GERMANY - Changes to the German accounting standards HGB will increase pension obligations significantly, according to Raimund Rhiel, chief executive at Mercer Germany.

Under the accounts modernisation law, known as BilMog, the German government is aiming to bring the national standards used by most small and medium enterprises up to the level of the international IFRS standards.

One of the things that will change from next year, if the bill passes parliament after the summer break as scheduled, is the way in which pension liabilities will be calculated.

At present, companies using HGB do not need to include longevity assumptions or outlooks on wage development in their calculations and they use a standard 6% interest rate.

But the new regulations will mean more actuarial assumptions have to be taken into account and the interest rate used for calculations will be adjusted to market developments.

Mercer estimates the interest rate will drop to 4.5% or 4.6% under the new calculations and together with new actuarial assumptions this will make pension obligations on company's books much more expensive.

"Once the pension obligations increase by 40-50%, companies will consider either closing their pension plans, worsen pay-out conditions or get some other form of funding such as trust agreements, insurance-based schemes or pension funds," Rhiel told IPE.

Even companies who already have a funded pension plan, such as an Unterstützungskasse, could opt for a second vehicle like a contractual trust arrangement (CTA) to fully fund their pension obligations, he continued, as there might be no tax advantage to put more than a certain amount into one vehicle.

The revised accounting standards will also allow SMEs to create plan assets by outsourcing their pension reserves to vehicles like CTAs or Pensionsfonds and thereby taking these liabilities out of their accounts. (See earlier IPE article: Taking the CTA to the Mittelstand)

Other than under IFRS, companies using HGB will not require the inclusion of deficits or surpluses of funded pension plans in their accounts, as only unfunded pension reserves have to be included.

Funded pension plans and their financial situation only have to be mentioned as an appendix to the accounts.

Plans to change this were defeated by multi-employer pension providers which argued it was too difficult to calculate the funding level for each individual company covered by a joint scheme.

However, companies can opt to include the surpluse or deficit of their pension funds in the balance sheet.

Rhiel said this might be an option for public companies which want to prove the need for more subsidies.

If you have any comments you would like to add to this or any other story, contact Julie Henderson on + 44 (0)20 7261 4602 or email