on the increasing popularity of reservoir trusts.

“About half our clients have something; [there’s] not just cash going into the scheme,” said Lynda Whitney, partner at consultancy Aon Hewitt. “Parent and group company guarantees are the most common.”

Earlier this year US department store Macy’s skipped a $150m (£89.3m) contribution to its pension fund, prompting speculation of a return to pension holidays as funding levels increase.

However, Whitney said the UK pensions industry was unlikely to accommodate a rise in pension holidays. “The out-and-out contribution holiday, given the role of trustees in the UK, is relatively unlikely,” she said. “The powers of trustee have changed massively since last time.”

The average funding level and the closure of many defined benefit schemes to future accrual was also cited as a reason contribution holidays are unlikely.

“Schemes are on around 85 per cent funded, so it’s a way off,” said Russell Lee, principal in consultancy Mercer’s financial strategy group. “Because a lot of schemes are closed, the only payments going in are to service the deficit.”

Lee said that, besides guarantees, the use of contingent assets was still not common, but that it was something schemes should be considering.

“If you look in the Purple Book the Pensions Regulator says schemes should ask for contingent assets, but it’s very rare,” he said

“If schemes get to a fully funded level and you give them more cash they’ll just use it to derisk. It may not be the most efficient use of cash.”