GERMANY - German listed companies have seen their pension liabilities increase over recent months as bond yields have risen, despite the fact that equity markets have recovered well.

This is according to an analysis conducted by the consultant Rauser Towers Perrin (RTP).

DAX-listed companies returned 6.6% in the third quarter, while their mid-cap MDAX-listed counterparts returned 7.8%. However, at the same time, pension liabilities  increased on average by 18.9% over the third quarter and by 18.6% since the beginning of the year.

"The major reasons for that are a significantly lower discount rate and increased inflation estimates," RTP stated in a press release on its "German Capital Market Update Report".

Together with falling yields on corporate bonds, the discount rate used to calculate pension liabilities has decreased to 5.29%, 106 basis points lower than in the first quarter.

Further, markets expect inflation to hit 2.43%, an increase by 12 basis points, over the medium term, affecting bond prices and future inflation-linked pension payouts.

Funding levels have therefore fallen to 58.2% for DAX-plans, down from 65.7% at end-June, and 43.3% for MDAX-plans, down from 48.2%.

But Thomas Jasper, principal at RTP, said the decrease in funding was mainly due to the rectification of the "anomaly" in the discount rate caused by higher credit spreads. He said this did not not threaten German pension plans' sustainability. (See earlier IPE article: German DB losses lessened by bond rates.)

Since the beginning of the year, equity holdings of German listed companies have performed about 20.8%, of that 16.7% in the third quarter.

The model pension plans use for the analysis assumes an exposure of 15% European equities and 10% global equities for DAX plans and a 21%/14% exposure for MDAX-plans based on 2008 accounts.

However, RTP beleives that actual returns were much higher as companies have increased their equity holdings since the beginning of the year.