GERMANY - Pension funds and consultants have warned German pension funds will face a major funding upheaval under the International Accounting Standards Board's (IASB) proposed reforms to pensions accounting.

Bayer AG, the chemical and pharmaceutical giant, has calculated 99% of its pension promises will be valued at fair value if forced to apply the new contribution-based classification.

Rolf Funk, group controller of Bayer AG, told a public meeting in Frankfurt - hosted by Germany's national standard setter, the DRSC -  last week: "We have already performed an analysis of our 100+ pensions plans and basically 99% and up is in the category of contribution-based promises."

Funk told Jenny Lee, IASB project staff,  the discovery was found to increase costs for its German pensions because the firm allows "a building block  for each year of service and we in principle do not have plans which are fixed at the end salary".

His analysis was also followed a presentation by Alfred Gohdes, managing director of Watson Wyatt Heissmann, which claimed were the IASB's proposals to become GAAP, by his estimation some 80% of German plans could shift to the new contribution-based classification.

Summing up the IASB's proposals, Gohdes said: "If IAS19 was broken, you could say that the new standard is kaputt."

Asked to confirm the impact of the IASB's shake-up of pensions accounting, a Bayer spokesman explained almost all of the of the changes in Bayer's pension benefit obligation would potentially impact profit or loss - hitting earnings in the process.

Under existing GAAP - International Accounting Standard 19 Employee Benefits - rules, pension plans in Germany are broadly split 80:20 between defined benefit and defined contribution arrangements.

Other more conservative estimates among Germany's actuarial profession put the likely outcome at somewhere in the 70:30 range, according to Gohdes.

"Today the split is 80:20 between defined benefit and defined contribution," he added.

"In Germany we have troublesome plans with a guarantee component. We have always said that those are DB promises. In the future that will more of less reverse. The defined benefit promises will under the new classification system make up 30% - in my estimation 20% - of all promises in Germany, and 70-80% will be contribution based."

Gohdes summed up the position in Germany as "acute".

The IASB launched its discussion paper on pensions accounting in March and the board proposed, among other changes to the existing accounting regime, a new definition of contribution-based pension plans.

One aim of the IASB's work on pensions accounting and its new plan classification is to improve the accounting for what it has dubbed "troublesome" cash-balance-type plans.

IASB has split its work on pensions into two clear phases. Following completion of Phase I, which should conclude with an improved version of IAS 19 in place by 2011, the board has said it wants to launch a full-scale review of pensions accounting with the US Financial Accounting Standards Board.

The project has run into controversy over plans to change the accounting for the UK's career average plans from the projected unit credit method to the new fair value model.

The sting in the tail is all so-called actuarial gains and losses go immediately into profit or loss under the new contribution-based methodology.

IASB has proposed a supposedly 'gentler' alternative for traditional final-salary plans and suggested in addition to full immediate recognition in income, IASB said there could be two alternative treatments disaggregating pension cost between operating and financing - lessening the impact on earnings.

Commenting on the latest discovery, Tim Reay, of Hewitt Associates' international pensions team, said: "The German pensions landscape features plans with capital guarantees, and under the new system these will be contribution-based plans. These are effectively defined-contribution plans where the value of the guarantee is not so material as to make a vast amount of difference."

But Reay also warned more details have yet to emerge about the situation in Germany.

"What we need to know is how many of the 60% of plans - based on the Watson Wyatt-Heissmann figures - that will switch classification are defined-contribution plans with a guarantee, and how many are of the career-average type as described by Rolf Funk."

Both Gohdes and Reay agree the scale of the potential upset in Germany dwarfs any problems facing the UK.

"I have discussed the point with my English colleagues, and they have said that the problem is probably not as acute there because the majority of the pension obligations are traditional final-salary schemes," said Gohdes.

Reay added: "I would expect there to be more of an impact in Germany because the UK has relatively few plans that are not either final salary or pure defined contribution. The middle ground in the UK is quite limited because companies have tended to move towards pure DC plans from DB final salary."

If you have any comments you would like to add to this or any other story, contact Julie Henderson on + 44 (0)20 7261 4602 or email