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Note 18 - Retirement benefits

Retirement benefits are provided in most of the countries where Shell has operational activities. Shell offers these benefits through funded and unfunded defined benefit plans and defined contribution plans. The most significant pensions plans are in the Netherlands, UK and USA.

Other post-employment benefits (OPEB) comprised of retirement health care and life insurance are also provided in certain countries. The most significant OPEB plan is in the USA.

Financial position

 

 

$ million

 

Dec 31, 2021

Dec 31, 2020

Obligations

(107,336)

(115,792)

Plan assets

104,495

102,678

Asset ceilings

(13)

(17)

Deficit

(2,854)

(13,131)

Retirement benefits in the Consolidated Balance Sheet:

 

 

Non-current assets

8,471

2,474

Non-current liabilities:

(11,325)

(15,605)

Non-current liabilities – Pensions

(6,458)

(10,237)

Non-current liabilities – OPEB

(4,867)

(5,368)

Total

(2,854)

(13,131)

Retirement benefit expense

 

 

 

$ million

 

2021

2020

2019

Defined benefit plans:

 

 

 

Current service cost, net of plan participants’ contributions

1,385

1,359

1,127

Interest expense on defined pension benefit obligations

1,223

1,683

2,192

Interest income on plan assets

(1,160)

(1,657)

(2,253)

Interest expense on OPEB obligations

128

145

172

Current OPEB service cost

60

72

61

Other [A]

(343)

(174)

26

Total

1,293

1,428

1,325

Defined contribution plans

403

423

428

Total retirement benefit expense

1,696

1,851

1,753

[A]

Mainly related to plan amendments and curtailments on pensions and OPEB plans.

Retirement benefit expense is presented principally within production and manufacturing expenses and selling, distribution and administrative expenses in the Consolidated Statement of Income. Interest income on plan assets is calculated using the same rate as that applied to the related defined benefit obligations for each plan to determine interest expense.

Remeasurements

 

 

 

$ million

 

2021

2020

2019

Actuarial gains/(losses) on obligations:

 

 

 

Due to changes in financial assumptions on pensions [A]

1,915

(9,500)

(10,913)

Due to changes in financial assumptions on OPEB [A]

59

(650)

(798)

Due to experience adjustments on pensions [B]

136

616

96

Due to experience adjustments on OPEB [B]

322

188

136

Due to changes in demographic assumptions on pensions [C]

(320)

1,310

(4)

Due to changes in demographic assumptions on OPEB [C]

(111)

65

(71)

Total

2,001

(7,971)

(11,554)

Return on plan assets in excess of interest income

8,185

4,509

8,460

Other movements

5

7

(12)

Total remeasurements

10,191

(3,455)

(3,106)

[A]

Mainly relates to changes in the discount rate and inflation assumptions.

[B]

Experience adjustments arise from differences between the actuarial assumptions made in respect of the year and actual outcomes.

[C]

Mainly relates to updates in mortality assumptions.

Defined benefit plan obligations

2021

 

$ million, except where indicated

 

Pension benefits

Other post-employment benefits

 

 

The Netherlands

UK

USA

Rest of the world [A]

OPEB [B]

Total

At January 1

37,268

32,269

20,367

20,520

5,368

115,792

Current service cost

377

323

339

339

60

1,438

Interest expense

155

376

357

335

128

1,351

Actuarial (gains)/losses

1,477

(1,418)

(695)

(1,095)

(270)

(2,001)

Benefit payments

(979)

(1,306)

(1,220)

(870)

(200)

(4,575)

Other movements

(27)

3

(145)

(167)

(187)

(523)

Currency translation differences

(2,931)

(334)

(849)

(32)

(4,146)

At December 31 [C]

35,340

29,913

19,003

18,213

4,867

107,336

Comprising:

 

 

 

 

 

 

Funded pension plans

35,340

29,440

17,874

15,341

 

97,995

Weighted average duration

19 years

19 years

12 years

17 years

 

18 years

Unfunded pension plans

 

473

1,129

2,872

 

4,474

Weighted average duration

 

18 years

9 years

14 years

 

13 years

Unfunded OPEB plans

 

 

 

 

4,867

4,867

Weighted average duration

 

 

 

 

14 years

14 years

[A]

Includes pension plans in Germany ($4,988 million) and Canada ($4,740 million) as the largest pension plans in the rest of the world.

[B]

Mainly related to post-retirement medical benefits in the USA.

