Expiry of the transition period: dynamic interpretation of the BAV age limit?

In view of the expiring transitional period set by the German Federal Ministry of Finance for employers to properly codify the retirement ages existing in the (various) company pension schemes, there is a current need for action on the part of companies to provide clarity with regard to (1) the age limit(s) applicable under the status quo, (2) the specific need for adjustment in the event of a dynamic interpretation of the age limit, and (3) the resulting tax implications. In this Client Alert, we would like to draw your attention to this need for action and the underlying authoritative labor law and tax law issues.

Initial situation: Labor law interpretation of the pension commitment

The company pension scheme under the German Occupational Pensions Act (Betriebsrentengesetz) aims to protect employees against the occurrence of certain biometric risks (old age, disability and death of the beneficiary). The biometric event triggering the pension is the age limit specified in the pension commitment.

According to the case law of the Federal Labor Court on comprehensive pension systems (BAG judgment dated May 15, 2012, 3 AZR 11/10 and dated January 13, 2015, 3 AZR 897/12), the reference to the completion of the 60th or 65th year of life in a pension plan that was concluded before the Pension Insurance Retirement Age Limit Adjustment Act came into force is generally to be interpreted as meaning that it is based on the standard retirement age under statutory pension insurance law, which has remained unchanged for decades.

Since 1957, women in the statutory pension insurance system have been able to claim old-age pensions from the age of 60 if they have fulfilled the qualifying period and have worked in an occupation subject to pension insurance for the past 20 years. Since 1973, men have been able to draw an old-age pension from the age of 63 if they have completed 35 qualifying years of insurance (Section 25 AVG). The statutory retirement age was raised in stages by the RV-Altersrentenanpassungsgesetz (RV Retirement Pension Adjustment Act) of April 20, 2007, effective January 1, 2008, for cohorts born between 1947 and 1963. For those born in 1964 and later, the standard retirement age is now 67.

The increase in the retirement age in the statutory pension insurance system nevertheless leaves the option of applying a different age limit for the respective company pension plan, provided that this is stipulated as a fixed age limit in the pension commitment. Whether the pension with the specified age limit is dynamically aimed at the statutory standard age limit and is to be raised step by step or is statically aimed at the completion of a certain age is to be determined by interpreting the legal basis of the specific pension under labor law in accordance with the relevant principles of interpretation.

A dynamic interpretation of the age limit has various implications for the calculation of pension entitlements, including vesting certificates, severance payments and the transfer of pension commitments.

Need for action under tax law: BMF requirement to put age limit in writing

In the BMF letter dated December 9, 2016 – IV C 6, the tax authorities issued a statement on the retirement age applicable to pension commitments under occupational pension schemes with reference to the case law of the Federal Labor Court in connection with the dynamic interpretation of pension commitments under so-called comprehensive pension schemes. In the case of a total pension, the employer does not promise a specific company pension benefit “in isolation”, but a pension level taking into account other pension benefits (statutory, occupational, other company or other pension benefits). The employer closes the pension gap that arises between the other retirement benefits and the promised pension level with its company pension benefit.

Effect on the tax balance sheet: compliance with the written form requirement

In order to continue to comply with the written form requirement of Section 6a of the German Income Tax Act (EStG) in the case of comprehensive pension systems, the BMF letter states that it is necessary to make a written adjustment or clarification of the pension commitment. To this end, the pension commitment must first be assessed under employment law, as shown above, to determine whether the pension age agreed in writing by the parties to date was based on the statutory retirement age limit. In this case, the adjustment must be documented in accordance with the general principles by means of a written amendment to the commitments concerned or, in the case of employees who have left the company with vested pension rights, by means of a written declaration published by the company. If, in exceptional cases, the interpretation shows that a retirement age of 65 is still to be assumed, it is advisable to document this in the same way. In this respect, the BMF letter is generally based on the fact that the retirement age fixed in writing is decisive for all pension commitments for balance sheet tax purposes.

If the pension commitment refers exclusively to the “statutory retirement age”, the valuation of the provision must be based on the statutory retirement age that is decisive for the occurrence of the pension event on the balance sheet date (cf. see also the BMF letter of May 5, 2008 (BStBl. I p. 569), which remains applicable.

“60/65 +”? Expiration of the transition period for documentation and publication of an adjustment

The written documentation of the adjustment to be made in accordance with the general principles shall be made within a transitional period expiring with the fiscal year beginning after December 9, 2016 (in case of a fiscal year with the same calendar year: December 31, 2017).

If there is no written documentation by that time (in the case of pension beneficiaries who have left the company with vested pension rights, a written declaration by the pension provider is sufficient, e.g. publication in the Federal Gazette, posting on a notice board), the pension provision recognized as a liability in the tax balance sheet must be reversed and recognized in profit or loss, as it does not comply with the statutory written form requirement (Sec. 4d (1) Sentence 1 No. 1 (b) Sentence 2 and 5 EStG and Sec. 6a (1) No. 3 EStG).

If the pension commitment has been adjusted in accordance with the above, the valuation of the pension provision must be reviewed if it has not yet been done. The measurement of the provision is based on the statutory retirement age fixed in writing and applicable at the balance sheet date for the occurrence of the insured event.

What is to be done concretely?

Your contacts at KPMG AG Wirtschaftsprüfungsgesellschaft and KPMG Law Rechtsanwaltsgesellschaft mbH will be happy to advise and support you as needed in the comprehensive labor law review of your pension commitments as well as the legally effective revision of the pension commitments (KPMG Law) and tax review (KPMG AG).