Company pension scheme – Pensions Update | Issue 1/2014

Contractual Trust Agreements after the accolade by the BAG

In its ruling of July 18, 2013, the German Federal Labor Court (Bundesarbeitsgericht – BAG) recognized the (out)financing of payment claims of employees from partial retirement value credits in a two-tier trust model (CTA) as insolvency-proof. This article outlines the structuring options for occupational pension commitments resulting from the ruling and the legal issues that are still open.

Over the past 25 years, the double-sided contractual trust agreement (CTA) has become the preferred instrument for financing the pension entitlements of beneficiary employees under company pension plans. From the company’s point of view, this is primarily for the purpose of transferring the provisions to be recognized for the pension entitlements to the balance sheet and thus improving the company’s credit rating on the capital market. In addition, for insolvency protection under private law of pension claims that are not protected by the statutory insolvency protection of the Pensionssicherungsverein.

On the one hand, the CTA involves a management trust relationship between the trustee and the employer, the purpose of which is the fiduciary management of the assets transferred by the employer for the (out)financing of the pension commitments. On the other hand, the CTA includes a security trust relationship between the trustee and the employee entitled to pension benefits, the purpose of which is the (further) fulfillment of the pension commitments by the trustee in the event of the employer’s insolvency.

The insolvency resistance of the CTA is largely determined by the legal form of the security trust relationship. In practice, there has been general agreement on the insolvency resistance of such CTA structures ever since a CTA was first established under German law. The BAG was unable to take a position on this legal issue until the summer of last year – due to a lack of legal disputes brought to its attention. It has now had the opportunity to do so in its decision of July 18, 2013. The subject matter of the legal dispute was the insolvency protection of credit balances from partial retirement employment contracts under the block model by means of a CTA. In the legal dispute, the plaintiff employee initially demanded that the insolvency administrator release the assets contributed to the CTA for her partial retirement credits; later, she sought a declaration that these assets did not belong to the insolvency estate. The BAG upheld the action and affirmed the insolvency-proof nature of a CTA for securing partial retirement credits if the contracting parties observe individual key points in the contractual formulation of the trust agreement:

The five core theses of the BAG on insolvency stability for practice
(1) The security trust is regulated in the CTA in a transparent and clearly demarcated manner from the administrative trust.
(2) In the agreement of the security trust, the beneficiary employee shall be entitled to his own claim against the CTA for the fulfillment of his secured (payment) claims in the event of insolvency.
(3) In the agreement of the management trust, the trustee shall have the duty to regularly check the degree of coverage of the funding of the pension liabilities.
(4) The assets managed by the trustee in the CTA are generally removed from the access of the trustor after the transfer.
(5) Termination or other termination of the trust agreement can only be effective if the settlor guarantees equivalent insolvency protection of the secured (payment) claims even after termination of the trust agreement.

So far, the BAG has not had the opportunity to assess the insolvency resistance of a CTA to secure company pension claims. Occasionally, a transfer of the legal principles of the BAG on the CTA of partial retirement credits to such a CTA is rejected on the grounds that the protection of the value credits was based on a corresponding obligation of the employer with regard to the work performed by the beneficiary employees for the partial retirement credits. In practice, however, the ruling of the BAG of July 18, 2013 is correctly considered to be authoritative for this CTA as well. The company pension benefits also include, as a result, a component of the remuneration that the employer gives to the beneficiary employee in return for the employee’s work performance. This applies in particular to pension commitments that are financed by the employee through deferred compensation.

Unsatisfactorily with regard to the economic interests of the beneficiary employees, in its ruling of July 18, 2013 the BAG only granted the employees a right to separate satisfaction under insolvency law with regard to the assets contributed to the CTA. Such a right of segregation, which requires an insolvency law settlement of the insolvency protection in such a way that the insolvency administrator sells the assets contained in the CTA and pays the trustee or the beneficiary employees the proceeds of the sale, is generally less attractive for the beneficiary employee than the alternative insolvency law right of segregation, as the assets are not necessarily sold at the best possible selling price in a corresponding market situation. In contrast, the right to separate satisfaction under insolvency law authorizes the trustee to freely dispose of the assets contained in the CTA; in particular, the trustee does not have to sell the assets after the opening of the insolvency proceedings, but can, for example, wait for the economically best possible time of sale by means of a staggered sale in line with the respective financial requirements for the fulfillment of the pension commitments due in each case, thereby increasing the degree of fulfillment for the actual fulfillment of the pension commitments.

The interests of the employer and the beneficiary employees in maximum economic utilization or exploitation of the assets contained in the CTA resulting from these framework conditions must be taken into account in two key places when implementing the CTA:
(1) In the starting point, by selecting the “right” assets for the CTA, which enables the employer to use the company’s capital assets in line with requirements prior to the occurrence of the protection event and involves the best possible use or realization of the assets contributed to the CTA for the employee in the protection event to finance his pension entitlements from the pension commitment.
(2) In the contractual arrangement of the legal positions of the employer, the trustee and the employee in the trust agreement in order to ensure the insolvency law treatment of the relevant legal position as a right to separate satisfaction under insolvency law.