[C]

As from 2021, liabilities associated with assets classified as held for sale are presented separately. (See Note 30)

2020

 

$ million, except where indicated

 

Pension benefits

Other post-employment benefits

 

 

The Netherlands

UK

USA

Rest of the world [A]

OPEB [B]

Total

At January 1

32,696

28,397

19,090

18,337

5,025

103,545

Current service cost

352

300

398

313

72

1,435

Interest expense

295

491

489

408

145

1,828

Actuarial losses

1,720

2,897

1,611

1,346

397

7,971

Benefit payments

(925)

(1,119)

(1,024)

(808)

(183)

(4,059)

Other movements

(21)

(162)

(197)

(65)

1

(444)

Currency translation differences

3,151

1,465

989

(89)

5,516

At December 31

37,268

32,269

20,367

20,520

5,368

115,792

Comprising:

 

 

 

 

 

 

Funded pension plans

37,268

31,839

18,892

17,339

 

105,338

Weighted average duration

19 years

19 years

13 years

18 years

 

18 years

Unfunded pension plans

 

430

1,475

3,181

 

5,086

Weighted average duration

 

19 years

8 years

15 years

 

13 years

Unfunded OPEB plans

 

 

 

 

5,368

5,368

Weighted average duration

 

 

 

 

15 years

15 years

[A]

Includes pension plans in Germany ($5,432 million) and Canada ($5,066 million) as the largest pension plans in rest of the world.

[B]

Mainly related to post-retirement medical benefits in the USA.

Defined benefit plan assets

2021

 

$ million, except where indicated

 

Pension benefits

 

 

The Netherlands

UK

USA

Rest of the world [A]

Total

At January 1

37,673

32,193

17,046

15,766

102,678

Return on plan assets in excess of interest income

3,199

2,575

1,377

1,034

8,185

Interest income

158

376

308

318

1,160

Employer contributions

170

266

559

(58) [B]

937

Plan participants’ contributions

13

19

7

39

Benefit payments

(979)

(1,306)

(1,220)

(821)

(4,326)

Other movements

(6)

(13)

(15)

(13)

(47)

Currency translation differences

(3,132)

(390)

(609)

(4,131)

At December 31

37,096

33,720

18,055

15,624

104,495

[A]

Includes pension plans in Germany ($3,282 million) and Canada ($4,325 million) as the largest pension plans in the rest of the world.

[B]

Includes the netted amount of $294 million received from the captive structure in relation to the pension plans reinsured in the rest of the world.

2020

 

$ million, except where indicated

 

Pension benefits

 

 

The Netherlands

UK

USA

Rest of the world [A]

Total

At January 1

33,863

30,260

16,042

14,661

94,826

Return on plan assets in excess of interest income

1,001

1,302

1,545

661

4,509

Interest income

307

523

404

423

1,657

Employer contributions

218

73

129

194 [B]

614

Plan participants’ contributions

15

21

6

42

Benefit payments

(925)

(1,119)

(1,024)

(775)

(3,843)

Other movements

(5)

(173)

(50)

(53)

(281)

Currency translation differences

3,199

1,306

649

5,154

At December 31

37,673

32,193

17,046

15,766

102,678

[A]

Includes pension plans in Germany ($3,346 million) and Canada ($4,025 million) as the largest pension plans in the rest of world.

[B]

Includes the netted amount of $41 million received from the captive structure in relation to the pension plans reinsured in rest of the world.

Type of pension assets

 

2021

2020

Quoted in active markets:

 

 

Equities

22%

25%

Debt securities

53%

52%

Real estate

1%

0%

Other:

 

 

Equities

10%

8%

Debt securities

4%

5%

Real estate

6%

6%

Investment funds

3%

3%

Cash

1%

1%

Employer contributions to defined benefit pension plans are based on actuarial valuations in accordance with local regulations and are estimated to be $900 million in 2022.

Characteristics of significant defined benefit and defined contribution plans and regulatory framework

The Netherlands

The principal defined benefit pension plan in the Netherlands is a funded career-averaged pension arrangement with retired employees drawing benefits as an annuity, with a surplus of $1,756 million reported as at December 31, 2021, (2020: $405 million surplus). Whilst the plan was closed to employees hired or rehired after July 1, 2013, it currently remains open for ongoing accrual for existing active members. 26% (2020: 31%) of the overall defined benefit liability in the Netherlands relates to active members. From July 1, 2013, onwards new employees in the Netherlands are entitled to membership of a defined contribution pension plan.

