Lufthansa pension deficit balloons amid low interest rates

Lufthansa on Tuesday warned of an "urgent" need to overhaul the way the German airline group provides retirement benefits to employees as the low interest rate environment caused its pension deficit to soar. 

The deficit in Lufthansa's defined benefit pension scheme reached €10.2bn at March 31, up 41 per cent from the end of 2014, according to the group's first-quarter earnings report.

The airline group is trying to move on after one of its passenger jets crashed last month, with the loss of all 150 people on board.

Prosecutors suspect co-pilot Andreas Lubitz deliberately flew the Germanwings jet into a French mountain, but Lufthansa said the tragedy only had a limited negative impact on bookings at its short-haul budget airline in the first quarter.

Lufthansa's pension difficulties underscore how the low interest rate environment, in a part a function of the European Central Bank's quantitative easing programme, is raising the cost of funding retirement benefits for some companies.

Simone Menne, Lufthansa's chief financial officer, said the group's pension challenges necessitated reform.

She added: "Here, more urgently than ever, we need sustainably financeable solutions in place of obsolete structures . . .

"We continue to see great pressure to act. The enormous pension burdens are putting considerable pressure on our equity." 

Lufthansa's equity ratio - an indicator of leverage and the proportion of assets financed by shareholders rather than debt - has fallen by 10.4 percentage points to 7.5 per cent over the past year, well below the group's target of 25 per cent.

Pension liabilities are increasing for some companies because they have been obliged to lower the "discount rate" under which they value retirement benefits.

If the discount rate falls, and therefore the liabilities rise, a defined benefit pension plan needs more assets to be able to cover a projected level of benefits in the future. Some companies have responded by injecting more cash into their pension schemes. 

At Lufthansa, the discount rate applied to its defined benefit pension scheme declined from 2.6 per cent in the fourth quarter of last year to 1.7 per cent in the first three months of 2015.

Lufthansa proposes to close this scheme but until now it has been unable to negotiate a new system for retirement benefits with employees. 

Lufthansa's pilots went on strike repeatedly last year in order to maintain existing early retirement benefits and are unhappy that new employees may not be able to join a defined benefit pension scheme. 

Last week Lufthansa management offered an arbitration of all outstanding contractual issues with pilots. 

Strike action depleted Lufthansa's earnings by €42m in the first quarter, and due to weak advanced bookings related to the industrial action, a cost of €58m is expected in the second quarter. 

Lufthansa generated strong cash flow in the first quarter, in part because of the weak euro.

Revenue came to €7bn in the three months to March 31, up 8 per cent compared with one year ago. The operating loss narrowed from €209m to €133m.

Other German companies have been hard hit by pension troubles. At BASF, the chemicals manufacturer, pension provisions more than doubled to €9.5bn in the first quarter compared with one year ago.

Before these earnings, Standard & Poor's revised its outlook on BASF from stable to negative, due to the significant increase in the group's pension deficit. 

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