Germany: Significant change in accounting for reinsured pension commitments
The institute of public auditors in Germany (IDW) has issued a new accounting standard that will significantly change the accounting treatment of reinsured pension commitments under German GAAP. This standard must be applied at the latest for balance sheet dates after 31st December 2022.
What exactly is it about?
In the case of reinsured direct pension commitments, previous local law practice often involves separate valuation and accounting of the company’s commitments to the beneficiaries on one hand (settlement amount in accordance with section 253 HGB) and the company’s claims against the reinsurer on the other (asset value). An exception is made for those commitments where the amount of the employer’s pension benefits is based on the benefits of the reinsurance policy. In this case, the settlement amount is measured at the asset value of the reinsurance policy in accordance with section 253 (1) sentence 3 of the German GAAP (HGB) due to the matching of the cash flows based on the accounting standards for security-based pension commitments.
Due to the different valuation assumptions, there are (depending on the constellation, sometimes quite high) differences between the settlement amount and the asset value, which suggest to the reader of the balance sheet that there is a deficit or surplus that does not actually exist in economic terms. The now published accounting standard extends the basic concept that matching cash flows should result in identical balance sheet amounts on the assets and liabilities side to commitments for which no direct reference is made to the benefits of the reinsurance policy in the pension scheme under local labour law.
As a benchmark for determining whether and to what extent (partial or full) matching exists, in the future the expected cash flows will be compared on the part
- of the employer to the beneficiary and
- of the reinsurance policy to the employer.
If there is a match, these cash flows are to be recognized in future on the assets and liabilities side using the same accounting approach. There is an option as to whether
- the calculation assumptions of section 253 of the German GAAP (“primacy of the liabilities side”) or
- the calculation assumptions of the insurance tariff (“primacy of the assets side”) are used.
If higher payments are made under reinsurance policies these must also be recognized as an asset on the basis of the actuarial assumptions used for the insurance. If the employer makes higher payments, these must also be recognized as pension liabilities at the settlement amount in accordance with section 253 of the German GAAP (§ 253 HGB).
Unfortunately, the accounting standard leaves open many questions of detail that are essential for practice and are currently being discussed in the expert committees of insurance companies, actuaries, auditors and consultants.
For whom is the topic relevant?
The subject affects all HGB accountants who have taken out reinsurance policies to finance direct pension commitments.
Where do we see a need for action?
Due to the large number of outstanding issues, but also due to the non-recurring effects on the balance sheet in the year of transition, we recommend a thorough audit in time,
- whether and to what extent a (partially) matching reinsurance exists,
- which information must be provided by insurance companies in the future,
- whether and to what extent there are accounting effects,
- if necessary, whether and which adjustments should be made to your pension system.
We will be happy to assist you in the audit and in coordinating the procedure with the external auditors and the insurance companies.
HEUBECK AG – Gustav-Heinemann-Ufer 72 a – 50968 Köln
You can find more information at http://www.heubeck.de or