Company pension schemes place a particular burden on medium-sized companies.

Because low interest rates increase pension provisions, which has a more serious impact on the balance sheets of small and medium-sized companies than larger ones.

In addition, tax law ignores this burden.

A study by the Institut der Deutschen Wirtschaft Köln (IW) examined why this is and what it leads to.

The client was the Family Business Foundation, the results are available to the FAZ.

Mark Fehr

Editor in business.

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This affects companies that have promised their employees to pay them a company pension when they get older.

According to IW, this applies to 100,000 companies.

In the context of such direct commitments, the employees earn the later pension through their current job in the company without having to forego part of their salary.

For this form of provision, companies have to build up pension provisions in their balance sheets in order to prepare themselves today for the burden of later pension payments to future retirees.

Tax law ignores the historic low in interest rates

This distinguishes the direct commitments from another model of company pension scheme, in which employees forego part of their salary and thus save a company pension guaranteed by the employer and bearing interest. No provisions are required for this salary conversion.

On the other hand, the pension provisions built up for direct commitments, according to IW analysis, amounted to 310 billion euros, significantly more than in times when interest rates on the capital market were even higher. For half of the companies, the pension provisions per employee have risen by at least 42 percent since 2009 without increasing their pension commitments. Rather, the reason for the greater pension burden is the collapse in interest rates. The German Commercial Code requires that companies calculate their pension provisions in the balance sheet using an average market interest rate. This has more than halved from 5 percent to 2.3 percent since the 2008/2009 financial crisis. If the actuarial interest rate falls, a company has to put aside the capital required for later retirement arithmetically much earlier.

Companies feel very similar to savers, who have to work much harder to accumulate assets due to the lack of interest. The expense resulting from the early saving reduces the profit and equity of the company. The IW estimates that for every percentage point that the actuarial interest rate falls, the pension provisions in company balance sheets rise by a total of 40 to 47 billion euros. On average, the pension provisions per company increased from 14 million euros in 2009 to just under 22 million euros in 2019. This corresponds to an increase of 57 percent.

These upheavals are not only taking place on paper, they are also causing companies to bleed financially. The reason is that tax law has so far ignored the historic low and continues to expect an unrealistically high interest rate of 6 percent. In contrast to the commercial balance sheets required for commercial purposes, the increasing expense for pension provisions is not reflected in the tax balance sheets that are to be prepared for tax purposes. Rainer Kirchdörfer, CEO of the Family Businesses Foundation, describes it as absurd that low actuarial interest rates reduce profits and equity, while profits that are not made still have to be taxed.

Although the Federal Constitutional Court declared the high interest rate on tax debts of 6 percent unconstitutional in August, an adjustment for the entire tax law has not yet been made.

The Institute of Auditors IDW has therefore called for the interest rate for the discounting of pension provisions in the tax balance sheet to be reduced significantly.

The figures from the IW study now show how justified this claim is.