GERMANY - Pension plan liabilities will reach an "historic high" before the end of the year due to low interest rates and falling bond yields in Germany, Mercer warns.
The firm said liabilities in DAX 30 pension schemes are expected to increase by 23% to €270bn ($380bn) from €220bn over the next two months, while the unfunded status is likely to increase by €40bn to €115bn.
German government bond yields fell after the European Central Bank Council reallocated funds into German and U.S. government bonds. Consequently, the iBoxx AA corporate 10+ bond declined and index corporate bonds' credit ratings also dropped in Germany and the euro zone as a whole.
Thomas Hagemann, chief actuary at Mercer in Germany, said: "If market conditions do not improve, it is expected that the year-end balance sheet liabilities will reach a historic high."
"A decline in the discount rate by 50 basis points leads to an increase in the liabilities of a pension plan by up to 10%. For this reason the level of pension plan liabilities rose faster than the assets that are held in numerous markets. The end result is much greater shortfall in the balance sheets of companies."
Stefan Oecking, a partner with Mercer Germany, said companies need to focus on active risk management in orrder to avoid pension deficits.
"The current performance demonstrates once again that companies need to control the financial and accounting risks of their pension plans. It is important to introduce risk management strategies that take into account local differences in pension plans of subsidiaries and their specific effects on the balance sheet account.
"Companies need to redesign their plans in line with DC schemes and transfer to cash balance plans," Oecking told GP.
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