New Rules for Pension Provisions Take Effect Without Permanent Company Relief
Germany's new regulation concerning the calculation of discount rates for pension provisions became effective on March 22, 2016. The change extends the averaging period for the interest rate from seven to ten years.
New regulations on calculating pension provisions took effect in Germany on March 22, 2016, but are unlikely to offer lasting relief for companies, according to consulting firm dhpg.
The updated legislation extends the averaging period for determining the discount rate used for pension provisions from seven to ten years. This aims to mitigate the significant increase in these provisions experienced by companies due to the prolonged period of low interest rates.
"Extending the averaging period for the discount rate from seven to ten years somewhat dampens the 'explosion' of pension provisions, but it does not solve the issue," stated Andreas Stamm, auditor and partner at dhpg. He noted that recent interest rate cuts by the European Central Bank indicate the problem remains acute and that current measures only buy time.
Stamm emphasized that companies must recognize that the actual financial burden of their pension commitments persists independently of legally mandated discount rates. He also pointed out that current mortality tables are outdated, predicting future increases in pension liabilities as life expectancy rises.
Dhpg is a leading mid-sized consulting firm in Germany specializing in auditing, tax, legal advice, and restructuring. The firm is part of the international Nexia network.