With the decision of the BAG of July 18, 2013, the CTA has finally established itself as an instrument for the (out)financing of pension entitlements from occupational pension schemes, also from the perspective of insolvency law. Employers who choose to implement a CTA can achieve a needs-optimal design through case-by-case needs-based decisions for the general economic evaluation parameters of a CTA:

The five core parameters for a needs-based design of the CTA
(1) Appropriate fiduciary: internal solution ./. external providers.
(2) Need-based selection of assets to be transferred to the CTA: primarily a decision between liquid and illiquid assets.
(3) Openness of the CTA with regard to secured claims: restriction to pension commitments ./. reservation of extension to other remuneration claims (e.g. value credits from working time accounts).
(4) Openness of CTA with respect to participating employers: individual CTA ./. group CTA.
(5) Out-financing: full financing with obligation to make additional contributions ./. flexible degree of financing.

(Anti)Discrimination in Pension Commitments: The Fog is Clearing (more)

In its landmark decision of July 19, 2011 (3 AZR 434/09), the Federal Labor Court (Bundesarbeitsgericht – BAG) recognized that age limits in company pension commitments do not generally violate the statutory provisions prohibiting discrimination (in this case, above all, the General Equal Treatment Act (Allgemeines Gleichbehandlungsgesetz – AGG) enacted on August 1, 2006). In the last 12 months, the BAG has continued its case law and set further cornerstones for practice. The article discusses the current legal development.

Maximum age limits and minimum waiting periods in pension commitments: (No) discrimination on grounds of age and gender

In its decisions of November 12, 2013 (3 AZR 356/12) and March 18, 2014 (3 AZR 69/12), the BAG continued its case law on the permissibility of maximum age limits in pension commitments.

In the case underlying the decision of November 12, 2013, the employer had promised its employees company pension benefits via a provident fund. The benefit plan stipulated a maximum age of 50 for the group of beneficiaries; if the beneficiary took up employment after the age of 50, he or she could no longer acquire an entitlement to pension benefits. The plaintiff, who was 52 years old when she began working for the employer, considered the age restriction for access to the pension system to be impermissible discrimination on the basis of age and gender.

The BAG dismissed their claim for the employer’s obligation to pay a company retirement pension in accordance with its pension plan. According to the statutory provisions of the AGG, age-related unequal treatment for access to a company pension scheme is permissible if it is

(1) is done to achieve a legitimate objective; and
(2) is appropriate.

The employer was to be granted the long-term financial viability of the company pension benefits voluntarily granted by it and financed by it as a legitimate objective for the age-related differentiation. The legislator had included in the catalog of § 10 para. 3 AGG, which contains groups of cases for the permissible age-related different treatment of employees, also explicitly includes occupational pensions. The specific age limit is appropriate if the employer does not disregard the legitimate interests of the employees concerned – as an economic interest in the granting of the company pension after retirement from active working life – when setting the age limit. The employees concerned could be expected to accept an age limit if, according to a typical view, they had the opportunity during their working lives – typically at least 40 years – to build up entitlements to occupational pension benefits or other pension benefits even without the periods of service completed with the employer. This is to be affirmed in the case of an age-based limitation of access to the pension scheme to the age of 50, according to which the employee typically has a period of more than 25 years available for the accumulation of pension expectancies even without taking into account the periods of employment completed after reaching the age of 50.

The BAG rejected a gender-related disadvantage for female employees – in relation to the role of mother and the associated child-rearing periods – on the grounds that typically, re-entry into working life after child-rearing periods can be expected before the age of 50.

The BAG had already previously ruled in the judgment of February 12, 2013 (3 AZR 100/11) considered a 15-year minimum waiting period in a benefit plan for the granting of pension benefits to be permissible with comparable reasoning. In its ruling of December 11, 2012 (3 AZR 634/10), it had already used this reasoning to consider the restriction of the years of service relevant for the amount of pension benefits to a scope of 40 years of service to be effective.

In contrast, in its ruling of March 18, 2014, the BAG found the stipulation of a 10-year minimum waiting period and not exceeding the age of 55 at the time of fulfillment of the waiting period to be a violation as unlawful age-based discrimination. Such a system of regulations in a pension plan would in fact exclude all employees who have exceeded the age of 45 at the time of the initial pension commitment. The associated denial of the accrual of pension rights for a typical employment period of more than 20 years includes a disproportionate encroachment on the legal position of the affected individual older employee.

The fundamental admissibility of the use of age limits and minimum waiting periods has been clarified according to the case law of the BAG. The maximum permissible limits have so far been left open by the FOPH. Taking into account the most recent decision of the BAG of March 18, 2014, they are likely to be in the range of 45 to 50 years of age or a minimum length of service of 15 to 20 years.
Access restrictions can be legally agreed with the data decided by the BAG. In view of the generally rather restrictive case law of the BAG on the conformity of the design of access to the pension scheme with the AGG, a further opening of scope for design in determining the group of beneficiaries is not to be expected.

