Shell makes big move toward centralization

RIJSWIJK, The Netherlands — Royal Dutch/Shell Group of Cos. took a giant step toward centralizing its internal money management operations this month when assets totaling $17.1 billion were transferred from its U.K. pension plan to the newly formed Shell Asset Management Co.

The fledgling Rijswijk-based in-house money manager also runs the $18.7 billion Shell Pensioenfonds Nederland. Assets transferred from other of the Anglo-Dutch oil company's pension plans throughout various countries should bring assets under management to about $40 billion by the end of the year. Overall, about 200 Shell pension plans in 65 countries have about $58 billion in assets. The $7 billion U.S. defined benefit plan and $8 billion U.S. defined contribution assets will not be transferred to SAMCO.

The company decided earlier this year that it would overhaul "a really fragmented setup," said Peter Bronkhorst, SAMCO's managing director, who led the 2004 review that culminated in the creation of the asset management unit.

Shell is consolidating its assets in part to gain more clout in different investment strategies. But for other multinationals, the quest for more efficient ways to manage cross-border pension assets is also being driven by the move toward mark-to-market accounting standards, the drop in equity returns and regulatory changes.

"We were doing OK, but looking down the road, it's not robust enough for the future," Mr. Bronkhorst said. "By pulling (the assets) together, it will be ... more sustainable."

SAMCO's chief investment officer is Sijb Bartlema, who formerly headed investments for Shell Pensioenfonds Beheer BV, which managed the Dutch pension fund.

About 70% of the portfolio will be managed internally, which is consistent with the way Shell's Dutch pension plan was structured previously. The U.K. pension plan also was almost entirely managed in-house. The externally managed assets will include microcap stocks, emerging market equities and debt, and currency overlays.

The individual pension plans will retain their own boards of trustees and decide for themselves whether to hire SAMCO, Mr. Bronkhorst said. They also will continue to set their own asset allocations. The consolidation is "more opportunity driven than cost driven," and the amount of money saved is negligible. The advantages gained involve being able to implement specific strategies and measuring performance more uniformly.

SAMCO will also be able to manage more assets with fewer people; it will have 85 employees, compare d with the 93 that were employed in the separate U.K. and Dutch units. Only three London investment managers agreed to join the 52-member Rijswijk group, and the company is looking to hire others.

SAMCO is paying its internal portfolio managers a competitive rate of incentive compensation, but not at the top of the range, Mr. Bronkhorst said. But portfolio managers will have more opportunities to grow in a smaller organization than a large financial institution, he said, adding that he wants "a continuous stream" of new people with new ideas entering the organization.

SAMCO is managing the assets as a centralized money manager handling mostly segregated accounts, although Mr. Bronkhorst said the company is "going to study pooling" for certain strategies and may implement them in the future to give smaller funds more investment options. Other multinational sponsors have taken that step, finding more efficiency in cross-border investment pools.

"It's an attempt to sweat out all the inefficiencies," said Ian Barnes, director of business solutions at Russell Investment Group in London. "In a bear market, corporations all over the world are trying to find better ways to make assets work. In the late '90s, they didn't really care about 30 or 40 basis points. Now that 30 to 40 basis points has become fairly significant."

The Nestle Group offers more than 10 cross-border pooling vehicles, with others in the pipeline. Swiss, U.K., German and other smaller pension plans have invested $4.5 billion into these funds. The group's worldwide pension plans total about 22 billion Swiss francs ($18 billion).

"...It (pooling) creates a much better way of monitoring pension fund exposure. It's more precise and quicker in terms of headquarter reporting. It's also quicker in selecting and terminating managers," said Jean-Pierre Steiner, Nestle's director of corporate pension and risk services in Vevey, Switzerland.

Pan-European pooled vehicles are dominated by Luxembourg's Fonds Commun de Placement and Ireland's Common Contractual Fund because of their tax-transparency elements. However problems with tax harmonization still exist across all 25 EU countries. The European Pensions Directive, which requires EU countries to establish a common framework allowing cross-border development of pension plans, does not address the issue.

"Though new ground has been broken over the past year, the pioneer work is grinding and slow," said Julian J. H. Presber, managing director of State Street Bank SA in Luxembourg.