We look back on an eventful 2015, which also kept the practice of occupational pension schemes on its toes. While no all-clear can be given with regard to the economic development (low-interest phase), there have been a large number of new developments and court decisions that we would like to share with you in our first issue PensionUpdates of 2016. In addition to current case law on occupational pension law, we have devoted this Pensions Update in particular to aspects of corporate transactions relevant to occupational pension law. The M&A market remains buoyant – and it is not uncommon for occupational pension plans to pose a particular challenge in a corporate transaction.
Shortly before the editorial deadline, on January 27, 2016, the German Cabinet approved a government bill (to implement the Residential Mortgage Credit Directive) that includes the long-awaited adjustment to the valuation parameters for pension provisions. The government bill provides for the extension of the average valuation of market interest rates for the HGB accounting interest rate from 7 to 10 years. We will inform you about this in detail in the next Pensions Update.
I hope you enjoy reading and wish you a successful 2016.
Your pension team of KPMG Rechtsanwaltsgesellschaft mbH and the
KPMG AG Auditing Company
Lars Hinrichs & Susanne Jungblut
In companies that grow through corporate transactions, the number of pension arrangements to be managed often increases sharply. These companies must assume new obligations and risks previously unknown to them, as well as ensure proper management. In these situations, it may be advisable to carefully analyze and document the complete supply landscape and associated processes.
With the implementation of the company pension scheme (bAV), every company – regardless of whether it has grown through transactions or not – assumes legal and economic obligations. These include, for example, obligations to pay pension contributions in the case of defined contribution plans, to provide information on the amount of employee entitlements, to pay pension benefits (sometimes after deduction of payroll tax and social security contributions), to carry out the adjustment check in accordance with Section 16 of the German Company Pension Act (BetrAVG), and to respond to queries from employees. In turn, the company pension obligations give rise to legal, procedural and valuation risks as well as financing and liquidity risks.
Which external providers, such as insurers or provident funds, are associated with this? What risks do the individual supply arrangements entail? Are there opportunities for harmonization and simplification?
Companies that have grown significantly as a result of corporate acquisitions are often faced with an opaque supply landscape. In corporate transactions, company pension schemes are not usually the first priority – with the result that, at the latest after a series of successive acquisitions, there is ultimately no overview of the existing pension schemes and external providers involved. Historical knowledge is often only available to a very limited extent because the employees who have it were not covered by the respective transfer of operations or have left in the meantime. In such a situation, it makes sense to conduct a comprehensive pension audit.
First and foremost, a pension audit records and describes the existing pension arrangements, their financing and the employee groups affected in each case. To stop here, however, would be too short a leap. Rather, such a pension audit should also include the risks and costs of the respective pension programs, assess their marketability, and evaluate the individual plans in terms of labor and tax law and analyze how they are handled in practice.
On the basis of such a comprehensive inventory, the company gains a good overview of the existing pension obligations and the associated risks and costs. On this basis, options for harmonizing and streamlining the care landscape can then be considered. So can
This list is by no means exhaustive. And, of course, a pension audit shows where there is an urgent need for adjustment due to changes in labor law or taxation in the meantime.
How do I conduct a pension audit?
The central objective of the pension audit is: What do I want to know? Which aspects do I want to analyze in depth? What actions should ideally follow inventory capture? Only when this is clear can it be sensibly determined which data, documents and other information should be recorded.
Who is likely to have the required information? This question is not always easy to answer. It may be necessary to approach a large number of employees at several locations – but do so in a targeted manner. In some cases, individual personnel files must also be reviewed. The more people are involved in the survey process, the more important it is to appoint superordinate persons responsible for individual topics and/or business areas and to prioritize the pension audit appropriately within the company. Ideally, there is personal communication from management or the board of directors, which makes the nominated employees individually responsible.
Equally important is the definition of a targeted, easy-to-understand query mechanism. It is conceivable to prepare a detailed questionnaire as well as to simply ask for documents to be sent. In practice, the ideal approach will lie between these two extremes, differentiating according to individual aspects (plan description, financial aspects, etc.). The incoming information must then be checked for completeness and plausibility. Indicators for this can be, for example, balance sheet figures or knowledge already available at headquarters. The possible points of reference for such an analysis must also be defined at the outset.
Finally, a suitable tool must be selected for compiling and evaluating the information collected and maintaining it later. This is where databases and online tools come in handy. It is important that these are designed to fit precisely. Tools available on the market are often designed for international supply landscapes and are therefore very generic – in the case of a purely German pension audit, it makes sense to adapt the tool to German conditions. In addition, the tool or database should, of course, be tailored to the objective of the audit and enable the desired analyses to be carried out on the basis of information that is updated at a later date.
