Low Interest Rates

Corporate Pension Liabilities Skyrocket

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German firms face surging pension obligations as a result of rock-bottom interest rates.
  • Why it matters

    Why it matters

    Ongoing low interest rates are increasingly affecting companies’ pension obligations, leading them to set aside billions of euros to cover future costs, in turn causing a sharp drop in equity ratios.

  • Facts

    Facts

    • Low interest rates mean this year the 30 Dax companies have increased accounting liability for pensions by 20 percent, to a total of €428 billion.
    • This increase does not immediately affect profits, but it does badly impact large corporations’ ratio of equity to total assets.
    • Smaller companies may have overpaid €20 billion to €25 billion in pension taxes because tax liability is calculated on an assumption that companies earn 6 percent on pension reserves.
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    Audio

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The European Central Bank’s low-interest policies have made this a marvelous time for companies to raise capital. But the darker side to the low-rates era is making itself felt on balance sheets: Despite decent profits, most firms’ book values and equity ratios are shrinking rapidly.

The main trigger for the trend is a drastic rise in future pension costs. The long-term decline in capital market interest rates has forced companies to earmark significantly higher sums to cover pension obligations.

According to figures released by Mercer, a corporate consultancy firm, since January, the 30 companies making up the prestigious DAX stock market index have increased their accounting liability for pensions by 20 percent, rising €67 billion to a total of €428 billion, or $478 billion. In the same period, pensions assets only rose by 4 percent, so companies have had to massively top up pension provisions on their balance sheet.

 

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