Matching Contribution: Age-dependent graduation of contributions

A standard of review comparable to the aforementioned judgments was also relevant for the decision of the European Court of Justice (ECJ) of September 26, 2013 (C-476/11) on the permissibility of an age-based graduation of contributions to a defined contribution plan. In this legal dispute, which was pending before a Danish labor court, the benefit plan stipulated that the pension benefits were to be financed by the Danish employer and the employee (matching contribution), whereby the amount of the contributions was to be as follows, depending on age (percentages based on the fixed salary from the employment relationship): (1) under 35 years: 3% employee contribution and 6% employer contribution, (2) 35 to 44 years: 4% employee contribution and 8% employer contribution, (3) over 45 years: 5% employee contribution and 10% employer contribution. The plaintiff, who was 29 years old when she started working for the employer, requested that the employer make an annual contribution of 10%. She claimed that the limitation of the annual contribution to 5% provided for her age involved age-related discrimination. In contrast, the employer justified the age-related staggering of employer contributions with the argument that the higher contribution enables older employees to build up adequate retirement provisions within a relatively short period of the qualifying periods. In addition, the contribution system would allow young employees to be integrated into this company pension scheme at an early stage, while at the same time leaving them with a larger portion of their salary, as a lower employee contribution would apply to them.

The ECJ recognized the salary-related differentiation put forward by the employer as a legitimate purpose for the age-related unequal treatment. With regard to the assessment of the appropriateness of the age-related differentiation of the contribution amount as the second condition for age-related unequal treatment, the ECJ cited as a decisive assessment criterion the evaluation of whether the age-related lower pension benefit due to the lower employer contributions is reasonable for the employee. The final assessment in this regard was transferred to the Danish court of origin.

Conclusion:

According to this ECJ decision, employers can in principle use an age-related graduation of employer contributions for a defined contribution plan as an element for a flexible and needs-based pension scheme. The specific degree of differentiation permitted depends on the absolute amount of the promised pension benefits and the gradient dynamics over time.

Survivor benefits: Exclusion in the event of marriage after leaving employment

In its ruling of October 15, 2013 (3 AZR 653/11), the Federal Labor Court (Bundesarbeitsgericht – BAG) was able to clarify the admissibility of excluding surviving spouses of employees from company pension benefits for surviving dependents whom the employee had married only after leaving the employment relationship. In the specific case, the benefit plan specified as a condition for the provision of survivor benefits that (1) the employee receiving the benefit had entered into the marriage before reaching age 60, (2) the deceased employee was not more than 20 years older than the spouse, and (3) the marriage had lasted at least one year at the time of the employee’s death. The plaintiff, a widow born in 1958, whom the employee, born in 1933, had married in 1987 after he left his employment in 1979, claimed that the aforementioned requirements for entitlement to survivors’ benefits included age discrimination against older employees.

The BAG recognized the clause as effective. The requirement of marriage prior to the termination of the employment relationship – which he considers to be the only one relevant to the dispute – is based on the legitimate purpose of limiting the benefit obligations under the occupational pension scheme to risks that are already created during the term of the employment relationship. This applies above all to benefits for surviving dependents, since such a promise of benefits entails additional imponderables and risks that affect not only the time at which benefits are payable, but also the duration of the provision of benefits.

In its ruling of June 23, 2011 (4 Sa 381/11 B), the Lower Saxony Regional Labor Court (LAG), as the court of first instance, also affirmed the validity of the age gap clause based on a 20-year age gap. The age gap clause pursues the legitimate purpose of limiting the risk for the employer with regard to the amount and duration of the employer’s benefits for surviving dependents. The limitation of pension benefits to surviving spouses with an age difference of less than 20 years is appropriate for achieving this purpose, since in particular the spouse who is more than 20 years younger can be expected to take up gainful employment in order to secure his or her livelihood. At the same time, this distance clause can ensure that it does not result in an exclusion of benefits for spouses with a typically smaller age difference.

Conclusion:

With these first (supreme) court decisions after the enactment of the AGG, the BAG continues its case law on the admissibility of age-related differentiations in survivors’ benefits. In particular, linking the entitlement to the specific survivor benefit to marriage prior to termination of the employment relationship enables the employer to manage the risk of funding these benefits in line with requirements.

Adjustment of company pension commitments

Legal issues relating to the adjustment test under Section 16 of the German Occupational Pensions Act (BetrAVG) continue to be in the crossfire of legal practice. Among other things, employers face major challenges in exercising the equitable discretion granted by the legislator for the adjustment requirement and their economic performance to be taken into account for this purpose. In the past 12 months, case law has fleshed out the framework for assessing economic performance in the event of a merger of the employer with third companies. It also determined the start of the accrual of default interest for adjustment claims.

