Adoption of international accounting standards by top-drawer German companies may lead to bolstering of their pension reserves - and faster-than-expected growth in the German pension market.
In the past year, companies such as Bayer AG, Hoechst AG and Schering AG, have switched to international accounting standards as a means to make their stock more appealing to non-German investors.
Manfred Schneider, Bayer's chairman, told shareholders at the annual meeting earlier this year that the switch would "provide our stockholders, lenders and the general public with more comprehensive information. It also improves the international comparability of our figures."
But one of the major net results has been hefty extraordinary charges for pension obligations. Bayer took a charge of 697 million deutsche marks ($480 million) for revaluing its pension debt for last year, while Schering swallowed an extraordinary charge of 101 million marks ($70 million).
The main reason is how the IAS accounts for future benefit accruals. The international standards require projecting salary increases every year, while the German system only counts contractual salary increases, said Gunter Becher, director international consulting Europe for Watson Wyatt Europe, Brussels.
The upshot is some pension experts believe German pension funds can be underreserved by as much as 25%.
Wolfgang Schuhmann, head of stock research at Deutsche Bank, Frankfurt, noted that "as a result, the pension reserves at German companies tend to be underfunded."
Germany's book-reserve system means pension reserves are reinvested in the company and not in any sort of independently managed fund. The reasons for that are historical: After World War II, corporate earnings were reinvested in order to rebuild the fractured German state.
Now, German companies are hungry for more accessible foreign capital.
Conforming with IAS is relatively easy because German accounting laws permit use of the international standards without forcing the company to maintain a second set of books. The U.S.-based generally accepted accounting principles, although similar to German rules in many respects, are not allowed by German authorities. Nor do U.S. regulatory authorities accept German accounting standards, because they allow for more hidden assets, among other things.
Keeping two sets of books is why no one has followed Daimler-Benz AG's example in listing on the New York Stock Exchange. The U.S. Securities and Exchange Commission has refused to yield in its demand that listed companies use GAAP.
"We've never made a secret of our interest in having a presence on the New York Stock Exchange - but not at the price of having two sets of books," said Gunter Forneck, a spokesman for Bayer.
That may change. Deutsche Telekom, Germany's newly privatized telecommunications behemoth, and Veba AG, the Dusseldorf-based holding company comprising electricity, oil, chemicals and trading, both are in negotiations with the SEC over whether they could produce their financial statements under IAS rather than GAAP.
No decisions have been made yet, but Telekom spokesman Ulrich Lissek said: "We have reached conclusions on some issues, although we are still negotiating."
Bayer's Mr. Forneck said if Telekom were successful in persuading the SEC to accept IAS, then his company "would certainly be interested."
Whether the SEC eventually concedes, a growing consensus believes German companies will have make greater provision for retirement obligations.
Recently, the Bundesbank resurrected the issue in a monthly report. The central bank warned the average retirement age for men is 59.5 years and declining.
Koen de Ryck, managing director of Pragma Consulting N.V., Brussels, and the European Federation for Retirement Provision's permanent representative to the European Commission, warned the ratio of retirees to active workers in Germany will climb to 61.2 by 2040 from 35.2 in 1990, nearly a 75% increase.
Because of the weak condition of the state pension plan, Mr. de Ryck believes that will increase pressure on other sources of retirement income, including company plans.
Deutsche Bank's Mr. Schuhmann believes German companies will have to do more for their retirees. "What we really need is a change in our laws that will make companies set aside reserves for pensions that will be independently managed - the way it's done in Anglo-Saxon countries. And I think we'll have that kind of a law in 10 years at the latest," he said.
The extraordinary charges taken by Bayer and others also might help boost pension funding. Companies adopting IAS tend to boost their reserves by 10% to 25%.
Some of these companies - notably Hoechst and Bayer - have adopted Spezialfonds, which are pooled vehicles for institutional investors, to finance their retirement obligations.
German companies have pension reserves totaling about 200 billion marks ($140 billion), according to Deutsche Bank figures. InterSec Research Corp., London, however, estimates total German pension assets at $124 billion at the end of 1994. InterSec projects German pension assets will grow to $177 billion within five years.
But a switch to advance funding would cause even faster growth, and Germany's capital markets will broaden and deepen - making them more attractive to international investors as well.