In line with Dutch regulations, the defined benefit pension plan has a joint Trustee Board with trustee representatives nominated by the company, the Central Staff Council and retired members. The defined benefit pension plan also has an Accountability Council comprised of members nominated by the company, the Central Staff Council and retired members. Furthermore, there is a Supervisory Committee which includes external experts from the pension industry to oversee management, compliance and operations of the fund. The defined contribution pension plan has a one-tier Trustee Board with an independent chairperson, and trustee representatives nominated by the company and the Central Staff Council (currently no retired members in the fund to act as trustee) as well as two executive board members. The defined contribution fund also has an Accountability Council comprised of members nominated by the company and the Central Staff Council.

The Dutch government is currently drafting a new regulatory framework for pensions in the Netherlands. The development of new regulations by the government was postponed in 2021 to January 2023 with subsequent implementation by January 2027. It is expected that these regulatory changes will have an impact on both the defined benefit pension plan and the defined contribution pension plan. The proposed changes will have to be submitted for consent with the Central Staff Council.

UK

The three largest defined benefit pension plans for employees in the UK are funded final salary pension arrangements with retired employees mainly drawing benefits as an annuity with the option to take a portion as a lump sum. The three plans are separate and independent plans and cannot be netted against each other. In total, the plans reported a surplus of $3,807 million as at December 31, 2021 (2020: deficit of $76 million), which is after netting of unfunded plans of $473 million which are reported as non-current liabilities on the balance sheet. All three plans were closed to new employees hired or rehired, however, two plans currently remain open for ongoing accrual for existing active members. 20% (2020: 23%) of the overall defined liability in the UK relates to active members. From March 1, 2013 onwards new employees in the UK are entitled to membership of a defined contribution pension plan.

In line with UK regulations, the principal defined benefit pension plan is governed by a corporate trustee whose board is comprised of four trustee directors nominated by the company including the chair and four member-nominated trustee directors. The defined contribution pension plan is governed by a corporate trustee whose board is comprised of three company-nominated directors including the chair and two member-nominated trustee directors. The trustees are responsible for administering the plans in line with the Trust Deed and Regulations, including setting the investment strategy for the pension plans’ assets and paying member benefits, and are required to act in the best interests of the members of the pension plans.

USA

The principal defined benefit pension plan in the USA is a funded final average pay pension plan with a surplus of $182 million reported as at December 31, 2021 (2020: $1,846 million deficit). After retirement, all retirees can choose to draw their benefits as an annuity, whereas others also have the choice to take their benefit in a lump sum. There is also an unfunded defined benefit pension plan with a deficit of $1,129 million (2020: $1,475 million deficit). The benefits under this plan are taken primarily in a lump sum. In addition, the company provides a defined contribution benefit plan. The funded defined benefit, unfunded defined benefit and defined contribution pension plans are subject to the provisions of the Employee Retirement Income Security Act (ERISA). 24% (2020: 25%) of the overall defined liability of the funded defined benefit plan in the USA relates to active members.

Both the funded defined benefit pension plan and the defined contribution pension plan are governed by trustees who are appointed by the Plan Sponsor and are named fiduciaries with respect to the plans. The trustees are generally responsible for investment-related matters, appointing the Plan Administrator, maintaining general oversight and deciding appeals of participants.

USA OPEB

The company also sponsors “other post-retirement employee benefits” (OPEB) mainly in the USA. The OPEB plans in the USA provide medical, dental, and vision benefits as well as life insurance benefits to eligible retired employees. The plans are unfunded, and the company and retirees share the costs with a deficit of $4,067 million reported as at December 31, 2021 (2020: $4,497 million deficit). The plan that provides post-retirement medical benefits in the USA is closed to employees hired or rehired on or after January 1, 2017. Certain life insurance benefits are paid by the company.

Significant funding requirements:

  • Additional contributions to the Dutch defined benefit pension plan would be required if the 12-month rolling average local funding percentage falls below 105% for six months or more. At the most recent (2021) funding valuation the local funding percentage was above this level;
  • There are no set minimum statutory funding requirements for the UK plans. A professional qualified independent actuary, appointed by the trustee board, undertakes a local funding valuation typically every three years. The most recent completed funding valuation for the principal defined benefit plan was undertaken as at December 31, 2020 and revealed a funding ratio of 103% and therefore no sponsor contributions (except for salary sacrifice contributions) were payable under the schedule of contributions.
  • Under the Pension Protection Act, US pension plans are subject to minimum required contribution levels based on the funding position. No contributions are required based on the most recent funding valuation.