In its ruling of August 20, 2013 (3 AZR 750/11), the BAG had the opportunity to further specify its case law on the framework parameters of the employer’s economic performance if the employer merges with a third company during the adjustment review period.

In the facts underlying the decision, which are graphically depicted in the overview below, the employer (A GmbH) promising the specific benefits of the company pension plan was merged into the company sued in the legal dispute (target company: B GmbH) after the pension payments had commenced. The merger was effected by absorption under transformation law, according to which A GmbH was dissolved as a result of the merger with B GmbH and its previous business operations were continued by B GmbH as universal successor.

In the legal dispute, the target company refused the adjustment of the company pensions requested by the company pensioner in accordance with Section 16 para. 1 BetrAVG with reference to the poor economic situation of the employer originally making the pension commitment. At the same time, the target company refused to take into account the very positive economic development of the business areas already existing with it prior to the merger for the assessment of economic performance.

The BAG opposed this view: The obligation to review the adjustment is incumbent on the company that granted the pension commitment to the employee or took it over by way of legal succession. If the pension debtor resulted from a merger of two companies in the relevant assessment reference period, the decisive factor was whether, on the basis of the economic development of the two originally independent companies, it was to be expected that the pension debtor would be able to meet the higher charges resulting from the adjustment from the expected company income and the available increases in the value of the company assets. This means that the economic development of both the merged entity (A GmbH) and the acquiring target company (B GmbH) on the adjustment date must be taken into account as parameters for the adjustment test in a forecast. The BAG thus takes a holistic view, including the economic situation of the (new) pension debtor before and after the merger.

This holistic approach to consulting in accordance with the interpretation of the BAG also implies, as a mirror image, that in the event of a merger of an economically successful employer granting the pension commitment with a company with a sustained loss-making business operation, the loss-making business development of the company involved in the merger must be taken into account in the economic assessment of the adjustment of the company pension benefits.

The adjustment horizon for other reorganizations under transformation law:

The legal principles established by the BAG on the holistic approach can be applied as follows for the adjustment test in the other conversion-related group situations relevant in practice:

a) Breakdown

When a company is split up, the employer granting the pension commitment (in the following overview, A GmbH) transfers its entire assets in each case as a whole by way of partial universal succession to at least two new legal entities (B GmbH and C GmbH). After completion of the demerger, the pension debtor is solely the legal entity to which the pension commitment was transferred (B GmbH). The adjustment test must therefore be based solely on the development of the economic performance of A GmbH and B GmbH, while the economic performance of C GmbH can be disregarded.

In detail, the following case groups can be recorded for the adjustment test in the case of splitting.

aa) Splitting by transfer to existing legal entity

In this case, the economic situation of A GmbH, which issued the pension commitment, and the economic situation of B GmbH, which absorbs the split-up part of A GmbH provided with the pension commitment, must be taken into account in accordance with the holistic approach. For B GmbH, the relevant economic development for the adjustment period prior to the split-up must also be taken into account. If the company pensioner was already employed by B GmbH prior to the split-up and received the pension commitment from the latter, B GmbH must take into account the economic development of A GmbH and B GmbH in the mirror image for the adjustment check of his company pension.

bb) Splitting through new formation

In the case of a split-up by transferring the assets of the company issuing the pension commitment (A GmbH) to a new legal entity established for this purpose (B GmbH), the assessment standard is identical at the outset – the assessment of the economic performance must take into account both the economic development of A GmbH and B GmbH. In view of its new formation, there is no operating business to report for B GmbH with regard to the assessment for the period prior to the demerger.

b) Spin-off and spin-off

In the event of a transfer of the pension commitment from the original employer (A GmbH) to an existing or newly established company (B GmbH) by way of a spin-off or spin-off, A GmbH shall continue to exist as the legal entity even after the spin-off or spin-off; only the part of the business to which the pension commitment granted to the beneficiary employee is assigned shall be transferred. In this case, the holistic consulting approach means that the economic development of A GmbH up to the spin-off and B GmbH for the entire audit period must be taken into account for the adjustment audit.

Conclusion:

The BAG continues its employee-friendly case law with its holistic view of merger processes in the assessment period relevant for the adjustment test pursuant to Sec. 16 BetrAVG. The companies involved in such transactions under transformation law must, if necessary, already take this holistic view into account when designing the concrete target structure – especially in the case of a demerger.

Pension adjustment in the Group: Another swan song for the calculation pass-through?

According to the previous case law of the BAG on the adjustment test in group cases, the employer granting the pension commitment also had to take into account the economic situation of its group parent company when assessing its economic performance if there was a consolidated group relationship between the group parent company and the employer and if typical group risks arose from this relationship. The BAG assumed a consolidated group relationship if a control and profit transfer agreement existed between the group parent company and the employer (contractual group) or a so-called qualified de facto group relationship existed, i.e. the group parent company actually and permanently managed the employer’s business. The realization of a danger typical for a group was assumed if the management power had been exercised by the controlling company in a way that did not take adequate account of the interests of the dependent company, but instead had given priority to the interests of other companies belonging to the group or to its own interests, thereby causing the employer’s lack of performance.

