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Decision Based Performance Measurement at SHELL Pension Fund
In 1993, the management company of the Shell Pension Fund in the Netherlands evaluated different options for a performance measurement system. However, given the firm’s profound internal investment and performance measurement knowledge and consequent information needs, none of the available products met its requirements. Therefore, Shell turned to ORTEC, a leading provider of optimization and decision support solutions and services, to match Shell’s visionary views on performance evaluation with ORTEC’s unique modeling expertise. As Shell’s Finance Manager, Paul Gerla stated: ‘In ORTEC we found the partner to really put our concepts of decision based performance evaluation to work’. In turn, the firms worked closely together for years to develop a model that would exactly track Shell’s investment process. The result is the revolutionary PEARL solution.
Traditionally, measuring performance had been about portfolios or composites and attributing performance to arguable market factors. From this time on, the challenge was increased to comprehensively decompose excess returns into sources that really mattered for Shell.
As with every investment decision process that is more complex than just security selection, Shell’s decisions were interrelated in a hierarchical manner. Furthermore, all decisions were expected to adhere to certain guidelines and should be measured against global risk and performance benchmarks provided by the plan sponsor. The (long-term) liabilities formed the ultimate benchmark and had to be outperformed by the aggregated returns of all isolated investment decisions, while also maintaining control of the individual and overall risk; daily challenges for every asset manager.
Decision Based Performance Evaluation
Based on the concepts that were researched in the 80’s and 90’s by experts including Brinson & al. and Karnosky & Singer, PEARL took performance measurement to the next level with the unprecedented Investment Decision Process Model (IDP). This model transferred arbitrary measurement factors into decision-based performance evaluation by stacking strategic, tactical and operational decisions according to Shell’s true investment process. With the IDP, ORTEC was in a position to mimic Shell’s daily operations, thereby enabling Shell to really evaluate its entire organization and at the same time measure the added value of every decision taken.
Prior to PEARL, linking performance attribution up to an entire investment process was unheard of, measuring the value added of each and every decision, and relating it to exposures and risks. A unique system was born, but the market did not yet fully understand the new concepts. New ideas about increased flexibility and faster implementation of other investment processes for helping this education process, led to a complete revision of the system. The new PEARL system was recently completed for Shell, with perfect timing for current market needs. Equipped with the newest version of the IDP model, PEARL is now optimally prepared to make the difference in a new era of performance measurement.