Associated risks to which retirement benefits are exposed

There are inherent risks associated with defined benefit pension and OPEB plans. These risks are related to various assumptions made on valuation of the liabilities and the cash funding requirement of the underlying plans. Volatility in capital markets or government policies, and the resulting consequences for investment performance, interest and inflation rates, as well as changes in assumptions for mortality, retirement age or pensionable remuneration at retirement, could result in significant changes to the funding level of future liabilities, and in case of a shortfall, there could be a requirement to make substantial cash contributions (depending on the applicable local regulations).

These inherent risks are managed by a pension forum, chaired by the Chief Financial Officer, which oversees Shell’s pension strategy, policy and operations. The forum is supported by a risk committee in reviewing the results of the assurance process with respect to the pension risk.

Investment strategies

Long-term investment strategies of plans are generally determined by the relevant pension plan trustees using a structured asset/liability modelling approach to define the asset mix that best meets the objectives of optimising returns within agreed risk levels while maintaining adequate funding levels.

Principal and actuarial assumptions

The principal assumptions applied in determining the present value of defined benefit obligations and their bases were as follows:

  • rates of increase in pensionable remuneration, pensions in payment and health-care costs: historical experience and management’s long-term expectation;
  • discount rates: prevailing long-term AA corporate bond yields, chosen to match the currency and duration of the relevant obligation; and
  • mortality rates: published standard mortality tables for the individual countries concerned adjusted for Shell experience where statistically significant.

The weighted averages for those assumptions and related sensitivity information at December 31 are presented below. Sensitivity information indicates by how much the defined benefit obligations would increase or decrease if a given assumption were to increase or decrease with no change in other assumptions. The sensitivity analyses may not be representative of an actual change in the defined benefit obligation as it is unlikely that changes in assumptions would occur in isolation from one another. The weighted averages are at nominal terms and based on market expectations at December 31, 2021.

 

 

 

 

$ million, except where indicated

 

Assumptions used at nominal rates

Effect of using alternative assumptions

 

Increase/(decrease) in defined benefit obligations

 

Dec 31, 2021

Dec 31, 2020

Range of assumptions

Dec 31, 2021

Dec 31, 2020

Rate of increase in pensionable remuneration [A]

3.4%

3.9%

–1% to +1%

(1,519)

1,672

(1,780)

1,948

of which The Netherlands

2.8%

3.5%

 

 

 

 

 

of which UK

3.6%

3.6%

 

 

 

 

 

of which USA

4.1%

4.9%

 

 

 

 

 

Rate of increase in pensions in payment

2.0%

1.6%

–1% to +1%

(9,908)

12,171

(10,937)

13,523

of which The Netherlands

2.2%

1.5%

 

 

 

 

 

of which UK

3.0%

2.7%

 

 

 

 

 

of which USA

—%

—%

 

 

 

 

 

Discount rate for pension plans

2.0%

1.5%

–1% to +1%

18,954

(14,599)

21,463

(16,382)

of which The Netherlands

1.2%

0.7%

 

 

 

 

 

of which UK

1.9%

1.5%

 

 

 

 

 

of which USA

2.9%

2.6%

 

 

 

 

 

Inflation rate for defined benefit obligation [B]

2.1%

1.7%

–1% to +1%

(10,691)

13,325

(11,514)

14,414

of which The Netherlands

2.2%

1.5%

 

 

 

 

 

of which UK

3.2%

2.8%

 

 

 

 

 

Expected age at death for persons aged 60:

 

 

 

 

 

 

 

Men

87 years

87 years

–1 year to +1 year

(1,946)

1,937

(2,022)

2,112

of which The Netherlands

88 years

88 years

 

 

 

 

 

of which UK

88 years

88 years

 

 

 

 

 

of which USA

85 years

85 years

 

 

 

 

 

Women

89 years

88 years

–1 year to +1 year

(1,863)

1,972

(1,985)

2,070

of which The Netherlands

89 years

89 years

 

 

 

 

 

of which UK

90 years

90 years

 

 

 

 

 

of which USA

86 years

86 years

 

 

 

 

 

Rate of increase in health-care costs [C]

6.2%

6.0%

–1% to +1%

(513)

630

(605)

751

Discount rate for health-care plans [C]

2.9%

2.6%

–1% to +1%

678

(539)

791

(624)

[A]

Based on active members.

[B]

Excluding US funds in the weighted average inflation rate, because of the insignificant impact on the defined benefit obligation.

[C]

Mainly related to post-retirement medical benefits in the USA.