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The future of Germany's on-book pension reserves

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German companies with “Direktzusage” pension funds held directly on their balance sheets are gaining better recognition from rating agencies, delegates at the Handelsblatt conference on occupational pensions heard this week.

However, accounting problems are still an issue for companies running such arrangements.

Stefan Brenk, global pensions expert at German metal company ThyssenKrupp, told the conference: “A few years ago it was difficult to explain our balance sheet to rating agencies, but now some are trying to understand it. Some are even considering whether to determine our on-book pension reserves as something similar to capital.”

In Germany, the Direktzusage has a long tradition, allowing companies to make pension promises – either in a defined benefit or defined contribution (DC) format – without having to fund them fully.

More than 80% of companies paying into the insolvency protection fund PSVaG have a Direktzusage, and around half of all the pension reserves in Germany remain on company balance sheets.

According to the latest data collected by Willis Towers Watson and Mercer the average funding level of Direktzusagen run by DAX-listed companies stood at 63% at the end of 2016. However, individual funding levels ranged from 97% at Deutsche Bank to 4% at real estate company Vonovia.

ThyssenKrupp is 22% funded, but the company aims to fully fund its new retirement provision plan. Last year, the company introduced a matching contribution plan for higher incomes only and with capital withdrawal at retirement, rather than a life-long pension.

Problematic discount rates

One domestic problem German companies continue to struggle with is the discrepancy between the tax-related discount rate on pension reserves and the rate they can apply under the domestic accounting standard HGB.

Martin Schloemer, head of accounting principles and policies at pharmaceutical company Bayer, said at the conference: “Under IFRS the volatility in the applied discount rates can lead to strong movements in a company’s capital, which in turn is sometimes reflected in [credit] ratings – in this case companies have to approach rating agencies with an explanation.”

Currently a company might have to apply a 4% discount rate (“Rechnungszins”) on its liabilities under HGB, but for tax purposes it can only report liabilities discounted at a 6% rate – and Mercer has forecasted the HGB rate to drop to just over 3% by 2018.

Tobias Hentze, economist at Institut der deutschen Wirtschaft, presented calculations showing that funding requirements would decrease by 14-18% if the HGB rate was cut by 100 basis points.

“And as the current discrepancy between the two rates is 200 basis points this means €24-30bn less liquidity for companies,” he said.

Georg Geberth, director of global tax policy at Siemens, said companies needed “controlled” flexiblity for the tax-related discount rate. He also called for it to be linked to the HGB rate, but with a buffer to prevent it from falling as far.

In a live ballot among the 300 delegates at the Handelsblatt conference, the majority voted in favour of introducing a flexible rather than a fixed rate for tax purposes.

Despite all the technical difficulties and challenges, there was a wide consensus at the conference that the German Direktzusage structure was here to stay.

Heribert Karch, chairman of the pension fund association aba, said Direktzusage had been “ignored” in the government’s most recent reform talks.

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