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20.05.2015 | KPMG Law Insights

Company pension scheme – Pensions Update | Issue 1/2015

Dear Readers,

With our “Pensions Update” we would like to inform you regularly about labor law, tax law and accounting issues relating to company pensions.

In this issue, our editorials discuss the needs-based selection of mortality tables for the valuation of pension liabilities in transaction and restructuring situations, provide you with a field report on the selection of service providers for the implementation of company pension plans, and present the current labor court case law on company pension plans. A brief outlook on the BMAS draft bill on the implementation of the Mobility Directive and on the current state of discussion on the BMAS proposal on defined contribution plans without minimum employer contributions via tariff funds round off this issue.

We would also like to draw your attention to this year’s roadshow on company pension schemes, which we will be holding at a total of five locations between June 9, 2015 (Frankfurt) and June 19, 2015 (Düsseldorf). Details on the topics of this year’s roadshow, the venues and registration can be found on the penultimate page of this Pensions Update.

We wish you a stimulating read!

Your Pensions Team of KPMG Rechtsanwaltsgesellschaft mbH and KPMG AG Wirtschaftsprüfungsgesellschaft

Sincerely yours

Susanne Jungblut and Dr. Lars Hinrichs

Those who die earlier receive a shorter pension

A person’s actual mortality depends, of course, on many more factors than simply his or her age and sex. For example, mortality tables do not distinguish by place of residence, occupation, marital status, lifestyle, health care, and wealth, even though these factors can significantly affect a person’s expected lifespan. This means that, depending on the mortality table used, safety margins must be added to the life expectancies to be applied in order to avoid underestimating the required financing resources as far as possible.

Separate mortality tables have been developed in Germany for almost every need. For example, the DAV 2004 R mortality table used by insurance companies for annuity insurance is a suitable basis for calculation. The mortality probabilities are degraded compared to reality. By contrast, in the DAV 1994 T mortality table, the mortality probabilities are increased compared with reality. These tables are used to calculate death benefit or term life insurance. Different mortality tables are used at the request of the insurance supervisory authority. While term life insurance covers premature death, the risk of annuity insurance is long life. In accordance with the principle of prudence, different life expectancy assumptions must therefore be used for the calculation of these products.

For the valuation of pension obligations, the 2005 G mortality tables by Klaus Heubeck are generally accepted in Germany and are used in virtually all cases.

The following table shows the average further life expectancy in Germany by age and gender according to the mortality tables mentioned above and the data on life expectancy from the Federal Statistical Office of Germany (destatis). According to the DAV 2004 R mortality table, the average life expectancy of a female newborn in Germany is over 100 years.

In Germany, only the Heubeck 2005 G mortality tables are used to measure pension obligations. For tax accounting purposes, these are the only generally accepted mortality tables in Germany. The Heubeck 2005 G mortality tables are also used for valuation purposes in accordance with German and international accounting principles. However, there is no provision here that makes the use of Heubeck 2005 G mandatory. For example, the invalidity probability of the Heubeck 2005 G mortality tables for salaried employees is often reduced by a flat-rate factor on the grounds that the group of salaried employees is less frequently affected by invalidity than the population as a whole. However, the mortality probabilities are also adopted unchanged in international valuations by Dr. Klaus Heubeck.

One step freer than the valuation of the provision for the balance sheet is the choice of actuarial valuation assumptions when determining the purchase price in the context of corporate transactions. Net debt is generally taken into account when determining the value of a company. This includes the net pension liability, i.e. the difference between the gross pension liability and the assets available for pensions. Appropriate actuarial assumptions must be made in determining the gross pension liability. These include the consideration of a discount rate and assumptions on future salary and inflation developments as well as on demographic parameters such as retirement age and fluctuation and mortality rates. These valuation assumptions are usually the subject of discussions between the buyer and seller, as their choice influences the amount of the pension obligation transferred and thus also the purchase price. Here, the discussion is almost exclusively about the “right” discount rate and the “right” inflation expectation. However, the fact that a “correct” mortality table also plays a decisive role is shown not least by the table above. In particular, higher earners can be expected to have a longer life expectancy than that resulting from the Heubeck table.

In the course of corporate deals, the demographic assumption “mortality” must also be critically examined. Underestimating or overestimating mortality in the actuarial valuation of pension obligations can lead to a significant additional burden when taking over or surrendering existing pension commitments.

(Anti-) discrimination in pension commitments: The relationship between the BetrAVG and the AGG is further clarified

The unequal treatment of employees on the basis of their age in pension commitments continues to be the focus of the BAG’s case law. On September 30, 2014, the BAG had the opportunity to continue its case law on the relationship between the BetrAVG and the AGG.

