GERMANY - German companies in the DAX stock exchange index reported an average 2.6% return on their pension plans for the third quarter 2010 but this was offset by a 4.4% rise in liabilities, according to consultancy Towers Watson.

Since the beginning of the year the Rechnungszins, or discount rate, has dropped by 70 basis points, increasing liabilities on average by 13.9%.

In the third quarter alone, liabilities rose by 4.4% quarter-on-quarter, with the discount rate standing at 4.6% - well below the long-term 5%-average, Towers Watson pointed out in its German Capital Market Update Q3.
Currently, the funding ratio in the model DAX-company pension scheme stands at 58.7%, 1.4% below the figure for the previous quarter and 6.4% below that calculated at the same time last year.

However, Thomas Jasper, practice leader and occupational pension expert at Towers Watson, explained that quarterly fluctuations get evened out over the long-term.

"A model pension plan shows that a company which was fully-funded at year-end 2004 would still be 96.5%-funded today," he added.

He pointed out that under IFRS and GAAP, the effects of market movements on pension liabilities are calculated mark-to-market.

"But in fact these volatilities based on the discount rate do not generate a cash-flow risk, as the pension benefit levels are not influenced by the changes in interest rates," he explained.

Further, he stressed that pension liabilities usually are taken on for decades making yearly or quarterly figures no more than an interim result.

Nevertheless, he called on companies to use these interim results to check whether their pension plans are stable.