Benedikt Köster, head of pensions at Deutsche Post, has reminded German companies to beware the “effects of action forced by financial difficulty” due to the impact of international accounting standards and the local HGB equivalent.
Taking part in a panel discussion at the Handelsblatt conference in Berlin, Köster said some of the measures dictated by international and domestic accounting rules “might not make sense over the long term”.
“Yet we are driven by these measures,” he said, “which make no sense economically.”
Across Europe, persistently low interest rates have increased the challenge of funding pensions liabilities, and in Germany, many companies – including large listed ones – still face sizeable defined benefit obligations.
According to Willis Towers Watson, the average pension funding level for companies on Germany’s DAX30 stock exchange is 65%.
The Deutsche Post pension scheme’s funding matches the average almost exactly, having just over €17bn in liabilities, funded via vehicles including a Pensionsfonds.
Also speaking on the panel, Friedemann Lucius, a board member at German actuarial firm Heubeck, called for a more drastic step, pointing to a “massive bulk of additional financing needs” in the system.
“We have to get away from pension funds having to adjust their investments to match liabilities on a given date,” he said.
He said forcing pension funds to ensure liquidity at all times had been “extremely counter-productive” and called for the allowance of an “underfunding corridor” for German Pensionskassen, similar to that permitted with the Pensionsfonds vehicle.
Although German regulator BaFin, wary of making Pensionskasse “too similar” to Pensionsfonds, has ruled out this proposal already, Lucius argued that the “pressure was not yet great enough”, and that the time was therefore “not yet ripe”.
Previously at the Handelsblatt conference, he called for changes to how companies are allowed to deal with promises on future services, such as the amount of time an employee must work before receiving a pension.
But he also warned that “all of that will not be enough if the low-interest-rate environment continues”.
Thomas Dommermuth, a professor at the German university Amberg-Weiden at the Institute for Retirement Provision and Financial Planning, said the application of the ‘marked-to-market’ term to liabilities was “actually wrong because I cannot sell off liabilities”.
In Germany, he said, even with external funding, a top-up requirement remains with the company, unlike companies in the UK and the US.
Reiner Schwinger, managing director at Willis Towers Watson, lamented that German companies with unfunded pension liabilities applying German accounting standard HGB were feeling the effects of rate changes directly in their profits.
These companies must calculate an average interest rate to apply as a discount rate to their liabilities.
But Schwinger dismissed that average as “nonsense”, as it “prevents any kind of hedging” against the effects in a company’s profits and losses.
At the beginning of the year, the German government increased the calculation period for this average HGB rate from seven years to 10 to include pre-financial crisis interest levels, but the move proved controversial.
Schwinger further warned that the alternative of switching to defined contribution plans merely presented different problems.
“The more a company backs away from making promises, the more other challenges appear on the horizon, such as reputational risk, warranty risk, transparency and the new role of employees as agents for their staff in choosing retirement provision.”