A comprehensive pension audit gives the company a good overview of the existing pension arrangements, their costs and risks. The Pension Audit also provides the basis for a potential update and simplification of the care landscape. This is often accompanied by a significant reduction in costs and risks.
Equally important is the definition of a targeted, easy-to-understand query mechanism. It is conceivable to prepare a detailed questionnaire and simply ask for documents to be sent. In practice, the ideal approach will lie between these two extremes, differentiating according to individual aspects (plan description, financial aspects, etc.). The incoming information must then be checked for completeness and plausibility. Indicators for this can be, for example, balance sheet figures or knowledge already available at headquarters. The possible points of reference for such an analysis must also be defined at the outset.
In corporate transactions, the focus is generally on the measurement of the pension obligation to be assumed. However, this approach often falls short of the mark. The acquirer is obliged to continue the occupational pension scheme of the transferred employees unchanged. This can pose considerable challenges, especially if the transferor’s occupational pension plan is implemented via an external pension scheme.
If the transferor’s occupational pension scheme is run by an intercompany pension provider, the continuation of the occupational pension scheme is generally unproblematic, as the transferee can join the external pension provider as a sponsoring company. The greatest challenges in this context arise in the case of the seller’s own external pension funds to which non-Group companies are not admitted as sponsoring companies. The following comments therefore relate only to the Group’s own pension providers.
If, upon completion of the transaction, the sold company loses its capacity as the sponsoring company of the Group relief fund, the relief fund’s obligation to provide benefits to the (former) employees of this company ends. If the employees are transferred to the acquirer in the case of an asset deal due to a transfer of operations (Section 613a of the German Civil Code (BGB)), they are also no longer covered by the Group support fund.
In principle, the acquirer has three options for continuing to provide benefits to the acquired employees:
If the first two options are not available to the purchaser, the pension obligation must be settled directly by the employer (purchaser) on the basis of the commitment made. In this case, the benefits are promised directly by the (acquiring) company in analogy to the benefit plan of the provident fund. This does not result in any disadvantage for the beneficiaries, the deferred taxation of the benefits remains in place and the direct commitment is also insolvency-protected via Pensions-Sicherungs-Verein a.G. (PSV).
As a result, the conversion of the indirect provident fund commitment into a direct commitment means that the acquirer must fully reflect the pension obligation in its balance sheet. If the seller was a reinsured pension fund and the acquirer has taken over the reinsurance policies, the obligation and the reinsurance assets may be netted or treated as a security-linked commitment.
Implementation of the occupational pension scheme at the seller via a pension fund/ pension fund
The starting situation is similar for the pension fund. The bylaws of Group-owned pension funds usually stipulate that membership is only open to employees of the Group or a specific group of companies. If the members leave the Group as a result of a transfer of operations, it is legally impossible for the acquirer to maintain the promised pension fund provision.
Depending on the options granted by the acquirer, the acquirer has the following options:
If the first option is chosen, there is a risk that the pension fund will demand a special contribution to fund the vested benefits to be maintained. Any additional expenditure for this out-financing should already be taken into account in the negotiations to reduce the purchase price. If the pension obligations are continued (FutureService) on the basis of the original benefit plan via another pension fund, it must be checked whether this can map the promised benefit package. In this case, it is generally not necessary that the care can be continued on a 1:1 basis, but that a comparable benefit package (e.g. higher retirement benefit to compensate for lower disability benefit) is made available. Overall, there should be no deterioration in performance. However, such an adjustment to the promised benefits requires the consent of the employees. Theoretically, the continuation of the promised benefits (future service) as a direct commitment by the new employer is also conceivable, which must not result in any deterioration of the benefits either.
If the second option is chosen, i.e. the transfer of the full pension obligation (past and future service) to an existing or new pension fund, it must be checked whether the existing pension fund or a new pension fund at the acquirer can provide the promised benefits. This is often not possible under the same conditions as with the original pension fund, as the pension fund tariffs on which the calculation of benefits is based are usually different. With the new pension fund, contributions may be higher or lower (different rate structure, group discounts, etc.). When transferring the past service to a new pension fund, it must also be checked under which conditions the actuarial reserve can be transferred to the new pension fund.
In principle, the same consequences apply to pension funds. However, most pension funds were established by large insurance companies and are therefore intercompany pension funds that an acquirer could join. This means that the continuation of the occupational pension scheme with pension funds is rather unproblematic.
In the case of a company acquisition, it should already be examined during the due diligence process how the assumption and/or continuation of the seller’s pension obligations, which are provided via the group’s own pension providers, can be made possible at the acquirer. The purchaser must make agreements with the seller and, if applicable, with the pension provider to take over the pension. In addition, any additional expense that may be incurred as a result of the acquisition (e.g., special contribution to fund past service, higher contributions to continue the supply) can be taken into account in the purchase contract to reduce the purchase price.