In essence, the BAG derived this case law from the model developed by the German Federal Court of Justice of “Durchgriffshaftung im Konzern” (group through-put liability). After the BGH had already abandoned this liability model in 2007, the BAG broke away from this model for the qualified de facto group in its decision of January 15, 2013 (3 AZR 638/10). In this decision, the BAG left open whether it intended to uphold its previous case law on the liability to pass through, at least for the case constellation of the contractual group. In its ruling of July 3, 2013 (4 Sa 112/12), the LAG Baden-Württemberg had the opportunity to issue its own opinion on this case constellation following the aforementioned change in case law.

In the facts underlying the decision, the defendant employer was the German subsidiary of an international group of companies. The employer provided part of its business activities to other group companies and performed administrative tasks for the group parent company. The intercompany service agreement concluded for the remuneration of these intercompany services did not provide for direct reimbursement of the costs incurred for the services in a certain predetermined amount; rather, an overall assessment was made in which the amount of the costs to be reimbursed, and thus the amount of the intercompany revenue, depended on the amount of the external revenue – if the external revenue was high, the amount of the reimbursement for the internal services decreased, and thus the internal revenue to be reported in the financial statements decreased, and vice versa. This structure of the intra-group service agreement meant that the employer could not in fact achieve a return on equity relevant for a pension adjustment at any time; this was also the case in the adjustment period relevant for the legal dispute, for which the employer ultimately also refused a pension adjustment. In the legal dispute conducted on the pension adjustment, the company pensioner claimed that the remuneration system set out in the intra-group service agreement prevented the return on equity required for the pension adjustment, that such an arrangement was an abuse of rights, and that he should instead be granted a pension adjustment in accordance with the principles of group pass-through liability.

The Baden-Württemberg Higher Labor Court dismissed the action. It did not recognize any regulations that were an abuse of rights in the structure of the compensation system in the intra-group service agreement. A calculation pass-through was not justified in the result, since the defendant had no possibility to refinance the costs of a pension adjustment with its shareholders.

Conclusion:

It remains to be seen how the BAG will continue its case law on company pension adjustments in the Group. The plaintiff employee has filed an appeal against the ruling of the LAG Baden-Württemberg with the BAG (3 AZR 729/13). Should the opinion of the LAG Baden-Württemberg prevail, company pension adjustments at Group companies which provide a significant proportion of their business activities internally to other Group companies can be prevented by structuring the service agreements accordingly.

Default interest on adjustment amounts: Only from legal effect!

Finally, in its ruling of December 10, 2013 (3 AZR 595/12), the BAG clarified the legal question, which had previously been unresolved in practice, as to the point in time from which default interest is to be paid on pension adjustments made retrospectively. This question arises in particular if the employee can (only) enforce the relevant pension adjustment against the employer by way of a labor court dispute. The BAG has now ruled that a claim to default interest on the adjustment contributions only exists from the date on which the judgment becomes final. In view of the provisions applicable to the employer for the adjustment of pension benefits in Sec. 16 para. 1 of the German Occupational Pensions Act (BetrAVG), a judgment of the labor court on an adjustment of the occupational pension has a formative effect (Section 315 (3) of the German Civil Code (BGB)) and the relevant adjustment amount only becomes due when the labor court judgment becomes final.

Conclusion:

With its decision, the BAG creates a welcome clarity for practice. Employers may therefore, in the event of a labor court clarification of the amount of the relevant pension adjustment under Sec. 16 para. 1 BetrAVG avoid liability for default interest if they pay the relevant adjustment contributions to the company pensioner in good time after the court judgment has been set aside.

And what else? – Further current case law

Case law has also been active in other areas of occupational pension provision over the past twelve months. Among other things, it substantiated its legal principles on the (partial) revocation of a pension commitment and on the (partial) waiver of company pension claims on the occasion of the establishment of a part-time employment relationship for older employees.

If an employee breaches his or her duties arising from the employment relationship in gross breach of duty, the employer may revoke the pension commitment in accordance with the established case law of the BAG (most recently, for example, in its ruling dated November 13, 2012, 3 AZR 444/10) if the employee’s invocation of his or her pension entitlement is an abuse of rights. In the opinion of the BAG, this is the case if the employee, as a result of his or her conduct in breach of duty, has caused damage to the company which endangers the economic situation of the employer and has thus at least contributed to the employer’s inability to pay the company pension. In such cases, the employee cannot demand that the employer nevertheless fulfill its obligation under the pension commitment. It would be contrary to good faith for the employee to rely on this.

