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Lufthansa sees pension fund liabilities soar 40% in three months

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Lufthansa’s pension liabilities have increased by nearly €3bn after the current low interest rate forced the airline to cut its discount rate by almost 1 percentage point.

The German flag carrier said liabilities rose by 41.2% compared with December – when a discount rate of 2.6% was still applied – after the rate was cut to 1.7%.

The airline is the latest company to see its pension arrangements impacted by the European Central Bank’s quantitative easing programme that has seen yields fall.

Mercer Netherlands recently warned that the low rate environment could increase the cost of pensions by 10%, and the new approach to monetary policy has also exacerbated the deficit within the Bank of Ireland’s defined benefit (DB) scheme.

Industry association PensionsEurope recently warned that pension funds risked being “collateral damage” as further monetary easing policies were launched, and urged regulators to consider postponing valuations or being more lenient as deficits increased. 

Lufthansa saw staff costs increase by more than 5%, despite a fall in employees, citing the fact it needed to increase pension provisions.

The 90-basis-point drop in the discount rate led to the pension liabilities increasing by €2.9bn to €10.2bn, coming close to doubling compared with March 2014.

In its first-quarter report, the company said: “Looking ahead to the quarters to come, it is not possible to rule out a further reduction in interest rates as a result of monetary policy and therefore the resulting impacts this would have on both the amount of the pension obligations shown on the balance sheet and equity.”

The airline in 2013 announced that it would close its DB arrangement after expressing concern over rising costs.

The shift to a defined contribution arrangement triggered a number of strikes as recent as March 2015.

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