Shell Launches DC-Only UK Pension Option For Future Hires

(January 4, 2012)—United Kingdom oil company Shell is to launch a defined contribution scheme for new hires, fuelling speculation it is to close its defined benefit (DB) scheme—one of the few remaining open schemes in the FTSE 100.

The company is to launch a DC scheme in the first quarter of next year, according to a statement it made on a website dedicated to its pension scheme members. The statement said that the conditions of the two existing defined benefit schemes—for staff based in the UK and UK-salaried staff that are based abroad—would not be affected by the move.

No one at Shell UK was available for comment this morning.

The statement, which was issued in December, said: “The Company announced today that it is proposing to develop a UK defined contribution pension plan for new hires to Shell to reflect market trends in the UK.”

Last July, a study by consultants and actuaries Lane, Clarke and Peacock revealed Shell was one of the few remaining companies to offer a benefit pension scheme to new employees.

The statement continued: “Active members of the Shell Contributory Pension Fund (SCPF) and the Shell Overseas Contributory Pension Fund (SOCPF) will continue to accrue pension benefits within those plans on the same basis as now. The Company has confirmed that its commitment to funding the SCPF and SOCPF remains unchanged. Further details of the proposed pension plan for new hires will be made available as the design is progressed.”

Increased longevity, poor investment returns, and a reluctance to shoulder the risk of holding onto DB pension schemes has meant the number of this type of fund has shrunk over the last decade in the UK.

According to data from the Association of Consulting Actuaries (ACA) published today, nine out of ten private sector defined benefit schemes are now closed to new entrants, and four out of ten are closed to future accrual. Half of these closed in the last year.

Paul Jayson, partner at consultants Barnett Waddingham, said: “If Shell is closing its defined benefit pension scheme to new entrants, it is no surprise.  As the statement on its website says, this reflects ‘market trends’.” 

Jayson said: “The difficulties experienced by sponsors of defined benefit schemes are well recorded and, with the advent of auto-enrolment, more and more employers are taking the opportunity to design good quality defined benefit arrangements to fit in with their overall reward strategy. It is a shame that this is generally at the expense of any defined benefit scheme they might have. 

The announcement by Shell did not specifically say it would close the DB scheme, but said the new DC scheme would be “designed to ensure that the reward package in the UK for new hires remains strongly competitive,” potentially a sign that DB schemes would not be available to new joiners.

Jayson said: “In Shell’s case, if it does close the scheme to new entrants, the decision has come relatively late—many employers are already onto the second phase of containing defined benefit liabilities with the complete cessation of accrual.”

According to the company’s annual report for 2010, across Shell’s schemes around the globe it made $2 billion in contributions in 2010 and was expected to pay in $2.1 billion last year. However, in 2009 it had injected $5.2 billion into its global schemes due to poor investment performance in 2008.

At the end of December 2010, global DB pension obligations for the company on a global scale had reached almost $66 billion. Assets were just over $63 billion.