In its ruling of November 12, 2013 (3 AZR 274/12), the BAG had to decide on the partial revocation of a pension commitment. In the facts underlying the decision, the employee – who was employed by the vehicle leasing company defendant in the legal dispute between 1975 and 1997 and who, as head of the legal department, was responsible, among other things, for the utilization of leased cars after expiration of the respective leasing contracts – had caused his employer financial losses of approximately EUR 150,000 by accepting bribe payments from individual employees of his employer. After the discovery of these bribery cases – which covered a total period of four years – the employee paid the employer an amount of EUR 100,000 on his own initiative; the parties reached an agreement on the remaining amount of damages, which provided for the employee to pay 40% of these damages to compensate for the loss. The employer also revoked the pension commitment in the proportionate amount corresponding to the relationship between the four-year period of acceptance of the bribe payments and the employee’s total 22 years of service. The employee considered the partial revocation to be invalid and demanded full payment of the company pension.

The BAG upheld the action. In further concretization of its previous case law, the court generally allowed the employer to revoke the pension commitment only on a pro rata basis with reference to the relevant breaches of duty. However, in the specific case, the employer had not suffered such a financial loss as a result of the employee’s breaches of duty that would endanger the existence of the company and justify a (partial) revocation of the pension commitment.

Conclusion:

The ruling once again demonstrates the very restrictive requirements of the BAG for the revocation of a pension commitment. At the same time, it makes clear that the BAG applies these restrictive requirements in the same way for a complete revocation as well as for a partial revocation of the pension commitment. In practice, only a few employers will be able to claim the existence-threatening economic risk required by the BAG due to the specific breaches of duty by the employee. Employers who are considering a (partial) revocation of the pension commitment, particularly in the case of intentional – punishable – breaches of duty by the employee, should therefore generally consider or implement alternative sanction or damage compensation measures in addition to the revocation of the pension commitment; in this case, in particular, the assertion of direct damage compensation claims against the employee.

Partial waiver of company pension entitlements in a partial retirement agreement

In its decision of April 4, 2013 (9 Ca 388/12), the Stuttgart Labor Court had the opportunity to assess the validity of a partial waiver of company pension claims in a partial retirement agreement. According to the case law of the BAG, such a (partial) waiver is only possible in accordance with the narrow conditions which the legislator has established for the settlement of vested pension rights in Sec. 3 BetrAVG (see only BAG judgment dated September 22, 1987, 3 AZR 194/86).

In the facts underlying the decision, the plaintiff employee had concluded a partial retirement employment contract with the defendant employer which, among other things, provided for a limitation of the eligible period of service for the company pension entitlements to the end of the active working phase. In this respect, the agreement contained a partial waiver, according to which the years of service earned in the release phase of partial retirement were not to be taken into account in the calculation of the company pension.

The Stuttgart Labor Court ruled that this partial waiver violated the statutory prohibition of severance pay pursuant to Section 3 of the German Company Pension Act (BetrAVG) and was therefore invalid. In view of the work and release phase agreed in it, the partial retirement agreement had already been negotiated and concluded with a view to terminating the employment relationship, according to which the employee terminated the employment relationship in accordance with the partial retirement agreement at an earlier point in time than would have been the case if the previous employment contract with the defendant employer had been properly executed. Negotiations had been held between the parties on the “how” and “whether” of the termination of the employment relationship, so that on the basis of the partial retirement agreement the plaintiff left active employment significantly earlier than would have been the case had he reached the statutory retirement age. Due to the direct link between the termination of the employment relationship and the waiver of part of the company pension entitlements without compensation, the agreement was invalid.

Conclusion:

A partial waiver agreement, often intended in practice as a reorganization contribution by employees to restructure the employer company in its economic crisis, can only be used as a viable reorganization instrument to a limited extent. The FOPH has not yet had the opportunity to take a position of its own. However, the reasoning of the Stuttgart Labor Court regarding the invalidity of the partial waiver agreement due to a violation of Section 3 of the German Occupational Pensions Act (BetrAVG) fits seamlessly and, from a dogmatic point of view, correctly into the case law of the Federal Labor Court (Bundesarbeitsgericht – BAG) regarding waiver agreements pursuant to Section 3 of the German Occupational Pensions Act (BetrAVG).

Designing a company pension plan for the future – Increasing employer attractiveness

By 2025, the German labor market will be short of six million skilled workers. Starting in 2018, the so-called “baby boomers” will retire. The challenges for HR departments are enormous. Different values and expectations of the generations resulting from their specific socialization, but also from their respective stage of life, have to be overcome. For example, employees of younger generations demand flexibility and a work-life balance, while older employees are increasingly interested in a good pension plan and a smooth transition to retirement. A study conducted by KPMG back in 2010 showed that company pension plans are one of the most valued fringe benefits. This article explains options for an attractive design of a company pension plan for the future that is fair to all employee groups and thus helps to attract and retain qualified employees.

