Shell will pay €500m to €850m to its own defined benefit (DB) pension fund to compensate for the disappearance of the sponsorship guarantee after the transition to the defined contribution (DC) arrangement new system. The Shell fund is planning to convert DB accruals to a flexible DC arrangement by 2027.

In the new DC pension system, so-called sponsor guarantees for pension funds will disappear. This guarantee means that sponsor Shell Netherlands deposits additional capital, should the fund be forced to reduce nominal benefits.

For Voeks, the association of former Shell employees, this was an important reason to speak out against converting accruals to DC earlier and to advocate for current benefits to remain in DB.

Unilever social partners decided last year that the closed Progress DB fund would not convert accruals to DC, precisely because of the sponsorship guarantee. 

Two compensation parts

According to the pension fund’s original transition plan, which was published in spring, the compensation would amount to a maximum of €390m, in the case of a coverage ratio between 125% and 130%. For a coverage ratio between 135% and 140%, it would be €80m, while with a funding ratio above 140% no compensation would be available.

After the association of former Shell employees, Voeks, argued that this was far too little to compensate for the disappearance of the sponsor guarantee, Shell decided to significantly increase the amount of compensation which now consists of two elements.

The first, worth €250m, is that no contribution discount will be granted by the pension fund to employer Shell in 2025 and 2026. This discount applies under the current arrangement if the Stichting Shell Pensioenfonds’ (SSPF’s) policy coverage ratio is higher than its coverage ratio required by regulator DNB (currently 116%).

The fund, which currently has a funding ratio of 136%, granted a full contribution discount to Shell this year.

The second part of the compensation is a one-off payment into the fund at the end of 2026, just before the DC conversion.

The exact size of the payment will depend on the funding ratio three months before the planned DC conversion.

If the funding ratio is higher than 135% at that time, this payment will be €250m (up from €80m), bringing the total compensation to €500m. For a coverage ratio between 130% and 135%, it is €350m and €600m, respectively. At a coverage ratio below 130%, the one-off payment will be €600m, with the total compensation amounting to €850m.

Minimum funding level of 125%

A notable point in the Shell scheme’s transition plan is that the funding ratio at the moment of conversion to DC must be at least 125%, which is much higher than in other transition plans where the minimum threshold is usually between 100% and 110%.

Social partners also explicitly say that the Shell fund “should not have to move to DC at any cost”.

With a coverage ratio of 125% or higher, there is a higher expected pension outcome for all age cohorts in more than two thirds of future macroeconomic scenarios in the new pension system.

This applies to active as well as inactive members and pensioners, according to social partners.

If the funding ratio falls below 125%, the transition is no longer considered “balanced”.

This article was first published on Pensioen Pro, IPE’s Dutch sister publication. It was translated and adapted for IPE by Tjibbe Hoekstra

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