The AGG, which entered into force on August 18, 2006, stipulates in § 2 para. 2 sentence 2 that the Company Pension Act applies to the company pension scheme. In its first decisions on the compatibility of pension commitments with the legal requirements of the AGG, the BAG had already clarified that the AGG is also applicable to company pension commitments insofar as the company pension law does not contain any overriding special provisions (BAG ruling dated December 11, 2007, 3 AZR 249/06). The AGG’s audit regime applies to company pension commitments in all implementation channels. In addition to direct commitments by the employer, pension commitments made via external pension providers are also covered. In terms of time, all pension commitments – regardless of their date of issue – are covered by the provisions of the AGG which (still) apply after the AGG has come into force (see only BAG judgment dated October 15, 2013, 3 AZR 294/11).

As special provisions of occupational pension law that take precedence over the AGG, the BAG has already considered the provisions of Section 1b of the German Occupational Pensions Act (BetrAVG) for the establishment of a vested pension entitlement, Section 2 (2) of the German Occupational Pensions Act (BetrAVG), and Section 2 (2) of the German Occupational Pensions Act (BetrAVG), which are linked to age, among other things. 1 of the German Occupational Pensions Act (BetrAVG) for calculating the partial value of a vested pension entitlement and Section 7 (1) of the German Occupational Pensions Act (BetrAVG). 2 BetrAVG on the calculation of the pension entitlement of beneficiaries against the Pension Protection Association in the event of insolvency of the employer originally making the pension commitment (see only BAG judgment dated July 19, 2011, 3 AZR 434/09).

Unification of age limits in old commitments and associated reduction of early pension benefits for female employees does not involve age discrimination

In its decision of September 30, 2014, the BAG had the opportunity to determine the compatibility of the reduction in early pension benefits for female employees resulting from the standardization of age limits in old commitments with the requirements of the AGG.

The subject of the decision was the assessment of the amount of a company pension of an employee who retired from working life at the age of 62 and received an early company pension from the pension commitment of her (former) employer which was reduced compared to the standard company pension. In its original version from 1976 (VO 1976), the pension scheme on which the pension benefits are based provided for different age limits for male (65 years) and female (60 years) employees for the initial receipt of the standard retirement pension. The defendant employer standardized the age limit to the age of 65 in a revised version of the pension scheme (VO 1979) in 1979. The employee left the employment relationship on January 31, 2001. She received the company pension from the employer as of January 1, 2011. The employer reduced the retirement pension pro rata temporis (proportionately) with regard to the early retirement by applying the calculation rules for partial pensions pursuant to Section 2 of the German Occupational Pensions Act (BetrAVG), assuming a maximum possible period of service until the age of 65. The employee sued the employer for the granting of an unreduced company pension. She claimed that her retirement pension should be calculated on the basis of age 60 as the retirement pension age under the 1976 VO. The 1979 Regulation had not effectively superseded the 1976 Regulation, and a pro rata calculation of their old-age pension benefits would constitute impermissible discrimination on the basis of age pursuant to sec. 2 para. 1 item. 1 AGG include.

The BAG dismissed the action. In particular, the proportional increase of the standard retirement age for female employees to 65 years and the associated proportional calculation of the early retirement pension drawn at the age of 62 is not inadmissible discrimination on the grounds of age pursuant to Section 2 (2). 1 item. 1 AGG connected. § 2 para. 1 item. 1 AGG is to be considered for the assessment of the effectiveness of the reduced granting of early age-related partial pension benefits – in comparison to the full pension – in view of the provisions of Sec. 2 (2) AGG. 1 BetrAVG are not applicable for the calculation of such partial pensions. § 2 para. 1 of the BetrAVG is therefore in conflict with the AGG as a special provision within the meaning of Section 2 (2) of the Act. 2 sentence 2 AGG.

Conclusion:

The BAG prescribes with the provision of this priority effect of Sec. 2 para. 1 BetrAVG for the age-dependent calculation of partial pensions in relation to the provisions of the AGG continues its established case law.
In the ruling, the BAG also confirmed its case law according to which the equalization of the age of female and male employees to 65 for the standard retirement pension can constitute an objective-proportional reason in accordance with its three-step theory for the encroachment on the legal position of the employee arising from the pension commitment associated with the amendment of the pension plan. The BAG correctly recognizes that by adjusting the age limits in such a pension scheme, the equal pay of men and women guaranteed under European law is realized.

And what else? – Further current case law

The courts have also been active in other areas of occupational pension provision in recent months. From the case law of the BAG, the clarification on the subsidiary liability of the employer for the fulfillment of benefits promised via Pensionskassen or direct insurances as well as on the requirements for the facilitated adjustment of occupational pension benefits of Pensionskassen pursuant to Section 16 (1) of the German Income Tax Act (AktG) stands out. 3 Sec. 2 BetrAVG. From the case law of the other courts, a ruling by the Regional Court of Hanover on the effective waiver of vested rights to occupational pension benefits pursuant to Section 3 of the German Occupational Pensions Act (BetrAVG) after termination of the employment relationship is worthy of note.

