Germany’s largest companies may see a continued increase in pension liabilities in 2021 while interest rates continue to fall, said Thomas Hagemann, chief actuary at Mercer Deutschland.

According to the consultancy’s latest estimates, the value of pension liabilities of the 30 largest firms in terms of market cap listed on the DAX rose by €20bn, or 5%, in 2020 to €410bn, from €389.9bn the prior year as a consequence of declining actuarial interest rates.

Pension assets in financial statements under the International Financial Reporting Standards (IFRS), on the other hand, dropped year-on-year in 2020 to around €252bn from €258.6bn the year before.

Also, the funding ratio of pension obligations decreased to 61% last year compared to 66% in 2019.

Mercer based its estimates on annual reports of DAX 30 index listed companies and capital market information.

In view of a challenging outlook for this year, Hagemann considers “modern forms” of pension promises without guarantees, “especially interest rate guarantees,” a valuable option.

The value of pension liabilities in the DAX 30 fell by €24.7bn in 2020 to €389.9bn after Lufthansa and Wirecard left the index, replaced by Deutsche Wohnen and Delivery Hero. Pension assets fell to €251.7bn in the course of 2020.

Jeffrey Dissmann, head of investment consulting at Mercer, said 2020 was a “very turbulent year” for equity markets, coupled with low return expectations as a result of central bank policies.

“We expect an unusually high divergence between individual results in annual financial statements for the pension assets of companies in the DAX 30,” Dissmann said.

Last year’s volatility partly cause by the effects of the pandemic saw fluctuating interest rates, which saw a sudden increase in March and then continued drop until the end of 2020, Mercer said.

“In the last quarter [of 2020] interest rates went down again by 0.15 percentage points, ”said Hagemann, adding that for DAX 30 companies the actuarial interest rate fell by 0.4 percentage points on average.

Mercer noted however that pension obligations do not depend on interest rates, which means that future pension payments are generally not impacted by interest rate developments.

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