Germany’s pension fund association (aba) has warned of an “urgent need for action” by the government on the discount rate that companies apply to their pension buffers. 

The discount rate is set to drop from just over 4% to less than 3% by 2017 unless an amendment to the German accounting standard HGB is passed in the coming weeks.

If the rate falls, companies with on-balance-sheet pension obligations will have to pay an additional €35bn-45bn in total annually over the next three years to compensate.

In a statement, the aba said: “This additional funding is a burden on the companies, reduces their capital buffers and credit ratings and fails to increase the security of workers’ pensions.”

It said it feared companies would stop adjusting pension payouts to inflation due to the higher costs.

This summer, a proposal was made to the government that would increase the calculation period for the discount rate from seven years to approximately 15.

The proposal has “still not been assessed by the government”, the aba said.

According to the association’s statistics, more than 40,000 German companies – small and medium-sized enterprises for the most part – will be affected by the drop in the discount rate.

The aba argued that a change in the HGB discount-rate calculation would have no effect on capital markets, as some critics have argued.

All listed companies have had to apply international pension accounting standard IAS19 with a lower discount rate for some time now.

The association also claimed that a 15-year period for calculation was “not too high”, as the liabilities it is applied to have much longer maturities.

Lastly, the aba said it would make more sense to replace the marked-to-market approach used in setting the discount rate for pensions in the HGB with a fixed rate set against future expectations for inflation and real rates.

Otherwise, companies applying HGB may be hindered in their investments because of higher contributions to their pension plans for a “discount rate that is not real but merely a calculation aid”.

For a more detailed discussion on the future of the HGB discount rate, see Peter König’s article in the November issue of IPE magazine