If the employer makes a commitment to the company pension scheme via an external pension provider (in particular in the form of a direct insurance policy or as a commitment via a pension fund), it shall be liable pursuant to Sec. 1 (1). 1 sentence 3 of the German Company Pensions Act (BetrAVG) is subsidiarily responsible, alongside the external pension provider, for fulfilling the obligations arising from the pension commitment. Subsidiary liability also extends to the adjustment of pension benefits in accordance with Section 16 of the German Occupational Pensions Act (BetrAVG). As a rule, it does not occur in practice, as the German Federal Financial Supervisory Authority (BaFin) regularly actively exercises its legal and technical supervision of insurance companies and pension funds and already actively intervenes when there are signs of a negative development in the economic situation. Moreover, prior to the low-interest phase, the external pension providers (in particular well-funded insurance companies or intercompany pension funds) were generally in a financial position to fulfill their pension commitments in view of sufficient returns on their investments. For the same reason, subsidiary liability of the employer for any increased pension amounts from a pension adjustment pursuant to Section 16 of the German Occupational Pensions Act (BetrAVG) is generally out of the question. In addition, subsidiary liability for pension adjustments has so far largely played no role in practice for pension commitments via a direct insurance policy or a pension fund, as the insurance terms and conditions are regularly based on the requirements for exemption from the adjustment obligation pursuant to Section 16 (1). 3 Sec. 2 of the German Occupational Pensions Act (BetrAVG) and for this purpose provide for the full use of the surpluses generated for current benefits of the beneficiary, with a minimum interest rate being granted. According to § 16 para. 3 Sec. 2 of the German Occupational Pensions Act (BetrAVG), the adjustment obligation for pension commitments via a pension fund or direct insurance does not apply if, from the start of the pension, all profit shares attributable to the pension portfolio are used to increase current benefits and are used to calculate the guaranteed benefit of the pension fund pursuant to Section 65 (2) of the German Occupational Pensions Act (BetrAVG). 1 No. 1 lit. a) of the Insurance Supervision Act is not exceeded for the calculation of the actuarial reserve.

The subsidiary liability § 1 para. 1 sentence 3 of the German Occupational Pensions Act (BetrAVG) has recently affected employers who had made pension commitments to their employees via Pensionskasse der Deutschen Wirtschaft VVaG (PKDW). In 2002, PKDW experienced an economic crisis, which its General Meeting resolved to remedy by reducing PKDW’s pension benefits by 1.4% per annum from 2003 onwards. The reduction was completed in subsequent years, first by 1.4% annually (2003 to 2006) and later between 1.2% to 1.37% (2007 to 2011). Employers who did not cover the shortfalls in coverage relative to promised pension benefits due to these benefit reductions to eligible employees were often sued by employees to do so. In its ruling of June 19, 2012 (3 AZR 408/10), for example, the BAG ordered such employers to fulfill the promised pension benefits and thus to close the coverage gap.

In the facts underlying the BAG’s decision of September 30, 2014, the employer had promised the plaintiff company pensioner a pension commitment via PKDW in 1971 and refused to close the coverage gap when pension benefits were granted since February 1, 2001. In addition, the employer failed to adjust the pension benefits in accordance with Sec. 16 para. 1 BetrAVG as of the reporting date of January 1, 2010. This with reference to the provision of § 16 para. 3 Sec. 2 BetrAVG, since from the start of the pension all profit shares attributable to the pension portfolio had been used to increase current benefits and the interest rate approved by BaFin had not been exceeded when calculating the guaranteed benefit. In the opinion of the employer, this interest rate approved by BaFin was the relevant interest rate pursuant to Sec. 16 (16) of the German Stock Corporation Act (AktG). 3 No. 2 BetrAVG is relevant for PKDW as a regulated pension fund. The company pensioner sued the employer to fully satisfy the pension benefits and to adjust the pension benefits as of January 1, 2010, in the amount of the consumer price index, which caused an increase in benefits of 15.42% for the relevant adjustment period from January 1, 2001, to January 1, 2010.

The BAG ordered the employer to fully fulfill the promised pension benefits and the associated closing of the coverage gap with reference to the subsidiary liability. In addition, the BAG ordered the employer to increase the pension benefits from January 1, 2010 in the amount of the purchase price compensation of 15.42% claimed by the employee. The obligation to make adjustments was not imposed by Sec. 16 para. 3 Sec. 2 BetrAVG no longer apply. The conditions specified therein regarding the exclusive use of surpluses to increase current benefits from the start of the annuity as well as compliance with the maximum interest rate for calculating the actuarial reserve determined in accordance with Section 65 I 1 No. 1a VAG for calculating the guaranteed benefit must be met cumulatively. This was not the case for the commitment at issue, as Section 16 para. 3 Sec. 2 of the German Occupational Pensions Act (BetrAVG) does not apply to pension benefits based on pension commitments that were issued prior to the entry into force of the Ordinance on the Provision for Future Policy Benefits (DeckRV) on May 16, 1996.

