German DAX firms see drop in pension provisions

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Pension provisions at German companies listed on the DAX index have seen a decline in the past months, partly defying early warnings of increasing liabilities and contributing to a positive development of the firms’ equity.

Carmaker Daimler saw pension provisions drop from €12.0bn at the end of December 2020 to €9.48bn at the end of March 2021, according to a first quarter financial statement.

The current value of the company’s defined benefit (DB) obligations went down from €39.8bn at the end of December last year to €36.9bn in March this year, while the fair value of pension plan assets used to finance those obligations remained almost unchanged quarter-on-quarter at €28.6bn.

The latest increase in discount rates was the main driver for a drop in the present value of Daimler’s DB pension obligations, it said.

The group’s equity grew from €62.2bn in December to €68.0bn in the first quarter of this year, mainly due to a net profit of €4.4bn and €2.0bn in actuarial gains in connection with pension provisions, up from €572m the prior year.

“The decline in pension provisions leads to so-called actuarial gains, which are captured directly in the equity,” Hanne Borst, head of actuarial consulting at Willis Towers Watson Germany, told IPE.

At Volkswagen, provisions for pensions decreased from €45.08bn in 2020 to €40.92bn in 2021, according to the company’s financial statement for Q1.

Pension provisions for Volkswagen’s automotive division fell from €44.2bn in 2020 to €40.1bn so far this year, with its equity increasing quarter-on-quarter to €100.7bn, pushed by lower actuarial losses, it said.

A discount rate of 1.1% was applied during the reporting period at Volkswagen, compared with 0.7% last December.

At Siemens, provisions also fell from €6.36bn in September last year to €3.28bn in March this year.

“In the last few months there has been an increase in the discount rate, so that pension obligations have fallen at many companies,” Borst explained.

Pension obligations include the current value of benefits, in particular pension payments, that companies have to provide to retirees. The balance sheet shows the value that the company would have to pay today for promised benefits in the future, she added.

“The interest rate used to discount future payments has a major impact on the amount of the pension obligation shown in the balance sheet [of companies]. For example, if it increases by 100 basis points, the obligation decreases by an average of 17%,” she said.

Deutsche Telekom also saw a cut in both pension provisions and other employee benefits, from €7.7bn in December to €6.6bn in Q1, thanks to an increase in share prices of plan assets and interest rate adjustments.

This in turn led to an actuarial gain of €1bn from the reassessement of DB plans and an increase of the shareholders’ equity by €4.9bn to €77.5bn, according to the company’s financial statement.

The increase in the discount rate on the one hand and the positive development of capital investments combined with further pension assets on the other hand resulted in a reduction in pension provisions, Borst said.

Asked whether the decrease in pension provisions is a permanent or temporary factor, Borst said that at the moment it is hard to predict the development of the discount rate, of capital markets and thus of plan assets.

Plan assets, she said, are “explicitly reserved for the payment of pension obligations and are separated from the company’s assets in a way that is protected against insolvency”.