Labor law implementation issues relating to the Company Pension Strengthening Act

With the aim of strengthening the company pension scheme (bAV) and making it more widespread, especially in smaller companies and among employees with low incomes, the Betriebsrentenstärkungsgesetz (BRSG – Company Pension Strengthening Act) paved the way for a fundamental reform of the bAV. The law enters into force on January 1, 2018. It includes a wide range of changes to the German Company Pensions Act (BetrAVG), about which we already informed you in our last Client Alert. In this Client Alert, we highlight current employment law issues arising from the implementation of the BRSG.

In a nut shell: Pay and forget and opt out as central innovations of the occupational pension system

The BRSG introduces the possibility of a liability-privileged collectively agreed pure defined contribution plan (TBZ). The employer does not have to pay for the permanent pension level. Guaranteed benefits are even prohibited to allow the employee, who bears the risks of the investment, the chance of a good return. In addition, there is now the possibility in an option system to perform per se deferred compensation if the employee does not actively object to this. Both commitments are designed in the social partner model with the participation of the collective bargaining parties. These central innovations are flanked by various regulations. This is mainly due to the improved tax framework for the allocation of the applicable implementation channels (direct insurance, pension funds and pension funds) to 8% BBG (but without a one-off amount of EUR 1,800). From January 1, 2019, employers will be required to pay a subsidy of 15% if social security contributions are saved as a result of deferred compensation; from January 1, 2022, this will also apply to existing pension schemes (except for the direct commitment and provident fund implementation methods).

Implementation issues under labor law

In the case of the introduction of a TBZ, which is at the core of the reform project (§§ 1 Para. 2 No. 2a, 21, 22 BetrAVG n.F.), implementation can take place (1) directly through a collective agreement or (2) by the collective agreement enabling a voluntary (or enforceable) works agreement and giving the works councils a right of initiative or co-determination for this. Depending on the design variant, there are different implications.

(1) Mandatory TBZ

In the event of a mandatory introduction of TBZ directly by means of a collective bargaining agreement, there would be no obligation under Section 77 para. 3, 87 par. 1 BetrVG leads to a blocking effect of this collective agreement: The company partners lack the regulatory competence for the contents that are regulated by collective agreement. This also applies if a collective agreement is subsequently agreed; the works agreement becomes invalid ex nunc on the basis of the collective agreement (BAG ruling dated January 21, 2003, 1 ABR 9/02). In the event of a collective bargaining lockout, a company agreement on the occupational pension scheme which has become ineffective cannot be reinterpreted as an overall commitment (BAG ruling dated March 5, 1997, 4 AZR 532/95) or, in view of its actual implementation, constitute a company practice (BAG ruling dated November 18, 2003, 1 AZR 604/02).

The decisive factor for the blocking effect is the identity of the subject matter of the regulation. It would therefore have to be questioned whether the parties to the collective bargaining agreement intended a conclusive regulation or whether they possibly linked it to other prerequisites for the facts. This is accompanied by further follow-up questions such as whether the TBZ involves the same subject matter as a traditional commitment – does the form of the commitment as a (defined contribution) defined benefit or defined contribution with minimum benefit or the same implementation channel matter? At any rate, pure deferred compensation and an employer-financed pension will be able to be regarded as different subjects of regulation. A new collectively agreed option model (Section 20 of the German Occupational Pensions Act (BetrAVG), as amended) will also only affect employee-financed deferred compensation and will make previously voluntary occupational deferred compensation mandatory, but will not displace employer-financed pension plans.

It has not yet been clarified whether, in the event of a tariff freeze, the company agreement would also be invalid if and to the extent that it contains a higher pension level. In principle, the tariff blocking pursuant to Sec. 77 (1) of the German Commercial Code (HGB) does not apply. 3, 87 par. 1 BetrVG does not depend on the favorability of the regulation. However, it might be advisable to limit the blocking effect in line with the BAG’s three-stage theory. The collective bargaining block is dispositive in this respect if the collective bargaining agreement expressly permits the conclusion of supplementary works agreements. The collective agreement should therefore already regulate the effects on existing regulations (replacement, crediting or increase). The practical challenge that will arise, depending on the scope of the collective agreement, is first of all whether the provisions of the collective agreement do justice to the diversity of company constellations. From the company’s point of view, the question arises in the event of the collective bargaining agreement being imposed to what extent existing pension commitments can be modified on account of the TBZ.

(2) Optional TBZ

In the case of “optional” TBZ by works agreement, no collective bargaining block applies, since the collective bargaining agreement in this constellation expressly authorizes the introduction of TBZ by means of a voluntary or enforceable works agreement. However, the three-tier theory also raises questions here – for example, can the collective agreement regulate how the company TBZ relates to existing pension schemes. In the case of a new collective agreement governing the occupational pension scheme, there is no equity review within the meaning of the three-step theory (BAG ruling dated July 28, 2005, 3 AZR 14/05). However, a TBZ implemented by company agreement is not covered by this exception. Therefore, if the collective agreement does not contain a conflict-of-law provision, the three-step theory applies. However, if – as is to be expected – there is no interference with the Past Service, but only a freezing of the old pension system and the introduction of the TBZ for the Future Service, only factually proportional reasons for the modification of the pension commitment are required. In addition to economic reasons or an undesirable development of the occupational pension scheme, the reassessment by the parties to the agreement may constitute grounds for intervention (BAG ruling dated October 13, 2016, 3 AZR 439/15). The codification of the TBZ in the BRSG could already be used for a modification with ex nunc effect.

(3) Liability privilege?

The lack of a duty of compliance for the TBZ from § 1 para. 1 sentence 3 BetrAVG does not mean that there is a comprehensive release of the employer from liability. If the target pension of the TBZ is subsequently missed or if there are significant losses of paid-in contributions, it is to be expected that pension beneficiaries will try to claim against the employer. One possible line of argument could be that the legislator has not expressly excluded the obligation to pay on the basis of the basic employment relationship. In particular, (form) errors in the (deteriorating) replacement of the previous supply system involve process risks. Whether the TBZ, with its opportunities and risks, is actually more (in)favorable than the previous supply system must be analyzed in detail. The pension beneficiary may wait until the start of the pension period to file an action without forfeiting his rights. From the company’s point of view, it is important – as always in occupational pension schemes – to be able to fall back on comprehensive and transparent documentation, especially with regard to the reasons that prompted the change in the pension system. In the same way as the formulation of pension commitments, labor law case law is constantly evolving. A failure to provide sufficient information about the risks of (total) loss (as in the case of prospectus liability), assurances and advice from pension providers or the lack of transparency of the employment contract provision (Section 307 (1) sentence 1 of the German Civil Code (BGB)) could also constitute gateways for liability.

The ball is in the collective bargaining parties’ court

It remains to be seen whether the reform goals in favor of occupational pension schemes will be achieved. In the first step, this depends on how the parties to the collective bargaining agreement implement it in practice. The second step will be to examine the consequences of the respective collective agreement for the companies’ existing pension systems. We will be happy to advise you on these and other aspects.