Conclusion:

With regard to the employer’s subsidiary liability in the case of a company pension scheme implemented via external pension providers, the ruling fits seamlessly into the BAG’s established case law. From a legal point of view, the legal principles established by the BAG in the judgment regarding the cumulative fulfillment of the requirements set forth in Sec. 16 (1) sentence 1 are also not surprising. 3 Sec. 2 BetrAVG for the dispensability of the regular adjustment test pursuant to Sec. 16 (2) BetrAVG. 1 BetrAVG certain conditions. The (pension fund) practice finds it difficult to come to terms with this insight gained from the ruling. This may be remedied by the Act on the Implementation of the EU Mobility Directive in German Company Pension Law, for which the draft bill presented on April 16, 2015 includes a modification of the provisions of Section 16 (1) of the German Corporate Pension Act. 3 Sec. 2 BetrAVG provides for. According to the draft bill, the adjustment review obligation will no longer apply in the future if all profit shares are used to increase the pension benefits from the pension commitment via the pension fund. We have presented the main features of the draft bill in this Pensions Update in the “Legislative News” section.

Bundling of the adjustment date and inconclusiveness of an employee’s adjustment claim (BAG judgment dated November 11, 2014, 3 AZR 117/13)

Employers obligated under a company pension plan must, pursuant to Sec. 16 para. 1 BetrAVG, an adjustment of the current pension benefits must be reviewed and carried out every three years for the beneficiaries. This means that the employer must carry out the adjustment check at intervals of three years after the individual benefit start date.

According to the established case law of the BAG, this legally prescribed three-year cycle does not force the employer to set rigid, individual audit dates. Rather, the employer may bundle the adjustment tests to be performed in the respective calendar year on a uniform annual date. This bundling causes a delay in the first adjustment test after the occurrence of the insured event if the uniform annual date is on a later date than the expiry of the three-year period after the insured event. The BAG has set a time limit for this delayed first-time adjustment test, according to which the first adjustment test must be carried out by the common adjustment date no more than six months after the first proper adjustment date and the subsequent adjustment tests must be carried out in each case after the expiry of a three-year reference period (see only BAG judgment dated November 30, 2010, 3 AZR 754/08).

In its ruling of November 11, 2014, the BAG clarified that these formal time requirements also have a direct impact on the merits of an action brought by an occupational pensioner for the proper review and implementation of the adjustment in accordance with Section 16 of the German Occupational Pensions Act (BetrAVG). In the facts underlying the legal dispute, the plaintiff company pensioner had been drawing a company pension since March 1, 2004. The defendant employer bundled the adjustment checks of all beneficiary company pensioners on January 1 of the respective calendar year. It first conducted a review of the plaintiff’s pension benefit adjustment on January 1, 2008, and increased the plaintiff’s pension benefits in that review. The Employer conducted the follow-up audit on January 1, 2011, and refused to adjust the Claimant’s pension benefits as of that adjustment date. The company pensioner filed an action against this negative adjustment decision and in the legal dispute sought a further increase in pension benefits from January 1, 2011. The BAG dismissed the action. In its reasoning, it stated that the plaintiff already had no claim for adjustment against the employer pursuant to Section 16 (1) of the German Labor Code at the date of January 1, 2011, which he had asserted in the action. 1 BetrAVG and that the employer was therefore not obliged to carry out an adjustment check at the time stated in the complaint. This is irrespective of the fact that the employer carried out the follow-up adjustment test for the plaintiff’s pension entitlements on January 1, 2011. This is because the employer would have had to conduct the initial adjustment test for the first time on January 1, 2007, given the bundling of adjustments to the annual adjustment date of January 1. The initial audit conducted on January 1, 2008, had taken place more than six months after the first regular adjustment date (March 1, 2007) and therefore could not be used as a reference date for the subsequent audits, which take place every three years. The occupational pensioner should therefore have claimed the subsequent adjustment test for January 1, 2010.

Conclusion:

Employers and company pensioners must observe the time requirements of the BAG when bundling the adjustment review to one annual date. If the annual date is more than six months after the individual (first) three-year adjustment date pursuant to § 16 para. 1 BetrAVG, the employer must already perform the initial test on the annual date prior to the individual three-year adjustment date. This annual date is also the reference date for the regular follow-up tests.

Adjustment of company pension benefits pursuant to Sec. 16 BetrAVG in the case of group employers with existing letters of comfort (BAG ruling dated Oct. 21, 2014, 3 AZR 1027/12)

The obligation to review and carry out the adjustment of company pension benefits in accordance with Section 16 of the German Occupational Pensions Act (BetrAVG) also generally applies in group situations to the employer making the pension commitment as the pension debtor. Therefore, the adjustment test must generally be based exclusively on the economic situation of the pension debtor.

An exception to this principle is allowed by case law in the case of a so-called calculation pass-through. In this context, the favorable economic situation of another Group company is attributed to the pension debtor when assessing the economic ability to adjust the pension benefits. The result of the calculation pass-through is that a company which is itself economically unable to adjust the company pensions must nevertheless carry out an adjustment of the pension benefits if the economic situation of the other group company permits this. In principle, case law requires that attribution and internal liability run concurrently (see only BAG ruling dated September 29, 2010, 3 AZR 427/08). The BAG recognizes such concurrence on the one hand if a control and profit and loss transfer agreement exists between the group companies – at the adjustment date – and the economic dependence of the controlled company is so complete that its economic situation does not count at all for legal transactions (BAG ruling dated October 26, 2010, 3 AZR 502/08).

