Lufthansa is preparing to offload pension liabilities from its defined benefit (DB) plans for employees outside Germany through buyout transactions, as it continues to reduce balance sheet risk.
The airliner is preparing the move for foreign DB pension funds once the respective plan is fully funded, or if overfunding has been achieved, a spokesperson for the German airline told IPE.
The outsourcing of pension obligations reduces administrative costs and balance sheet risks, including longevity and interest-rate risks. As a result, Lufthansa is preparing to transfer further liabilities currently held on its balance sheet.
A “key objective” for Lufthansa is to reduce balance sheet fluctuations resulting from the valuation of pension assets and liabilities, the spokesperson added.
Lufthansa has already completed a buy-in transaction for its pension obligations in the UK. In January this year, £120m of assets across three UK pension schemes were transferred to Royal London.
A comprehensive data-cleansing process is currently underway. Once this is completed and all regulatory requirements are met, the buyout will take place, according to the spokesperson.
“We are now currently exploring similar options in the US,” he added.
Defined benefit obligations (DBOs) mainly relate to the group’s employees in Germany, Switzerland, Austria and the US.
DBOs total €20.86bn on Lufthansa’s balance sheet, including €15.75bn in Germany, €4.35bn in Switzerland, €292m in Austria, €104m in the US, and €340m in other countries, according to the company’s 2024 financial statement.
Pension obligations in Switzerland are funded through pension funds, while defined contribution (DC) liabilities are outsourced to a pension fund in Austria, according to the statement.
Net pension liabilities fell by 17%, or €438m, to €2.12bn in the first three quarters of this year, from €2.56bn at the end of December last year. The reduction was driven by rising discount rates, according to the group’s Q3 financial statement.
The interest rates used to discount pension obligations increased by 0.4 percentage points to 4.0% in Germany and Austria, and by 0.1 percentage points to 1.1% in Switzerland.
Net pension liabilities, which are actively managed, continue to weigh on the company’s debt ratio.
Against this backdrop, Lufthansa is switching to DC plans to limit further increases in liabilities, a move that has drawn opposition from pilots in Germany.
The introduction of a liability-driven investment (LDI) strategy to manage assets held in pension plans in Germany “significantly mitigates” balance sheet fluctuation risks, the spokesperson said.
Under the strategy, 75% of liabilities are hedged against interest rate changes, while the remaining 25% is invested in a growth portfolio to build a financial buffer against risks that are difficult to hedge, such as longevity.
“Outsourcing pension obligations in Germany is not currently planned,” the spokesperson said.
German buyout boutique Funding Solution took over €300m of liabilities following gategroup’s acquisition of Lufthansa’s European catering business in 2019.
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