German firms change to DC plans

BERLIN — Several German companies are restructuring, or are considering restructuring, their pension schemes into defined contribution schemes or cash balance plans, a move they hope will save millions in future contributions.

German companies have been converting their book-reserve plans to advance funded pension plans since the mid-1990s. That shift gained steam in the past year, especially after a decision last spring by the two major U.S. credit ratings agencies to treat companies' pension obligations as corporate debt.

But now the trend — boosted by Bosch, Siemens and Lufthansa — seems to be toward defined contribution plans, or in some cases cash balance plans, and away from traditional defined benefit plans.

Robert Bosch GmbH, Wiesbaden, plans to shift its book-reserve pension plan to a funded defined contribution scheme, one company source said. Bosch has €3.2 billion in pension liabilities for its German operations. The source said it will be awhile before any change is implemented.

"It is going to happen eventually, but we are waiting to see the platform we can use. It may be awhile off," said the source, who requested anonymity.

But Bosch is already well down the road in converting its schemes in other parts of the world, including the United States and Japan.

According to Dave Davis, director of compensation and benefits at Bosch's U.S. subsidiary, Robert Bosch Corp., Broadview, Ill., the company "has a proposal before the board" on converting the company's $650 million traditional defined benefit plan to a cash balance plan.

Bernhard Wiesner, head of company pensions in Germany, said Bosch's schedule in the United States is being delayed because of a recent federal court decision that said IBM Corp.'s cash balance plan violated the age-discrimination provisions of the Employee Retirement Income Security Act of 1974 (Pensions & Investments, Aug. 18).

Neither Mr. Wiesner nor Mr. Davis would say when they expect the U.S. effort to resume.

But Mr. Wiesner said a similar project in Japan would continue, whereby the company's defined benefit scheme would be restructured into a cash balance scheme.

Jurgen Radomski, chief personnel officer at Siemens AG, Munich, said the firm will be converting its estimated €11 billion ($12.95 billion) in defined benefit pension assets to a defined contribution pension plan, effective Oct. 1, 2004.

"For Siemens, the (new arrangements) will make the benefit cost considerably easier to calculate," Mr. Radomski said in a written statement issued by the company.

"It is primarily uncertainties arising from future interest rate developments, connected with the longer life expectancy of our employees, that have made this modification of our scheme necessary."

Last year, the company was forced to cough up €2.6 billion in additional contributions to help plug a funding deficit that had grown to an estimated €4.5 billion.

Lufthansa AG, Cologne, which has €4.2 billion in pension liabilities funded from corporate book reserves, is toying with the idea of shifting to a defined contribution-style scheme, said Andreas Noth Durft, vice president, human resources.

"These liabilities are unfunded in Germany, but there is some thinking going on about how we can change this," Mr. Noth Durft said.

He declined to offer details on which path the company would take.

The move to funded defined contribution plans is a trend among German companies, according to Ulrich Kamm, a consultant with Georg Seil Consulting GmbH, Wiesbaden.

"The German companies that do have funded defined benefit schemes have found out in the past few years, like the ones in the U.S. and Britain, that there are costs involved in running these schemes. I think that's the reason behind so many companies considering converting to DC-style," he said.

The companies that are currently unfunded but are considering switching to a funded plan might choose defined contribution schemes, among a number of options, he added.

"In Germany, there are any number of ways that companies can provide employee pensions. Setting up a (DC) pension fund is one of them, but there are also insurance means — pensionskasse."

German companies are beginning to shift to funding pension liabilities and away from their long-held tradition of paying pensions on a "pay-as-you-go" basis from book reserves.

Analysts say the shift is taking place because of expected changes by 2005, when international accounting standards are scheduled to be adopted by European Union countries.

Another factor is the realization by German corporations that an approach more consistent with the rest of the world works better in attracting foreign investors.