In addition, in the opinion of the BAG, there should be a calculation pass-through in individual cases if the respective group company is legally obligated to fulfill the obligations of the pension debtor arising from the pension commitments on the basis of another commitment to the pension debtor. In practice, such other commitments may include, in particular, intragroup letters of comfort.

However, a letter of comfort and the associated consideration of the (favorable) economic situation of the group company issuing the letter of comfort can only be used profitably by the company pensioner for the adjustment check in accordance with Section 16 of the German Company Pension Act (BetrAVG) if a liability of the other group company to fulfill all obligations of the pension debtor arising from the pension commitment can be derived from the letter of comfort in a legally binding manner.

The fact that this assessment can encounter friction in individual cases is clearly shown by the ruling of the BAG of October 21, 2014.
In the facts underlying the decision, the pension debtor got into economic and financial difficulties in 2007. The imbalance included balance sheet over-indebtedness. Two Group companies then issued a letter of comfort to the pension debtor with the following declaration of liability:

“1. We each and separately hereby irrevocably undertake, on or before March 31, 2012, to. [den Versorgungsschuldner] to provide additional liquidity or other financial resources upon first request to the extent necessary to (1) [dem Versorgungsschuldner] to enable it to satisfy all of its creditors’ claims as they fall due, thereby avoiding any existing or impending illiquidity. [des Versorgungsschuldners] and/or (2) to eliminate any imminent or existing overindebtedness. [des Versorgungsschuldners] in the sense of insolvency law. All funds disbursed under this agreement will be loaned to [den Versorgungsschuldner].

2. we hereby resign until the end of the financial crisis. [des Versorgungsschuldners] with all present and future claims due to us from the granting of additional funds under this agreement, including repayment, against [den Versorgungsschuldner] behind all current and future claims of all other creditors [des Versorgungsschuldners]regardless of the legal basis, to the extent that and as long as this is necessary to avoid over-indebtedness. [des Versorgungsschuldners] within the meaning of section 19 of the German Insolvency Code (InsO) is required. Until the end of the financial crisis [des Versorgungsschuldners], the additional funds made available to [dem Versorgungsschuldner] on the basis of this letter of comfort are to be treated as equity [des Versorgungsschuldners] (functional equity). The fulfillment of such subordinated claims can only be asserted from any freely available annual or liquidity surplus or from the freely available assets exceeding the other liabilities [des Versorgungsschuldners] and after satisfaction of all creditors of the Company within the meaning of Section 39 (1) of the German Stock Corporation Act (AktG). 2 InsO and at the same time with the shareholders’ claims for restitution of deposits within the meaning of section 199 sentence 2 InsO. This subordination shall remain unaffected in the event of a termination of the letter of comfort.”

The pension debtor was subsequently overindebted and reported a balance sheet deficit of more than EUR 20 million for the adjustment date of January 1, 2011, which is the subject of the dispute. He refused to adjust his company pension benefits to the plaintiff company pensioner, citing his economic situation. In contrast, the Group companies issued letters of comfort had significant balance sheet surpluses at the adjustment date.

In his action against the pension debtor for the proper review and implementation of the adjustment of his pension benefits as of January 1, 2011, the company pensioner requested that, in addition to the pension debtor, the economic situation of the Group companies issued the letters of comfort also be included in the assessment of the economic situation.

The BAG dismissed this claim (and the claim as a whole). The liability commitments contained in the letter of comfort did not give rise to a calculation pass-through. According to their legal interpretation, they did not cover any assumption of liability for the obligation of the pension debtor to adjust the company pension benefits it had promised. According to the interpretation of the BAG, the letter of comfort serves exclusively to prevent the insolvency or overindebtedness of the pension debtor. They did not serve to form the basis for an adjustment of the company pension and new payment obligations based thereon.

Conclusion:

The ruling clearly illustrates the mandatory and at the same time restrictive case-by-case assessment of a calculation by way of recourse in the case of group situations in which a group company has issued a liability commitment to the pension debtor in the form of a letter of comfort. At the same time, it points to structuring options for issuing letters of comfort in favor of group companies in crisis in line with their needs, the scope of which, according to the intention of the group companies involved, should only relate to certain obligations of the distressed group company.

Effective waiver by a commercial agent of vested pension rights under a company pension scheme (LG Hannover, judgment of July 21, 2014, 2 O 19/13)

Employees entitled to pension benefits or persons similar to employees (Section 17 (1) sentence 2 BetrAVG) may generally only effectively waive vested rights from a company pension scheme during the performance of the employment relationship. Waivers of such vested benefits that are declared on the occasion of or in connection with the termination of the employment relationship are subject to the restrictive requirements of Section 3 of the German Occupational Pensions Act (BetrAVG). This regulation determines in § 3 para. 1 of the German Occupational Pensions Act (BetrAVG) provides for a general prohibition of severance payments, which, in exceptional cases, allows the severance payment of pension entitlements in principle in accordance with Section 3 (1) of the German Occupational Pensions Act (BetrAVG). 2 BetrAVG only allows for small pension entitlements with a current monthly pension amount of EUR 28.35 (or, in the case of lump-sum benefits, currently EUR 3,402). According to the established case law of the BAG, the provision, which according to its wording only regulates the settlement of vested pension rights, is also to be used for the assessment of the admissibility of a waiver of the pension benefits from the pension commitment by the beneficiary (see only BAG ruling dated September 22, 1987, 3 AZR 194/86). § Section 3 of the German Occupational Pensions Act (BetrAVG), pursuant to Section 17 para. 1 p. 2 BetrAVG also generally applicable to pension commitments to commercial agents BGH Urt. v. May 21, 2003, VIII ZR 57/02).

