HAMBURG, Germany -- Deutsche Shell AG is creating a 2 billion deutsche mark pension fund ($1.16 billion) in a move to generate higher returns from its assets.
All of the assets will be outsourced. Four managers plus a global custodian are expected to be picked this week. In an added twist, Shell's Dutch pension fund is one of the bidders on a European mandate, in its first effort to manage assets for a sister company.
The wholly owned German subsidiary of the Royal Dutch/Shell Group expects to earn 7% average annual return from its pension fund investments, substantially greater than the 3% it now earns by investing the 2 billion marks in cash.
On average, the move should generate income of about 45 million marks a year on an after-tax basis, said Treasurer Jens-Peter Stoehr, who hopes other German companies will follow the petroleum giant's example.
A secondary consideration is that establishment of a trust will enable parent Royal Dutch/Shell Group to remove 2 billion marks in assets and liabilities from its balance sheet, under U.S. accounting rules.
In the past, analysts have questioned the size of Shell's cash hoard, which stood at 5.8 billion pounds ($9.4 billion) at Sept. 30. One analyst, who asked not to be named, said removal of the amounts from the balance sheet should help clarify Shell's obligations. Shell officials previously have said parts of the cash pile relate to pensions and other matters, but had not quantified those amounts, the analyst said.
Technically, the pension fund will remain a book-reserve account in the German subsidiary's books, but the company has established a separate trust through which it can invest in stocks and bonds.
Under the book-reserve system, German companies make tax-deductible pension contributions but can invest the assets back into the company, providing a cheap source of corporate financing. Unlike most German companies, however, Deutsche Shell has held cash to back its pension liabilities.
Keeping the assets in book-reserve form is the most tax-efficient way of financing pension debt under German law, Mr. Stoehr said. Otherwise, contributions would not be deductible to the employer and would be taxable to employees as current income.
The legal structure Shell is adopting will allow for creation of a separate trust, called Deutsche Shell Pension Treuhand. Creation of the trust satisfies U.S. generally accepted accounting principles, which require pension assets to be held separately and be protected from corporate creditors.
The trust will take the form of a Spezialfond that is split between European and non-European subparts. (Spezialfonds are tax-favored unitized vehicles usually created for a single institutional investor.)
Investing the assets in stocks and bonds should enable Deutsche Shell to earn greater returns on its assets, said Colin Price, Shell's internal investment consultant based in London.
Retaining the book-reserve account will allow the pension fund to avoid the narrow strictures on equity and foreign investment that apply to other types of German pension funds. For example, foreign investment typically is limited to 20% of total assets.
Deutsche Shell officials have decided to split the 2 billion-mark fund into two major components: 60% in European assets and 40% in non-European assets. Two managers will be selected for each category. Each portfolio will be divided evenly between stocks and bonds.
Mr. Stoehr believes three of the portfolios will be actively managed, but managers had not yet decided whether the passive portfolio would be European or non-European assets.
Benchmarks had not been made final, but equities were expected to be measured against units of the Morgan Stanley Capital International World Index, and bonds against the Salomon Brothers World Bond Index.
Officials are looking at five managers, reduced from an initial list of eight. Mr. Stoehr declined to name the managers, but they include Deutsche Bank's money management arm; State Street Global Advisors; and Shell Pensioenfonds Beheer B.V., the Rijswijk, Netherlands-based Shell pension fund.
A spokesman for Shell in Holland said the Dutch fund had "no intention" of providing external money management for other pension funds, unlike other funds that have offered money management, such as Philips Pensioenfonds or AMR Corp.