Impact of interest rate trends on the valuation of pension obligations under German Commercial Code (HGB)

published on 19 february 2025 | reading time approx. 2 minutes

The HGB provides for the discounting of provisions with remaining terms of more than one year. The interest rates to be used are provided by the Bundesbank. They result from average considerations and, depending on the type of provision, are based on the average of the last seven or ten financial years. For the measurement of provisions for pension obligations and the required disclosures, various special features arise from the requirements of the HGB in conjunction with the latest developments in the interest rate environment, which are addressed below.

Regulatory background

Section 253 (1) sentence 1 HGB stipulates that provisions with a remaining term of more than one year are generally discounted at an average interest rate of the last seven years (7-year average interest rate) corresponding to the remaining term. Provisions for pension obligations, on the other hand, are discounted in the balance sheet at the average market interest rate of the last ten financial years (10-year average interest rate) in accordance with Section 253 (2) sentences 1 and 2 HGB, whereby a residual term of 15 years may be assumed as a general rule. In addition, a valuation using the 7-year average interest rate must be carried out in order to determine the difference between the actual balance sheet value and the calculated value using the 7-year average interest rate. This difference must be disclosed in the notes or under the balance sheet in accordance with Section 253 (6) sentence 3 HGB and is subject to a distribution block (not a transfer block) in accordance with Section 253 (6) sentence 2 HGB.

Until the introduction of the 10-year average interest rate due to the amendment of the HGB in 2016, the 7-year average interest rate also applied to the measurement of pension obligations. The aim of the amended regulation was to reduce the burden on companies' earnings due to the development of the interest rate environment at that time. At the same time, the distribution block is intended to counteract the distribution of income that results purely from the amended statutory requirement for the valuation of provisions for pension obligations - and therefore not from the business activities and thus the earnings power of the companies.

Current developments and dealing with “negative” differences

Due to the development of interest rates in the recent past, there was a reversal of the interest ratios in the valuation of pension provisions according to the German Commercial Code and the corresponding disclosures for the first time in May 2024. It is questionable how to deal with a difference that has a negative sign due to this development. The question also arises as to the effect of such a “negative” difference on the distribution block of Section 253 (6) sentence 2 HGB.

The IDW's Expert Committee on Company Reporting (Fachausschuss Unternehmensberichterstattung – FAB) already discussed these issues in its 274th meeting on 22 November 2023 and clarified that

the higher 7-year average interest rate may not be used to measure pension provisions in the balance sheet;
a “negative” difference must also be determined and disclosed despite the reversal of the interest rate relationship, as Section 253 (6) sentences 1 and 3 HGB do not contain any such restriction;
the restriction on distribution in accordance with section 253 (6) sentence 2 HGB does not apply in the event of a “negative” difference; although a reduction of amounts restricted from distribution for other reasons (section 268 (8) HGB) by offsetting the “negative” difference is not permitted.

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