In its ruling of July 21, 2014, the Regional Court of Hanover decided that restrictive statutory provisions nevertheless do not prevent a commercial agent from effectively waiving vested pension rights under a pension commitment in individual cases. In the facts underlying the decision, the defendant insurance company had concluded an agency agreement with the plaintiff insurance agent, which included the granting of a company pension commitment by way of direct insurance. The insurance agent terminated the agency agreement effective June 30, 2010. After the agency contract was terminated, the insurance company and the insurance agent disputed the insurance agent’s violations of competition law during the term of the agency contract. The settlement reached between the parties in this regard in March 2011 contained a general settlement clause according to which there were no (more) mutual claims between the parties arising from the agency agreement. In August 2011, the insurance agent requested the transfer of the direct insurance from the insurance company. The insurance company rejected the transfer with reference to the settlement clause agreed in the settlement and the associated expiry of the plaintiff’s claims from the pension commitment. The insurance agent then brought an action against the insurance company for the transfer of the insurance contract. In the lawsuit, the insurance agent argued that, in view of the principle set forth in sec. 3 para. 1 BetrAVG could not cover the claims from the pension commitment.

The Hanover Regional Court dismissed the action. The plaintiff had been able to effectively waive his claims from the pension commitment in the settlement clause agreed in the settlement. The waiver does not violate the prohibition of severance pay pursuant to Sec. 3 (3) of the German Stock Corporation Act. 1 BetrAVG. The statutory prohibition of severance pay only covers waivers agreed in an agreement to terminate the employment or agency relationship. The prohibition of severance pay pursuant to Sec. 3 para. 1 BetrAVG, on the other hand, does not apply to agreements concluded after the termination of the contractual relationship which do not regulate the termination of the employment relationship but – as in the facts in dispute – conclusively deal with individual issues arising from the implementation of the contract. In the opinion of the Regional Court of Hanover, moreover, when assessing the scope of the prohibition of severance pay pursuant to Sec. 3 (3) of the German Civil Code (Abfindungsverbot), the following must be taken into account 1 of the German Occupational Pensions Act (BetrAVG), a modified valuation standard is applied to the agency agreement of a commercial agent as compared to an employee. The statutory prohibition of severance pay pursuant to Sec. 3 para. 1 of the German Occupational Pensions Act (BetrAVG) is intended to protect employees from the ill-considered surrender of their vested pension rights. According to the Hanover Regional Court, a commercial agent as a businessman is more versed in economic matters than an average employee and is generally able to assess the consequences of waiving retirement benefits more accurately than an employee who – at least due to his position per se – is not always as familiar with financial circumstances as a businessman due to his professional activities. In the opinion of the Regional Court of Hanover, there is much to be said in favor of the prohibition of severance pay pursuant to Sec. 3 (3). 1 BetrAVG shall in any case not apply to a waiver by a commercial agent of his expectancies from a pension commitment.

Conclusion:

Commercial agents may effectively waive their vested rights under a company pension commitment after the termination of the contractual relationship if the waiver is (at least) not declared in connection with the termination of the contractual relationship. Taking into account the protective purpose of the statutory prohibition of severance pay pursuant to Sec. 3 (3) of the German Stock Corporation Act (AktG) 1 BetrAVG, there is much to be said in favor of also considering such a waiver declared by employees after the termination of the employment relationship to be effective if the waiver is not declared in connection with the termination of the employment relationship. The BAG has – as far as can be seen – not yet ruled on this and has expressly recognized only the (partial) waiver of vested pension rights declared during an employment relationship as effective.

Health insurance obligation of an early lump-sum payment from a company pension commitment (BSG ruling dated August 20, 2014, B 12 KR 110/13 B)

Pursuant to Sec. 229 (1) of the German Stock Corporation Act (AktG), pension benefits from commitments under the company pension plan are subject to the following rules 1 S. 1 No. 5 SGB V of the statutory health insurance obligation. The legislator and the case law of the social courts interpret this statutory provision broadly and apply it to all benefits granted by the employer to the employee under a pension commitment. The Federal Social Court (BSG) has already ruled in this regard that benefits from a pension commitment are also subject to compulsory health insurance in accordance with Section 229 (1) of the German Social Security Code. 1 S. 1 No. 5 SGB V if the employer grants the benefits to the employee in the form of a lump-sum payment before the agreed insured event occurs due to the exercise of an employee’s option to this effect in accordance with the pension commitment (BSG ruling dated April 25, 2012, B 12 KR 26/10 R).

