Current status of the German Company Pension Strengthening Act (Betriebsrentenstärkungsgesetz)

The design of the “new world” of occupational pension schemes (bAV) in the form of the draft of the Betriebsrentenstärkungsgesetz (BRSG) and its relationship to the “old world” continues to be in flux.

We last gave you an overview of the evolution of the reform proposal in our spring issue of Pensions Client Alert and in our March 2017 webinar. With this Client Alert, we report on the current status of the reform project and summarize for you what the individual new labor law and flanking contents of the draft are in the current version and which hurdles and points of criticism have already been overcome. The outlook is for the further challenges that will still have to be overcome in practice in the future.

Past meets Future: What happened so far

After the disagreement on the prohibition of guarantees and the scope of tariff exclusivity threatened to become the breaking point of the reform project, the governing coalition was now able to overcome its differences of opinion and reach an agreement on the reform. The modified version was approved by the advisory committees on May 31, 2017. The Bundestag approved the revised version of the BRSG in its session on June 1, 2017. The Bundesrat is expected to give final consideration to the BRSG at its meeting on July 7, 2017.

Latest News – What are the latest changes to the BRSG?

In detail, with regard to the main labor law contents of the reform:

(1) Pay-and-forget and opting-out

• Introduction of the pure defined contribution plan: According to the legal definition in section 1 para. 2 No. 2a of the German Occupational Pensions Act (BetrAVG), occupational pensions are now also deemed to exist if the employer is obliged by or on the basis of a collective agreement in a company or service agreement to pay contributions to finance occupational pension benefits to a pension fund, a Pensionskasse or a direct insurance company in accordance with Section 22 of the German Occupational Pensions Act (BetrAVG). Insolvency insurance obligations and also the employer’s obligations under Section 1 para. 1 sentence 3 BetrAVG do not exist. This is deliberately intended to ease the burden on employers, which is not permissible outside the new form of commitment in the occupational pension system (cf. see our Client Alert on employer liability for indirect pension commitments).
• The amount of the benefits may not be guaranteed in the case of a pure defined contribution plan (Section 22 BetrAVG).
• Supervisory regulations are intended to ensure monitoring by BaFin; otherwise, it is up to the social partners to design and implement an efficient system in accordance with the requirements of sections 21 to 25 of the German Occupational Pensions Act (BetrAVG), as amended. For pure defined contribution plans, the Pension Fund Supervision Ordinance now provides greater clarity for collective buffering mechanisms to dampen capital market fluctuations in the vesting phase. The accounting treatment of the planned security contributions to a pension scheme is also regulated. For benefit increases during the reference period, a limit of the kind that the capital coverage ratio may not fall below 110% as a result of the increase is now provided for.
• Introduction of option systems: Pursuant to Sections 19, 20 of the German Occupational Pensions Act (BetrAVG n.F.), collectively agreed models of automatic deferred compensation can be introduced – now also by means of a company or service agreement after being opened up by the collective agreement. In general, all employees participate in the deferred compensation program unless they object to it within a set (minimum) period after being informed accordingly. The parties to the collective agreement shall not deny employers and employees who are not bound by collective agreements access to the implementing pension institution (Section 21 (3) BetrAVG).

(2) Optimization of the promotion of deferred compensation

• New employer subsidy contributions for low earners (upper earnings limit up to EUR 2,200 monthly income): They are to receive a tax incentive in the amount of a 30% incentive contribution for contributions of at least EUR 240 to EUR 480 p.a. by offsetting them against the wage tax to be paid by the employer (incentive contribution thus EUR 72 to max. EUR 144 p.a.).
• Tax-free endowment: It is to be increased to 8% of the income threshold for pension insurance contributions for the direct insurance, pension fund and pension fund implementation channels. The rules on lump-sum taxation (20%) remain in place; in the case of severance payments, up to 10 times the annual volume is permissible.
• Mandatory additional employer contribution: Under the new version of Section 1a (1a) of the German Occupational Pensions Act (BetrAVG), the employer is obliged to pass on an additional 15 percent of the converted remuneration to the pension fund, pension fund or direct insurance company as an employer’s allowance, insofar as it saves social security contributions as a result of the deferred compensation. The regulation no longer applies only to pure defined contribution plans, but is dispositive of rates for other commitments than pure defined contribution plans. It will come into force from 2019 with a transitional period of 3 years for conversion agreements concluded by then, so that the new regulation will only take effect from January 1, 2022 for conversion agreements concluded by that date. The new rules do not apply to deferred compensation implemented via the direct commitment and provident fund schemes.

(3) The legislator’s second helping: trial of strength over genuine retroactivity

• Finally, at the instigation of stakeholders, a “clarification” was made to Section 16 para. 3 No. 2 BetrAVG: Contrary to the decision of the BAG (ruling dated December 13, 2016, 3 AZR 344/15), the simplified adjustment review obligation of the employer shall also apply to adjustment review periods prior to 2016 in the case of implementation via a pension fund or direct insurance in the event that all profit shares are passed on from the start of the pension. After the question of the requirement for the scope and coverage of the adjustment review obligation was the subject of court disputes for a long time, it remains to be seen whether this genuine retroactive effect will now be upheld.

Against – Criticisms of the opposition

The opposition continues to criticize the reform project as an attempt to cushion the declining pension level in the statutory pension. The company pension is not a supplement but a substitute for gaps in the first pillar. The employer’s obligatory subsidy is too low compared to the savings of 20 percent (below the BBG) in the case of deferred compensation for social contributions. With regard to the ban on guarantees, there are also concerns in some quarters that dispensing with guarantees and shifting the capital market risk to employees could mean that pension beneficiaries end up with fewer pension benefits, which would be particularly unacceptable for the low earners in focus. Correctly, however, the waiver of guarantee does not mean a waiver of security, but brings more flexibility and thus more return on investment. The target pension also remains a calculable variable – for all sides.

Next? – Implications from the BRSG

What does the reform mean for your company in concrete terms? Existing pension systems will not be abolished when the BRSG comes into force on January 1, 2018, but occupational pension schemes will become (even) more complex. Companies need to address how the new opportunities offered by the BRSG can be combined with existing pension systems in a meaningful way, also with a view to extended tax incentive models. There is also a need for companies to analyze the maturity of their own occupational pension plans with regard to deferred compensation.

We will cover these and other aspects in our next issue of Pensions Update and as part of our roadshow this year.

We will publish more information about our events shortly.