German companies pressed to fast-track Pensionsfonds transfers before tax cuts

German companies should accelerate plans to transfer pension liabilities to Pensionsfonds to maximise the benefit of upcoming corporate tax cuts, according to Mercer Deutschland’s chief actuary Thomas Hagemann.

Germany will gradually lower the corporate income tax rate from 15% today to 10% by 2032, under legislation introduced in July to revive investment and drag the economy out of its prolonged stagnation.

Transfers of pension obligations to a Pensionsfonds typically generate tax-deductible operating expenses where the one-off contribution exceeds the existing tax provision. However, these expenses can only be deducted over 10 years.

Hagemann warned that delaying transactions erodes the value of the deduction: the later the transfer, the more of the 10-year amortisation shifts into periods when the tax rate will be lower.

“This means that, considering only the tax implications, it is important to transfer obligations to a Pensionsfonds as early as possible,” he told IPE.

The same logic applies to other pension actions that trigger initial operating expenses, such as introducing new schemes or increasing benefit promises. In recent years, many firms have already shifted obligations from direct promises (Direktzusagen) into Pensionsfonds, generating such deductible costs.

Mercer is also urging companies to fast-track any planned expansion of direct pension promises or benefit upgrades, so that increases in pension provisions are recognised while the current 15% rate still applies.

“Considering only the tax implications, it is important to transfer obligations to a Pensionsfonds as early as possible”

Thomas Hagemann, Mercer

The tax reform also affects deferred tax calculations. Pension obligations are valued lower in the tax balance sheet than in the commercial balance sheet, creating timing differences.

When these provisions unwind, the smaller tax-balance-sheet values lead to future tax benefits, which must be booked as deferred tax assets, WTW Germany’s chief actuary Wilhelm-Friedrich Puschinski explained.

He said companies will now need to forecast these expected tax benefits under a tax rate that changes over time, rather than a stable rate, and should align their methodology with auditors in advance.

The looming reduction may also prompt firms to accelerate tax-relevant expenses where feasible.

“In company pension schemes, this could be achieved, for example, through a legally binding commitment to a minimum pension adjustment,” Puschinski said.