In its ruling of August 20, 2014, the BSG was able to uphold its case law on the broad interpretation of Section 229 para. 1 S. 1 No. 5 SGB V in a further case constellation. In the case underlying the decision, the employer had granted the employee a pension commitment in the form of direct insurance. The direct insurance was financed by deferred compensation, for which the employee used his claim against the employer for the payment of an annual Christmas bonus. The employment relationship between the parties ended on January 31, 2010. In 2007, the employee had already had the pension entitlements from the pension commitment paid out in a lump sum by the direct insurance company on the basis of a previous settlement agreement with the employer. The health insurance carrier decided for the employee that the one-time amount was a lump-sum payment pursuant to sec. 229 para. 1 S. 1 No. 5 SGB V of the statutory health insurance. The BSG dismissed the action brought by the employee against the decision of the health insurance carrier. The court based its rejection of the claim on the broad scope of § 229 para. 1 S. 1 No. 5 SGB V, which also includes one-time benefits for an effective settlement of pension entitlements from a pension commitment.

Conclusion:

The BSG’s decision fits into its broad understanding of the obligation to provide health insurance for benefits from a company pension commitment pursuant to Section 229 (1). 1 S. 1 No. 5 SGB V. In practice, employers and employees must take this into account when implementing the respective pension commitment, in particular also in the case of any effective dispositions of the benefit entitlements from the pension commitment before the agreed pension event occurs.

 

Provider Selection field report

Many companies in Germany operate their company pension schemes via a direct commitment. The direct commitment leads to the recognition of pension provisions in the balance sheet, which some companies now want to avoid. Furthermore, a direct commitment ties up time and specialist resources in terms of administration. Most companies do not have these resources. In order to avoid the balance sheet impact, but also to obtain additional resources, it may be advisable to involve an external service provider for the implementation or administration of the company pension scheme. Which service provider is suitable should be evaluated as part of a careful provider selection process. The article explains how KPMG AG Wirtschaftsprüfungsgesellschaft (KPMG) supports provider selection.

For several years, KPMG has had a unit in the Advisory division that deals with compensation and benefits. In the past, this unit has carried out a large number of company pension plan (bAV) projects in the Provider Selection area. Three projects are presented here as examples:

Due to the complexity of the occupational pension system, companies should pay particular attention to this topic. If the implementation or administration of the bAV is to be transferred to an external service provider, this requires technical expertise as well as additional time resources. For provider selection, it is therefore advisable to engage the services of an independent external consultant.

 

Current developments in legislation: The draft bill on the implementation of the Mobility Directive and the BMAS proposal on defined contribution plans via tariff funds

The Federal Ministry of Labor and Social Affairs (BMAS) presented the first draft bill for the implementation of the Mobility Directive on April 16, 2015. The BMAS proposal to amend Section 17b of the German Occupational Pensions Act (BetrAVG) in order to enrich occupational pensions with a pure defined contribution plan via a tariff fund and without employer liability continues to be the subject of intense debate.

The implementation of the Mobility Directive (RL 2014/50/EU, “EU-MobRL”) is essentially carried out in the Occupational Pensions Act. To this end, the draft bill specifies five key changes to the BetrAVG:

(1) Pension entitlements shall already become non-forfeitable by law if they have been promised for at least three years (previously five years), whereby all commitment periods after the age of 21 (previously 25) shall be taken into account (Section 1b (1) sentence 1 BetrAVG).
(2) Vested pension rights of employees who have left the company and have pension commitments with a dynamic pension entitlement shall be dynamized (Section 2a of the German Occupational Pensions Act (Be-trAVG)). For this purpose, the draft bill allows linking dynamization to the adjustment of current pension benefits from the specific pension system (Section 16 BetrAVG). Commitments from pension schemes concluded before May 20, 2014 are not subject to dynamic modification.
(3) The employee must consent to the settlement of small entitlements in the event of a change of employer to a foreign country within one year of the termination of the employment relationship (Section 3 (2) BetrAVG).
(4) The duties to provide information pursuant to Section 4a of the German Occupational Pensions Act (BetrAVG) are modified in terms of content. In the future, the employer or the pension provider must provide the beneficiary with information on the vested pension rights upon request. The legitimate interest of the employee previously required for the provision of information is no longer necessary under the draft bill.
(5) The adjustment obligation for pension commitments via direct insurance and pension funds (Section 16 (3) no. 2 BetrAVG) shall already cease to apply if all profit shares are used to increase benefits. The previously required additional alignment with the relevant (maximum) interest rate is also to be eliminated for all existing commitments. It remains to be seen whether the legislature will include this change in the final version with a transitional provision. The BAG most recently clarified in rulings dated September 30, 2014 (including 3 AZR 617/12, these are presented in this Pensions Update in the section “And otherwise – other current case law”) for commitments made via a (regulated) pension fund that the pension commitments made in accordance with the current section 16 para. 3 No. 2 BetrAVG facilitated an adjustment a use of the pensionable salary specified in Sec. 2 para. 1 DeckRV (currently 1.25%). The regulation proposed in the draft bill interferes in a constitutionally questionable manner with the legal position of employees with an employment contract similar to the current Section 16 (1). 3 No. 2 of the German Company Pension Act (BetrAVG).

