Accounting Standards and German Supplementary Pensions: The Emerging Framework Underpinning Global Finance

In this paper we focus on the current status of German employer-sponsored supplementary pensions in the context of moves towards the harmonization of international accounting standards. We emphasize the changing standards used to measure pension liability, and the consequences of these changes for (firstly) corporate management discretion and (secondly) German under-funded systems of defined benefit pensions. In combination, we show that claimed historical differences between the Anglo-American market for corporate control and the German system of entrenched management within interlocking boards of supervision are now less compelling than assumed. Adoption of international and US financial accounting standards by leading German corporations presages a new era in European capital markets with important implications for the design and management of German supplementary pensions. The reader is introduced to financial accounting standards institutions, the evolution of US accounting standards since the introduction of FASB 87 and recent patterns in US corporate pension assets and liabilities. Emphasis is placed upon the concerted campaign of national and international accounting professionals to harmonise corporate accounting practices and the measurement of pension liabilities to accepted international standards. Using data collected from 1998 annual reports for German firms in the DAX 30 index, we report on the adoption of international accounting standards and the scope and significance of reported corporate net pension liabilities. Noting the theoretical literature relevant to adoption, we identify four reasons that may account for the immediate adoption of international accounting standards. As well, tests for correlation between net pension liabilities and indicators of corporate financial performance are developed. In conclusion, implications are drawn for management discretion and the future of German defined benefit pension system