An attractive pension model that is appreciated by employees should be flexible enough to meet different needs. Security, transparency and high returns are other decisive criteria. These requirements are met by a combination model comprising a working time/time value account and a company pension plan:
(1) The employee accumulates time credits by building up overtime on the working time account and uses it flexibly for free time at short notice.
(2) To the extent that the time credit is not used up, it may be converted into a time value account. There is also the option of additional funding through deferred compensation and employer contributions.
(3) Additional employer and/or employee contributions may in turn be paid into the company pension scheme.

The employer is responsible for setting up and financing the pension plan. Naturally, models that provide for an employer subsidy are particularly attractive, for example. in the form of contributions or a subsidized return. In addition, it must be determined whether the contributed time components or the converted amounts remain within the company (internal financing) or are transferred to external financing instruments (e.g. trust solution, insurance models). The security of the model at all times is guaranteed by the legally required insolvency insurance.
In addition to enabling flexible structuring of the working day at any time, the future provision model can be used to finance sabbaticals, top up lower pay during care or parental leave or part-time employment, or enable a smooth transition to retirement. The company pension scheme, in turn, supplements the benefits provided by the statutory pension insurance in the pension phase and protects the employee or his or her surviving dependents (the latter only if the pension scheme is appropriately designed) in the event of occupational disability or death.
– vis-à-vis younger employees through the long-term flexible working time arrangements and
– toward older employees by offering them the option of a flexible, smooth transition to retirement.

At the same time, such a model helps to keep older employees in the company longer, because they often still want to work, just not to the same extent as before. This will become increasingly important for companies in the future. As baby boomers retire, over 10% of current workers will leave the active workforce in the next 10 years. This gap will be difficult for many companies to close in light of demographic change.

An attractive future provision model strengthens the company’s competitiveness on the labor market and thus helps to ensure the company’s continued existence. In summary, a variety of advantages of a future provision model can be mentioned for both employer and employee:

Employers can meet the challenges of the labor market by making a future provision model attractive.

New Legal Provisions in the Income Tax Act on Debt Contributions for Pension Obligations

According to the established case law of the Federal Fiscal Court (Bundesfinanzhof, BFH), companies could realize hidden burdens early for tax purposes by transferring existing pension obligations, e.g. by assuming debt. The legislator reacted to this at the end of 2013 with new regulations in the German Income Tax Act (EStG) on the assumption of obligations. Although this has reduced the possibilities for realizing hidden charges, it has not completely eliminated them.

In the case of an assumption of debt, a second company additionally enters into the pension obligation alongside the previous debtor on the basis of a contractual agreement. This means that the added debtor is liable alongside the previous debtor. A joint and several liability therefore arises in accordance with § 421 ff. BGB. The employee’s consent is not required for this.

In return for joining the debt, the joining company is to be paid a consideration (compensation payment). The amount of this fee is freely agreed under civil law. It regularly exceeds the value of the pension provision carried as a liability in the tax balance sheet of the previous debtor (employer), which is subject to the tax valuation proviso of Section 6a EStG. In practice, in many cases the compensation payment is based on the IFRS balance sheet approach to the pension obligation, which basically includes all costs and risks.

Due to the low yields currently being achieved on senior corporate bonds and the fact that future increases in pension benefits are taken into account in both the vesting and benefit phases, the settlement payment is regularly significantly higher than the going-concern value for tax purposes in accordance with Section 6a of the German Income Tax Act (EStG).

According to the case law of the BFH (BFH, ruling dated April 26, 2012, IV R 43/09), the previously obligated party was able to realize the hidden burdens in a tax-reducing manner. It is true that, as a result of the assumption of the debt, there is no longer any economic burden from the pension obligations and the provisions must therefore be reversed to income. In return, however, the (higher) compensation payment is immediately deductible as a business expense. The acceding company must recognize the pension obligations as liabilities in the amount of the compensation payment received (acquisition costs) (BHF, judgment dated December 12, 2012, I R 28/11, I R 69/11). The tax valuation proviso of Sec. 6a EStG does not apply in this respect.

However, the new statutory regulation (Sec. 4f EStG) now provides for an equal distribution of the hidden charge realized by the original obligor over 15 years in the case of an assumption of debt. The previous debtor must reverse the pension provision in the tax balance sheet with an increase in profit. The expense arising in connection with the transfer of the pension obligation is immediately deductible for tax purposes as an operating expense up to the amount of the pension provision reversed. Any expense in excess of this amount of the reversed pension provision is to be spread evenly over the financial year in which the debt is incurred and the subsequent 14 financial years.

The debtor (Section 5 (7) EStG) must initially carry the obligations as liabilities in the tax balance sheet at acquisition cost. However, on the reporting dates following the assumption of the debt, the obligations are to be measured at the (lower) value in accordance with section 6a of the German Income Tax Act (EStG). The resulting profit can be spread over a maximum of 15 years by setting up a reserve amounting to fourteen fifteenths (14/15), which reduces the (tax) profit and at least one fourteenth of which must then be released to increase profit in each of the following 14 fiscal years. It should be noted that the new regulations for the acceding company may also be applicable to old cases.

