The present values of pension obligations as recognised on corporate balance sheets have risen constantly since 2009 due to falling interest rates and the discounting effect. Over the past years this has led various companies to implement capital measures to strengthen their equity.
The reference interest rate for HDAX companies decreased by around 60 basis points in FY 2016. This raised pension liabilities by around 10% to EUR 480 billion and pension provisions by approximately 15% to EUR 185 million. In turn, this reduced the funding level from 62.9% to 61.6% to lie slightly above the 62.2% average since 2010. At the same time, however, it is also evident that corporate profitability and equity backing remains strong, as the equity ratio has risen to 40.3%.
Looking ahead and with bond yields on the rise again, we believe this problem will now unwind. The low in terms of reference interest rates should have been traversed in September 2016. With interest rates now going up, companies‘ provisioning needs should also fall, exerting a positive effect on their equity. This has also been indicated by various passages in recent annual reports, such as those of E.On and Siemens, where provisions have already been reduced again.
In a scenario model, we have calculated that pension provisions could be reduced by around 25% given a 100 basis point interest rate increase, feeding through to a more than EUR 40 billion lift in equity. This accounting effect is not expected to have particularly significant effects on share prices, however, but does promise relief for strained balance sheets, and could also have positive effects for credit ratings.