GERMANY - Watson Wyatt Heissmann has called for revised German accounting standards, the so-called BilMoG bill, to be reversed as new accounting terms could lead to an enormous increase in German companies' pension obligations.

The consultancy said a change in the calculation of the discount rate, which is used to discount expected future payments to the present day, could increase obligations to as much as €30bn-€50bn.

On the initiative of the German federal bank, the discount rate under BilMoG would now no longer be determined using AA-rated bonds, as stated under the IFRS accounting standards, but would instead adopt zero coupon euro interest swaps. (See earlier IPE-story: HGB gets a facelift)
"Interest swaps are closer to an AAA rating, leading to a substantially lower discount rate," Watson Wyatt pointed out.

While at present the difference between a discount rate based on the interest rate swap curve and one based on AA bonds is at 150 basis points, the spread has historically been between 40 and 60 basis points.

"Assuming a long-term difference of 50 basis points, the additional charge to local German financial statements (for those not having to comply with IFRS) amounts at present to about €30bn to €50bn," estimated Alf Gohdes, managing director at Watson Wyatt.

The government's reasoning for changing the reference in the calculation is a yield curve could be determined more easily on the basis of interest rate swaps than on the basis of AA bonds, the interest rate swap market being deeper.

But Watson Wyatt officials fear there would be repercussions on the German economy so have urged the finance ministry to rethink the draft and stick with using AA bonds - a reference which has been used by German actuaries since the mid-80s and which is also widely used internationally.

Gohdes added interest swaps are used in the Netherlands "as a reference for reporting to the pension fund supervisor" but not in the actual accounts.

Furthermore,the UK's Accounting Standards Board proposed last summer to shift the reference rate for international accounting to "virtually risk free" bonds, eg gilts, "but interest swaps were not mentioned and the suggestion was met with little positive response", Gohdes told IPE. (See earlier IPE-story: ASB to reconsider risk-free discount-rate)

Gohdes pointed out no final deadline for the law was given yet but approved changes could be passed by April.

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