German companies are likely to see higher pension liabilities under a new methodology for calculating pension reserves, while the change could also affect tax-deductible provisions, according to consultants.
The German Federal Ministry of Finance changed the methodology for valuing pension liabilities through a circular published on 17 September.
Under the new methodology, companies must calculate pension reserves based on the market value of invested securities underlying their pension commitments, rather than only the share of promises guaranteed by contributions already paid.
Manfred Stöckler, senior director, retirement and head of tax and accounting at WTW, said modern direct corporate pension promises are typically security-linked defined contribution (DC) arrangements without guarantees.
“[Therefore] it can be expected that pension provisions for tax purposes on companies’ balance sheets will rise. However, the specific impact depends on the structure of the commitment and the performance of the underlying investments,” he said.
The value of the underlying securities is now factored into the calculation of future pension benefits, whereas previous administrative practice generally allowed only the inclusion of a guaranteed minimum benefit.
In practice, factoring in the value of underlying securities can result in higher pension provisions for tax balance sheet purposes if the underlying securities have appreciated over time, Stöckler explained.
“The impact may be particularly significant for long-standing commitments where substantial value increases have accumulated,” he added.
Thomas Hagemann, chief actuary at Mercer, said the value of underlying investments often exceeds guaranteed minimum benefits, resulting in higher tax-deductible pension provisions for many companies, particularly during periods of strong capital market performance.
However, Hagemann added that the level of pension provisions “tracks capital market trends”, potentially leading to future fluctuations.
“This means that tax-deductible pension provisions may also decrease during periods of poor market performance. The overall impact on an individual company depends on the structure of the workforce, and the specific terms of the pension commitment,” he added.
The new circular, which replaces guidance issued in 2002, follows a ruling by Germany’s Federal Fiscal Court (Bundesfinanzhof) in September 2024.
The court ruled that pension provisions set aside to pay promised benefits depend on the value of a reinsurance life insurance policy invested in fund units.
The finance ministry had challenged the ruling, but the court rejected its arguments, which Mercer’s Hagemann said were “sometimes very far-fetched”.
According to the Institute of Pension Actuaries (IVS), the finance ministry’s new circular is “necessary, sensible, and logical”, deputy chair Friedemann Lucius said.
Lucius also noted that the inclusion of “the fair value of the underlying securities” generally leads to a “significant increase in the pension provision” built to meet liabilities.
“It is crucial that the principles established in the ruling apply to all pending cases, not just on the specific case,” he added.