As a result of the changes in the law, the agreement of a debt assumption no longer enables the immediate lifting of the hidden charges from the pension obligations. However, there are possibilities for a medium-term tax deferral. For example, if the tax burden of individual Group companies differs, an assumption of debt can still have far-reaching consequences for the overall tax burden of the Group. Furthermore, a debt contribution by a foreign Group company to the pension obligations may be appropriate. In addition to conceptual and administrative issues, the tax treatment of the assumed pension obligations on the part of the foreign company must be analyzed in particular.

It is still worthwhile to analyze the opportunities arising from debt assignments within a group of companies. In any case, the focus must also be on the accounting effects associated with debt assumption and, above all, on the specific administrative implications.

The further view to the legislator: The coalition agreement and the mobility directive

If the coalition agreement of the Grand Coalition of November 27, 2013 is taken as an indicator for the further development of the legal framework for occupational pension provision, no legislative activities are to be expected from the current federal government in the current legislative period. In contrast, the European legislator’s efforts on the mobility directive, which have been ongoing for several years, have reached the finish line.

With regard to the legal framework for occupational pensions, the coalition agreement confines itself to the general statements that the governing parties want to strengthen occupational pensions and, to this end, create the conditions for occupational pensions to become widespread even in small companies. To this end, the grand coalition intends to examine in the current legislative period the extent to which possible obstacles for small and medium-sized enterprises can be removed. The black-yellow coalition had already set itself such an audit mandate in the previous legislative period in its interministerial working group on company pensions. This audit assignment was triggered by the findings of an empirical survey conducted by the German Federal Ministry of Labor and Social Affairs in 2011, which showed that while more than 60% of employees in employment subject to social security contributions have a company pension commitment to their employment relationship, only 30% of companies with fewer than 10 employees grant their employees a company pension commitment.

On May 20, 2014, the European Union’s Mobility Directive came into force – among others against the votes of Germany, the Netherlands and Great Britain in the European Council – which has to be transposed into national law by the member states by 2018 at the latest at least for all cross-border employment relationships. The Federal Ministry of Labor has already announced that, due to the technical difficulties in defining the boundaries of temporary activities abroad, which are not uncommon in today’s employment biographies, and also in order to avoid apparent discrimination against nationals, all direct commitments under occupational pension schemes in Germany will probably be affected. A draft bill with far-reaching changes to the Occupational Pensions Act is expected as early as this fall with the following key points:

• In the case of salary-dependent commitments, the vested rights of employees who have left the company for periods of employment from 2018 onwards will in future be subject to an adjustment obligation (dynamization).
• For pension commitments, the vesting periods for the portion of pension entitlements acquired from 2018 onwards will be shortened to a duration of the commitment from previously five to three years with a reduction in the minimum age from 25 to 21 years.
• The lump-sum settlement of small pension entitlements is now only possible with the employee’s consent.

These measures will increase pension costs and the employer’s administrative burden. For this reason, rapid action is now required for the design of the supply systems. In particular, a switch to defined contribution plans or the involvement of external pension providers offers the opportunity to control the consequences of the obligation to dynamize the pension entitlements of employees who have left the company.

Outlook: Company pension roadshow 2014

This year, we are once again holding business breakfasts on current topics in occupational pensions from our interdisciplinary pension network – which includes actuaries, auditors, tax advisors, lawyers and management consultants from KPMG AG Wirtschaftsprüfungsgesellschaft and KPMG Rechtsanwaltsgesellschaft mbH.

In this year’s events, we will outline the main changes to company pension schemes in labor and tax law. In particular, we address issues relating to trust agreements and equal treatment as well as the new regulations on debt assumption and the assumption of pension obligations. In addition, we discuss the extent to which the Foreign Account Tax Compliance Act (FATCA) is relevant for company pension plans of German-based companies. Against the backdrop of persistently low interest rates, higher provisions and possibly lower returns on plan assets, in particular from reinsurance, are causing the cost of company pension plans to rise. In sales situations, this makes negotiations to determine the purchase price more difficult. Nevertheless, the low interest rate environment also opens up opportunities and possibilities for action, which are also the subject of discussion at this breakfast meeting. Participation is free of charge.

The individual event dates (each from 8:30 a.m. to 11:30 a.m.):
June 24, 2014 Hotel Melia Düsseldorf, Inselstraße 2, 40479 Düsseldorf, Germany
June 26, 2014 KPMG offices, Ludwig-Erhard-Strasse 11-17, 20459 Hamburg, Germany
July 02, 2014 KPMG offices, Theodor-Heuss-Strasse 5, 70174 Stuttgart, Germany
July 03, 2014 KPMG offices, Ganghoferstrasse 29, 80339 Munich, Germany
July 23, 2014 KPMG offices, THE SQUAIRE, Am Flughafen, 60549 Frankfurt a.M.

You can register for the events by registering at www.kpmg.de/bav.html or by emailing aheinrich@kpmg.com.

We look forward to your participation!