GERMANY – Increase in IAS19 pension liabilities expected as new mortality tables published
Isabel Coles | 6 September 2018
On 20 July, Heubeck AG published their new demographic tables, Heubeck Richttafeln RT 2018 G. The Heubeck demographic tables are the main mortality tables used for valuing corporate pension liabilities in Germany.
Companies are expected to consider and in many cases adopt these new mortality tables for the coming financial year-end, leading to an increase in the value of the pension liabilities disclosed on company balance sheets.
The new tables reflect the latest statistics available from the German state pension system and the German Federal Statistical Office covering mortality, invalidity, marriage and employee turnover. They replace the previous set of tables (RT 2005 G, released in 2005) and indicate that average life expectancy in Germany continues to increase, although the rate of increase has slowed in recent years. In a change from the 2005 G tables, the new 2018 G tables allow for life expectancy to increase with income levels; an adjustment is applied to reduce the mortality rates in the 2018 G tables, which further increases the cost of pensions compared to using the 2005 G tables.
The extent of the impact of the new mortality tables on the value of the corporate pension liabilities in the balance sheet will vary from company to company, depending on the features of the company’s pension plan(s) and the plan membership.
According to Heubeck AG, moving from RT 2005 G to RT 2018 G for the coming financial year-end would lead to an increase in the liabilities in the range of 1.5% to 2.5% for disclosures under international accounting standards (both IAS19 and ASC 715) or the German commercial balance sheet (Handelsbilanz, HGB).
How this one-off increase in the liability value due to the change in the mortality assumption is recognised depends on the accounting standard:
• Under HGB, the increase in the liability is recognised immediately as an operating expense.
• Under IAS19, the increase in the liability is classified as a loss due to change in demographic assumptions, which is recognised directly in equity (via Other Comprehensive Income or OCI) and not in profit or loss.
• Under ASC 715, the approach depends on the company’s accounting policies: either the actuarial loss from the increase in liability is recognised immediately in the net periodic pension cost or it can be delayed. If recognition is delayed, the actuarial loss will initially be included in accumulated OCI, and then recycled through the future profit or loss in line with the company’s accounting policies.
Going forward the company’s P&L expense would also be slightly higher where employees continue to accrue pension benefits, reflecting the longer life expectancy and so the pension being accrued is expected to be paid for longer.
For the German tax balance sheet (Steuerbilanz), Heubeck AG forecast a lower impact with an increase in the pension liabilities of 0.8% to 1.5% when updating the mortality tables from RT 2005 G to RT 2018 G. However, the German Ministry of Finance must first approve the use of the new tables to calculate the tax liability, and the impact would be spread over at least 3 years. It is expected that the German Ministry of Finance will approve RT 2018 G and specify any transitional arrangements before the end of 2018.
As companies approach their financial year end reporting they should evaluate the impact of the new tables on their disclosure figures. For many this will mean assessing the liability increase when adopting RT 2018 G as their best estimate of mortality rates for accounting purposes. Those companies who have adapted RT 2005 G to reflect the actual experience of their own plan may continue using those modified tables – and consider whether RT 2018 G would offer a better fit when next reviewing their plan-specific best estimate mortality tables.
It is worth noting that the new tables are also expected to be adopted in due course for the assessment of pension entitlements that are split on divorce as well in cases where pensions are converted to a cash lump sum.