The funding ratios of pension schemes of German companies listed on the DAX and MDAX indices have climbed to an unprecedented level in the first half of this year, according to the latest Pension Finance Watch published by WTW.
The funding ratio of pension plans of the largest firms listed on the DAX index improved to 84% in H1 2024, up from 79.1% at the end of 2023, WTW’s figures show.
The funding ratio of pension plans of companies listed on the MDAX index, tracking the performance of the 50 largest companies by market capitalisation below the DAX, has gone up to 84.8% in the first half of the year, from 77.7% at the end of 2023, according to WTW.
Declining pension obligations and positive development of capital markets have led to a new peak in terms of funding ratios for the pension schemes of the largest firms in Germany, the consultancy noted.
The international discount rate increased by almost 50 basis points in the first half of this year, bringing with it a positive impact on liabilities, with financial markets disappointed by the fact that the major central banks will cut key interest rates not as quickly as expected, said Hanne Borst, head of retirement at WTW.
The amount of pension obligations of DAX and MDAX companies went down by around 5% since the beginning of the year to €309.4bn and €37bn, respectively, according to WTW’s Pension Finance Watch.
The overall positive development in capital markets led to an increase of assets set aside to pay occupational pension benefits by 0.9% to €259.8bn for DAX companies, and by 4% to €31.4bn for MDAX companies in the first half of 2024.
WTW expects the international discount rate to fall, meaning that pension liabilities will increase. However, Borst noted this fall is expected to slow down, the opposite of what was expected a few months ago.
The international discount rate fell slightly following the European Central Bank’s first key interest rate cut in June, as inflation also fell in the euro zone. Four key interest rate cuts are forecast for each of 2025 and 2026, according to WTW.
This has an impact on the returns on corporate bonds with high credit quality, and thus on the development of the international discount rate for the valuation of pension obligations in accordance with IAS 19 and US GAAP, WTW said.
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