- Provisions according to IFRS will increase by around 17% compared to the 2022 valuations
- Drivers are lower interest rates since December 2022 and inflation above most pension trends
Monheim am Rhein, 19 January 2024
In the current reporting season, many companies are once again facing the uncertainties of pension liabilities. The current constellation of inflation and interest rate trends has a direct impact on companies' balance sheets. Together with BDO AG Wirtschaftsprüfungsgesellschaft, VEDRA Pensions has analysed the expected valuation of German companies' pension liabilities in the current economic environment. These calculations show that the pension liability at the end of 2023 has increased by approximately 17% compared to the previous year, mainly due to the average decrease in the IFRS discount rate of around 0.5 percentage points as well as the impact of inflation, which continues to exceed long-term pension trends.
While the IFRS rate is an accounting component that many companies have become familiar with in recent years, the increased inflation will not only affect the carrying amounts but also the cash flows, particularly in the case of inflation-linked pension benefits.
"This picture once again highlights the risks of pension liabilities, which, unlike other forms of liabilities, entail both balance sheet and cash flow volatility for companies", says Tilo Kraus of VEDRA Pensions. "Compared to previous years, it is extraordinary that both the development of interest rates and the development of inflation parameters were equally negative for companies."
Rising pension provisions can therefore not only have a negative impact on the company's balance sheet, but ultimately also affect its financial stability if it is forced to provide additional financial resources to cope with the increased costs.
Um die errechneten Zahlen gesamtwirtschaftlich für Deutschland einzuordnen: Bei geschätzten EUR 650 Milliarden Pensionsrückstellungen in Deutschland, von denen ein großer Teil unmittelbar inflationsabhängig ist, ergibt sich voraussichtlich insgesamt ein Anstieg um einen hohen zweistelligen Milliardenbetrag.
Lutz Specht, partner at BDO AG Wirtschaftsprüfungsgesellschaft, adds with regard to a possible scenario for 2024: "While the moderate increase in the average discount rates should lead to a slight decrease in the valuation of pension liabilities under commercial law over the next few years, there may be significant increases in liabilities under IFRS if the interest rates continue to fall. In addition, persistently high inflation would continue to cause a sharp increase in the liabilities and cash flows for inflation-linked liabilities due to the long payout periods of most pension plans".
The Bundesbank currently forecasts an inflation rate of 2.70%1for 2024, which is likely to lead to further increases in provisions. Funding and risk transfer of pension liabilities can help protect balance sheets and cash flow plans from such fluctuations. In particular, definitive risk transfers such as pension buy-outs with specialist providers such as VEDRA Pensions create value for companies and owners.
About VEDRA Pensions
VEDRA Pensions is a German holding company specialising in innovative and pragmatic solutions related to pension buy-outs. Since its inception in 2016, VEDRA has pioneered the German market in freeing companies from the four risks associated with pension liabilities: Inflation, longevity, interest rate risk and market risk. The VEDRA model achieves a complete economic and legal release of the company from the liability, combined with the derecognition of the obligations from the balance sheet. For the pensioners concerned, this in turn means that their obligations are fully funded. VEDRA currently serves several thousand beneficiaries and has already made pension payments totalling around EUR 50 million.
About BDO:
With over 2,500 employees in 27 offices, BDO is one of the leading firms for auditing and audit- related services, tax consultancy and business law advice as well as advisory in Germany. In the 2022 reporting year, the German BDO Group generated revenue of EUR 347 million - an increase of a good 14 per cent.
For questions or interview requests, please contact:
Nicole Ziegler, Mobile: +49 151 70 36 86 90 presse@vedra-group.com
EN 
DE