GERMANY – Contractual trust arrangements – which permit firms to fund pension liabilities off their balance sheets – should continue to boom due to great potential for CTAs among listed small-to-midsize companies, according to private bank HSBC Trinkaus & Burkhardt.
In Germany, companies have traditionally financed pension liabilities with book reserves on the balance sheet. This method, called the Direktzusage in German, accounts for around 60% of the €366bn in German corporate pension assets.
Since last year, listed German companies have been obliged to adopt International Accounting Standards (IAS). For those reporting under US-GAAP, adoption of IAS is required from 2007.
As IAS generally treats pension liabilities covered by book reserves as unfunded yet those covered by CTAs as funded, many of the big German companies traded on the Dax-30 equity index have set up the vehicles.
Now Andreas Folgner, a senior consultant and CTA specialist at HSBC Trinkaus & Burkhardt, believes that beyond Dax-30 companies which have not yet created a CTA, there is great potential for the vehicle among medium-sized companies traded on Germany’s MDax equity index.
“The same is true for those (30 technology stocks) traded on the TecDax and all other listed companies. Especially following the advent of IAS, all these firms will consider whether a CTA is the best way of meeting their pension liabilities,” Folgner told IPE in an interview at the bank’s headquarters of Düsseldorf.
Folgner noted that despite IAS and due to various reasons, there were also several Dax-30 companies still financing their pension liabilities with book reserves. “We recommend to analyse the appropriate strategy in each individual case,” he said.
These companies include energy giant RWE, the industrial gas producer Linde, the luxury automaker BMW, steel and engineering firm Thyssen Krupp and the former state-owned postal service Deutsche Post.
Last autumn, HSBC Trinkaus & Burkhardt itself has set up a CTA for the pension liabilities of its 1,600 employees. According to Folgner, who was in charge of the CTA project, the external fund has already received €160m in capital from the bank.
At the end of September 2005, the bank’s pension liabilities totalled €200m.
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