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Pension returns fail to dent DAX30 liabilities

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  • Pension returns fail to dent DAX30 liabilities

GERMANY - Pension schemes of the 30 companies listed in the DAX-index returned around 8.7% on average last year - but funding ratios remained virtually unchanged as low interest rates increased liabilities, Towers Watson and Mercer both found in separate studies.

Figures derived from currently available annual reports of DAX companies are very similar for Mercer, which included 22 companies, and Towers Watson, which looked at 23. Assets returned around 8.7% while liabilities increased by around 11%, with funding ratios remaining constant at around 66%.

This was also due to companies paying an estimated €7.3bn into their pension schemes last year, noted Towers Watson, which brought total pension assets to €165bn.

The average return was well above the assumptions made for last year of 5.7%, for which Alfred Gohdes, head of actuarial consulting at Towers Watson Germany, gave credit to asset managers.

"There is a lot of focus on risk management which means that some of the outperformance is down to good and very professional risk management, tactical strategy and hedging," he told IPE.

On the basis of the current situation in the financial markets, Gohdes did not expect a significant further drop in the discount rate for this year, the interest rate used to discount pension liabilities due in future, which stood at 4.9% at year-end 2010 down from 7% in 2008.

Despite this rise in liabilities, German companies have not used the financial crisis to cut back on or withdraw from occupational pension provision, added Thomas Jasper, head of general consulting at Towers Watson Germany.

"Companies are already fighting over key personnel and employees see the importance of saving for their retirement," he explained.

Towers Watson calculated an average long-term pension benefit increase for company pension schemes of between 1.7% and 2%, which is much more than the 0.6% average increase in the state pension scheme during the last five years.

Around ten of the DAX companies, which are still using the corridor method for recognition of pension costs, face a joint one-off €5bn net effect on equity when the IASB finalises its proposals for IAS19 on the basis of 2010 results.

"We expect that this will be the content of the IASB's final version of IAS19 scheduled to be published at the end of March or beginning of April and it is quite certain that the corridor will be scrapped," explained Gohdes.

Other changes, such as the calculation of interest income on the basis of the discount rate rather on the basis of expected return, which is usually higher, will cost DAX-companies between €500m and €1bn annually, said Gohdes.

He expects more pronounced changes for international pension plans, which currently have around 50% invested in equities compared to the around 25% equity allocation of  the schemes run by the DAX-companies worldwide.

"It is expected that there will be a trend towards lower equity exposures because of the new accounting standards," Jasper confirmed.

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