Discount rate cuts German corporate pension liabilities in 2017
German corporate pension schemes’ funding improved in 2017 by nearly two percentage points, according to model calculations by Willis Towers Watson.
Schemes of companies listed on Germany’s DAX stock exchange ended 2017 with aggregate funding of 64.9%. At the end of 2016 the schemes were 63% funded.
The average discount rate crept up from 1.8% at the end of 2016 to 1.85% at the end of 2017, which cut total liabilities by €5.3bn to €392.2bn.
Pension assets increased from €250.3bn to €254.4bn during the year.
Overall, the funding position among schemes of mid-cap companies was similar, according to the consultancy.
Thomas Jasper, head of retirement for western Europe at Willis Towers Watson, said the development was “gratifyingly stable”.
Heinke Conrads, the consultancy’s newly appointed head of occupational pensions consulting for Germany, said companies needed to run different interest rate scenarios to be able to take the appropriate preparatory measures for their pension plans.
It was currently difficult to assess whether and when the discount rate for calculating pension liabilities under international accounting standards would rise again, but it was clear that the rate required by the local HGB accounting standard would develop unfavourably, she said.
Discount rate equalisation in sight?
At the same time, there were welcome signs of “movement” in the discussion about the treatment of pension liabilities for tax purposes, Conrads noted.
In Germany the discount rate for calculating pension liabilities under the HGB standard is different to the one used for tax accounting purposes.
The latter is specified in law, and has been fixed at 6% for years. The HGB discount rate, meanwhile, has been steadily falling, and was at 3.68% at the end of last year.
German companies are unhappy about having to use the 6% discount rate for tax accounting, arguing it is out of touch with the reality of rates in the capital market.
The disparity means that companies had to apply the HGB’s 3.68% discount rate to determine their pension liabilities, which in turn determine how much cash and assets they must hold in reserve. For tax purposes they have to report liabilities based on the 6% rate.
“That means that companies are paying tax on income that does not even exist according to the HGB standard,” Conrads told IPE.
The disparity between the two rates has been a regular topic of discussion for years in Germany, but Conrads said last year there seemed to be an intensified exchange between industry trade bodies and politicians. This extended to include the method for assessing pension liabilities for tax statements, which is seen as not being fit for purpose as corporates increasingly move to defined contribution-oriented pension promises.
A key development in this longstanding discussion was the referral to the German constitutional court in November last year of a complaint about the discount rate for tax accounting purposes.
The complaint was originally made by a company that had pension provisions of some €11m on its balance sheet under the HGB standard, but could only account for around €7.5m for tax purposes. The company took its complaint to the tax court in Cologne, which ruled that the 6% rate for calculating pension provisions was unconstitutional and requested a decision from the federal constitutional court on the matter.
“That it has gone to the constitutional court is a strong signal,” said Conrads.
She added that the high tax accounting rate ran counter to the aim of Germany’s latest pension reform, which, as per the name of the implementing law – Betriebsrentenstärkungsgesetz – is to boost occupational pensions coverage in the country.