The German Institute of Pension Actuaries (IVS) has called for a reform to set a stable discount rate of 3.25% on pension liabilities on balance sheets of companies, deviating from international accounting standards.

“Pension obligations in balance sheets in Germany are currently based on the international accounting [standards], and on market interest rates for high-quality corporate bonds,” said Stefan Oecking, chief executive officer of IVS.

Under IAS 19 accounting standards, pension obligations are outsourced to external institutions striving for full funding, matching assets and liabilities, and deficits are recorded on balance sheets at close market value – a construct that is prohibited under German law – allowing instead to take into account direct promises (Direktzusage), without the need for external funding, IVS said.

Moreover, in contrast to the international accounting standards, the effects of market value fluctuations have to be taken into account under German laws, and fully mirrored in profits or losses, which brings with it the need for a “smoothing mechanism” for discount rates, it added.

With the Accounting Law Modernisation Act, the average discount rate was first set for a seven-year period, and then from 2016 for a 10-year period, IVS said.

Actuaries think that a discount rate should reflect long-term inflation expectations and real interest rates, which are derived from economic considerations that lead to a real return of around 1.25% or within a range of 1.0% to 1.5%, IVS said.

“Against this background, the IVS thinks that a constant discount rate of 3.25% for the valuation of pension obligations in commercial law, and comparable long-term obligations, is appropriate,” said Björn Ricken, IVS board member.

The IVS proposes its discount rate concept into law, changing the rules in the Commercial Code (Handelsgesetzbuch) and in the Introduction to the Commercial Code (EGHGB), designing a framework to transition to a new regime.

A constant discount rate represents a departure from the concept of fair value accounting of assets used to cover obligations, that should only be applied in the case of security-linked promises providing a picture of the assets, finances and returns, IVS said.

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Luigi is IPE's Berlin-based DACH correspondent. His coverage includes regulation and the latest pensions and investments trends, and, being a native Italian, he also covers Italy’s pensions market. He has reported from Italy and Germany on international politics and business for European and US publications including USA Today, Bloomberg BNA and for the investigative magazine L’Espresso. He was previously Germany correspondent for Mergermarket covering M&A.View full Profile

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