The first four amendments are generally effective for commitment periods beginning on or after January 1, 2018. The Fifth Amendment is to apply as soon as the law is enacted. We discussed the draft bill in detail in our Pensions Client Alert 01/2015 (http://www.kpmg-law.de/docs/Pensions_Client_Alert_01_2015.pdf).

In her presentation at the annual conference of the Arbeitsgemeinschaft für betriebliche Altersversorgung (aba) on May 7, 2015, the Federal Minister of Labor and Social Affairs announced that the draft bill would be published in the Federal Government on June 24, 2015. According to current plans, the law is to be passed in the Bundestag this fall.

The defined contribution plan without minimum benefits and without employer contributions: the current state of the debate

The BMAS has revised its first proposal of October 6, 2014 to expand the canon of occupational pension commitments to include a contribution commitment via a joint institution of the collective bargaining parties (tariff fund), which the employer must provide without a minimum benefit and for which the employer also has no subsidiary liability (cf. on the details of the proposal already published the article in our Pensions Update 02/2014 (http://www.kpmg-law.de/docs/Pensions_Update_03.pdf), revised it after some strong criticism from the private sector and published the revised version on January 26, 2015.

The revised version contains the following changes compared to the original version:
(1) The employer shall issue the defined contribution plan. A minimum benefit is guaranteed by the joint institution of the collective bargaining parties.
(2) The pension commitment is subject to the statutory insolvency protection of the PSV.
(3) The defined contribution model without employer liability may also be used by employers and employees who are not bound by collective bargaining agreements if the application of the collectively agreed regulation is agreed between them.

How is the practice responding to this revised proposal?

Reactions in the occupational pension market have also been very mixed to the revised proposal. In particular, the need-based insolvency protection carrier is the subject of intense discussion. To this end, the insurance industry, among others, has placed Protektor AG as an alternative insolvency protection vehicle alongside the PSV. In addition, the employer side continues to criticize the restriction of the employer’s liability to the tariff funds and fears a weakening of the other implementation channels for occupational pensions if their legal framework is left unchanged after the introduction of the defined contribution plan via the tariff funds.

What’s next?

On March 9, 2015, the BMAS consulted the most important associations and other stakeholders on the revised proposal of Section 17b BetrAVG. The Federal Minister of Labor and Social Affairs reported on the initial results of the hearing, among other things, at this year’s annual conference of the Arbeitsgemeinschaft für betriebliche Altersversorgung (aba). According to this, the BMAS is open, among other things, to needs-based insolvency protection (for example, with Protektor AG as an alternative insolvency protection provider) and to the joint institution of the collective bargaining parties being allowed to use existing institutions or external service providers (such as competitor pension funds) for operational implementation. It is currently not foreseeable that the discussion proposal will be concretized into a formal draft law. Should the discussion proposal result in a draft law, we will follow the possible further legislative process in our Pensions Update.

 

Outlook: Company pension roadshow 2015

This year, KPMG AG Wirtschaftsprüfungsgesellschaft and KPMG Rechtsanwaltsgesellschaft mbH are once again holding joint 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 employment law. In particular, we will address current decisions on pension adjustments, the current status of legislation on the implementation of the EU Mobility Directive in the German Occupational Pensions Act, and the current discussions on the introduction of a new, collectively agreed occupational pension scheme.

Against the backdrop of the ongoing low-interest phase and the associated further increase in pension provisions, numerous companies – even economically sound ones – face the risk of balance sheet overindebtedness in the medium to long term. At the same time, the company pension scheme remains an essential element of compensation in terms of employer attractiveness. How are companies responding to this challenge? In a panel of experts, we will present individual current projects that showcase exemplary response options.

The following topics will be discussed during the event:
– Labor law pitfalls and structuring options,
– Strategic and economic considerations,
– Possible alternatives and accounting effects,
– Tax aspects.

The individual event dates (each from 8:30 a.m. to 11:30 a.m.):
09 June 2015 Intercontinental Hotel, Wilhelm-Leuschner-Strasse 43, 60329 Frankfurt, Germany
June 10, 2015 KPMG offices, Theodor-Heuss-Strasse 5, 70174 Stuttgart, Germany
June 16, 2015 Empire Riverside Hotel, Bernhard-Nocht-Strasse 97, 20359 Hamburg, Germany
June 18, 2015 KPMG offices, Ganghoferstrasse 29, 80339 Munich, Germany
June 19, 2015 KPMG offices, Tersteegenstraße 19-31, 40474 Düsseldorf, Germany

You can register for the events by registering at http://www.kpmg.de/fachveranstaltungen/39507.htm or by emailing aheinrich@kpmg.com.

We look forward to your participation!

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