Balance sheet solutions/financing of pension commitments

Many German companies have company pension commitments to their employees. The most popular format is direct insurance with the corresponding reporting of pension provisions in the balance sheet. “Unsecured” pension provisions have a considerable impact on the balance sheet structure and contain considerable risks.

German tax law treats the recognition of pension provisions restrictively, as they reduce the taxable profit. Risks from longevity, salary increases and pension adjustments are not taken sufficiently into account. In addition, the prescribed discounting rate of 6% p.a. does not currently equate to any market yield. The value reported under tax law is generally included in the commercial balance sheet.

A rise in pension provisions of around 20% to 25% is anticipated with the switchover to international accounting standards (IFRS/US GAAP). This is because the reporting and measurement policies are close to the market and reality.Even under international accounting standards, the fair value (economic value) of pension obligations, including all costs and risks, is still underestimated. The fair value can be up to around 40% higher when costs such as risk premiums (e.g. longevity), contributions to the Pensions Insurance Association and the costs of administration and asset management are taken into account.

The need for companies to act as part of liquidity and risk management:pension risks must be an integral part of the liquidity and risk management of every company. If unsecured pension risks arise, these ultimately have to be borne out of the equity capital. Shareholders and lenders are making increasing enquiries about the cover for risks arising from pension commitments. Rating agencies also subject the pension commitments of companies to regular checks, feeding the outcome into the rating. For capital market-oriented companies, this has a direct impact on the cost of financing. The same applies to credit rating by banks in the light of Basel II.

Consequently, pension commitments are a topic meriting the attention not only of the Human Resources department but also and indeed particularly that of the financial decision-makers in the company.

The correlation between corporate financial planning, changes in risks and the management of pension commitments makes comprehensive analysis and advice from under one roof essential. Simply identifying the risks does not solve the problem. We can work with you to strategically assess and manage your pension commitments in line with the development of your company.