Home ListingMarch 5, 2015

Eurozone Policy Leads to Rare German Pension Closure

Ultra-low interest rates have led one company to shut its final salary pension in an ominous sign of the effects of central bank policy.

Reported by Featured Author

A German printing company has shut its final salary pension fund to new accruals as perpetual record-low interest rates in the Eurozone have taken their toll on liabilities.

Heidelberger Druckmaschinen (Heidelberg) announced at the end of February that its final salary arrangement would be replaced by “a contribution-based capital commitment”, a development rarely seen in Germany’s pension market. A similar arrangement has been in place for new employees since 2006, but will now apply to all staff.

“The continued decline in interest rates has increased the risk that pension obligations may rise further.” —Heidelberger DruckmaschinenMany German companies fund their final salary pensions directly from their balance sheets rather than with a separate pool of assets, which has left them exposed to falling discount rates. Across Europe, company pension funds have been at the mercy of European Central Bank (ECB) policy as the institution has battled low inflation and low economic growth.

A statement from Heidelberg said the move would save roughly €100 million ($110 million).

“It was vital to adapt pension provision at Heidelberg to demographic developments and low interest rates in order to make it sustainable,” said Dirk Kaliebe, the company’s chief financial officer. “This is an important step in strengthening the company’s balance sheet and continuing to provide the workforce with a company pension based on a new model.”

According to Heidelberg’s most recent financial report, provisions for pension rose from €450 million at the end of March 2014 to €619 million at the end of December, an increase of more than a third.

The report said the ECB’s move to increase monetary stimulus measures, including quantitative easing, had “increased the risk that pension obligations may rise further.”

German funds performed strongly in 2014, but saw their returns all but wiped out by rising liabilities—in common with many other countries’ pensions. Research by Mercer last year estimated that the combined liabilities of DAX-listed company pensions would hit €353 billion by the end of 2014.