AUSTRIA - Austrian companies’ defined benefit pension obligations may need to be increased by as much as 30% due to the impact of falling bond yields on liabilities.
Mercer Austria pointed out that, under the international IAS19 accounting standard, companies must use ‘high-quality’ corporate bond yields to determine their discount rate, or Rechnungszins. Experts have agreed that bonds rated as lowly as AA meet this criterion.
But the consultancy noted that the euro-zone’s AA bond market had shrunk by half since 2010 due to a number of major downgrades.
According to IAS19, pension funds in markets that lack sufficiently deep high-quality bond markets should instead use government bond yields.
In a research paper, Mercer Austria warned that investors “might soon have to deal with the question of whether the AA bond market in the euro-zone is actually still deep enough”.
The consultancy added that, if companies listed on Austria’s ATX stock exchange were compelled to use local government bond yields - currently well below those of AA bonds - to calculate their discount rates, it would increase liabilities by as much as 30%.
Currently, the combined defined benefit obligations of all companies in the ATX stand at €4.1bn.
Mercer Austria recommended stabilising pension schemes’ liabilities by including A-rated bonds in the IAS19’s ‘high-quality’ definition.
However, the consultancy also pointed out that liabilities would be increasing for pension funds across the country, even those not using government bonds to calculate their discount rates.
Since the beginning of the year, yields in the euro-zone have fallen by around 100 basis points, which translates into a 15% hike in liabilities, or an additional €600m needed in the pension coffers of ATX companies.