Employer’s liability for indirect pension commitments

If external pension providers, such as the first pension funds at present, are unable to fulfill the promised company pension benefits for whatever reason, the employer is liable to the beneficiaries for the fulfillment of the promised pension benefits. This liability risk can be reduced by selecting needs-based design options.

Introduction

If the external pension provider does not fully meet the promised company pension benefits, the employer is liable for the financial shortfall compared to the promise. In the low interest rate environment, this liability risk arises in particular for indirect commitments with guaranteed interest rates that are considerably higher than the current interest rate level – the first pension funds and provident funds are enforcing a reduction in the guaranteed interest rate on their members. The resulting gaps in cover are to be closed by the member companies through annual top-up payments to the external pension provider or direct payments to the beneficiaries.

What is the employer’s obligation to indemnify?

Pursuant to Section 1 (1) sentence 3 BetrAVG, employers are also liable to the beneficiaries for the provision of pension benefits from a commitment via an external implementation channel. According to the case law of the Federal Labor Court (BAG), this so-called “procurement claim”, which exists for all external implementation channels (direct insurance, pension fund, pension fund and relief fund), includes a direct claim for performance by the beneficiary against the employer if the external pension provider is unable to provide the benefits specified in the pension commitment, either because it has not been sufficiently endowed or because it is unable to perform for other reasons.

Can the employer exculpate itself from liability?

No, the claim for provision is aimed at fulfillment and not at compensation and is therefore independent of fault. The cause of the shortfall in cover may be misguided investment strategies or other economic influences that neither the employer nor the pension provider can avoid – it does not matter from which sphere or for what specific reason the inability of the pension provider to perform arises.

Differentiation from the right to compliance with the implementation route

The employee’s entitlement to compliance with the implementation method specified in the pension commitment is upstream in terms of time and content. The employer must take all necessary steps to ensure the subsequent fulfillment of the pension promise via the agreed implementation method before the pension event occurs. The employee may enforce compliance with the implementation method against the employer by way of compulsory enforcement following a ruling by the labor court.

How far does the obligation to indemnify extend?

The entitlement to procurement covers all types and content of pension benefits (retirement, disability and surviving dependants’ benefits in the form of pension and lump-sum benefits) as well as all benefit components. In the case of defined contribution benefit commitments with profit participation, this includes not only the guaranteed pension (in particular on the basis of the promised minimum interest rate) but also the profit participation.

What applies to employee contributions and mixed financing?

The entitlement to procurement also applies to pension benefits resulting from the employee’s own contributions (in particular matching contributions) if the employer’s commitment as a “comprehensive commitment” is also intended to cover these pension benefits. It must be clarified by interpretation whether this results from a corresponding declaration or implicitly from the overall circumstances, which is judged more strictly by the case law of the BAG for commitments made before July 1, 2002 – the date on which § 1 Para. 2 No. 4 BetrAVG came into force. The burden of presentation and proof of coverage lies with the beneficiary who asserts the obligation to assume liability. To avoid liability, employers should document the lack of willingness to pay pension benefits from the employee’s own contributions by means of a transparent provision in the commitment.

Do (simplified) adjustment review obligations apply for the employer?

The obligation to assume liability also includes any increases in pension benefits from indirect pension commitments to be granted following an adjustment review in accordance with Section 16 BetrAVG. When examining the need for adjustment, the interests of the beneficiary and the economic situation of the employer must also be taken into account in the case of external implementation paths in accordance with Section 16 (1). 1 2. Hs. BetrAVG to be taken into account. The economic situation of the external pension provider is irrelevant. When implementing commitments made after May 16, 1996 via a pension fund or direct insurance, the adjustment test can be fulfilled more easily in accordance with Section 16 (3) No. 2 BetrAVG if all surplus shares attributable to the pension portfolio are used to increase the current benefits from the start of the pension. It was adjusted by the law implementing the EU Mobility Directive to remove the previously applicable further requirement that the amount of the profit participation in accordance with Section 65 para. 1 No. 1 lit. a) VAG in conjunction with. § Section 2 DeckRV is not exceeded when calculating the actuarial provision. The new version came into force on December 21, 2015; the supreme court has not yet clarified from which adjustment review cycle it applies. According to initial rulings published in this regard, it should not be applied without exception for audit periods that have already been completed, as this would constitute a genuine retroactive effect. This is only permissible if those applying the law were unable to form a legitimate expectation of the existing legal situation. The substantive modification was to be expected for the first time with the government draft of July 1, 2015, so that a genuine retroactive effect is likely to be recorded for all audit periods that had not yet been completed at that time. Furthermore, a simplified adjustment review could only be carried out effectively if the statutory maximum interest rate was observed for the adjustment. If it has been exceeded, the adjustment test must be carried out in accordance with the case law of the BAG pursuant to Section 16 para. 1 BetrAVG to be carried out. As the simplified standard was used in the past by regulated pension funds in an inadmissible manner, there is a risk of liability from the procurement claim, as well as if not all surplus shares attributable to the pension portfolio were used without restriction to increase the benefits from the start of the pension, but rather partially to close a coverage gap.

Conclusion

The employer should use the legal options to minimize its liability risk: In addition to active administration of the legal relationship with the external pension provider, it is advisable to carefully select the pension provider in terms of economic performance, risk profile of the contribution investment and management expertise when making the commitment. The scope for negotiation should be utilized and concrete, reliable hedging instruments should be determined. Any membership rights should be actively exercised in order to ensure timely notification of changes in economic performance.

The options for beneficiaries to amend the pension commitment remain unaffected. The employer can reduce its obligation to assume liability by applying options under employment law, taking into account the requirements for the formal and material amendment of the pension commitment, particularly with regard to changing the external pension provider, the implementation route and changes to the content by intervening in the benefit plan. The needs-based approach must be based on an individual analysis of the relevant framework parameters of the employer, the external pension provider and the other stakeholders.