The continuation of pension commitments at the target company in line with requirements after completion of the company acquisition is often a major challenge for the acquirer. This is particularly the case if the pension commitments are to be integrated (as far as possible) into the pension systems in place at the acquirer, or if the pension commitments have previously been linked to hedging instruments for their funding (e.g. contractual trust arrangements) which the acquirer cannot continue without further ado. The legislator and, above all, the Federal Labor Court (Bundesarbeitsgericht – BAG) have developed a differentiated system for the possible integration scenarios, which restricts the purchaser’s autonomy in the individual scenarios to varying degrees, but generally allows for overall solutions that are in line with the interests of the purchaser.
From an employment law perspective, the continuation of pension commitments in line with requirements and their integration into the pension systems existing at the acquirer is set at the starting point in the transaction by two anchors which are regularly interlinked: On the one hand, by the transparency of the information and documentation provided in the due diligence and the associated completeness of the labor law analysis and, on the other hand, by the guarantees and other risk distributions between the acquirer and the seller enforced by the acquirer in the purchase agreement.
A complete analysis of labor law is indispensable for a legally sound determination of the existing legal basis for pension commitments. It also includes examining the effectiveness of previous benefit plan modifications. If the respective benefit plans are regulated in agreements under collective law – and here primarily in works agreements – the analysis must also extend to any accompanying materials to the agreements reached (such as protocol notes, separate agreements or other (e-mail) correspondence between the parties to the works agreement) in order to ensure a comprehensive (historical) regulatory understanding of the individual legal bases. If the pension commitments are linked to hedging instruments for their insolvency-proof financing (e.g. contractual trust arrangements, reinsurance), the acquirer should have conclusively examined the possible continuation of the individual hedging instrument in the due diligence and have made relevant provisions in the purchase agreement, in particular on the possible continuation/transfer of the hedging instruments or on any necessary modification.
Ideally, the acquirer has received all materially relevant information on the pension commitments in the due diligence process, has been able to conduct a complete risk analysis in the due diligence process, and has already been able to run through concrete scenarios for the possible integration of the pension commitments into the existing pension systems. Ideally, the purchaser was also able to pass on to the seller in the purchase agreement all economic implications arising from any labor law risks (such as an ineffective replacement of pension commitments in the target company in the past and the associated continuation of the predecessor commitments – which were more expensive from the employer’s point of view – or the ineffective failure to adjust pension benefits in accordance with section 16 of the German Company Pensions Act (BetrAVG)) with guarantee and cost exemption commitments. Finally, the ideal case includes that the acquirer can continue existing hedging instruments for the individual pension commitments unchanged.
In the normal case, however, the picture is more differentiated: The acquirer was unable to carry out a complete risk analysis because the seller did not want to or could not provide all the relevant information on the pension commitments in the due diligence. Relatively high economic value limits for the risk-oriented employment law review in the due diligence did not allow for a detailed analysis of the employment law risks contained in the existing pension commitments. In the purchase agreement negotiations, the acquirer was not able to transfer the significant risks to the seller and, following the final agreement of the purchase agreement, must, for example, in particular bear all risks for the ineffectiveness of a modification of the existing pension commitments made in the past. The acquirer cannot continue the existing hedging instruments – in particular a contractual trust arrangement model reserved only for the seller’s Group companies.
For the continuation of the pension commitments in line with requirements and the decision on their possible integration into the existing pension systems, the acquirer must realistically assess the actual status of the two aforementioned anchors after completion of the transaction and derive from this the actions required for the continuation in line with requirements. The required actions are essentially defined by the selected transaction form (share deal or asset deal, which includes a transfer of business within the meaning of Section 613a of the German Civil Code), by the implementation method and by the legal basis of the individual pension commitment .
No integration – The singular continuation of pension commitments
If the pension commitments are to be continued on a stand-alone basis, i.e. independently of a pension scheme previously in place at the acquirer – because integration does not make sense for the acquirer from the point of view of labor law or business or because the acquirer does not operate any company pension schemes in its previous company or group of companies – the acquirer must observe the following guiding principles:
The target company must obtain the consent of the employee benefiting from the pension commitment when transferring the pension commitment to another legal entity while retaining the implementation method (e.g. from the target company’s previous group pension fund to its own company pension fund) if the pension beneficiary has a claim to the specific implementation method via the specific pension provider according to the content of the commitment (cf. BAG ruling dated June 12, 2007, 3 AZR 186/06) or if the pension commitment is less favorable for the pension beneficiary than the original commitment after the change of implementation method. The
The target company also requires the consent of the pension beneficiary if it wishes to convert the pension commitment into a direct commitment in view of the fact that it is no longer possible to continue it via the previous group pension fund or support fund and the pension commitment contains an entitlement of the pension beneficiary to the previous implementation method (BAG ruling dated June 17, 2008, 3 AZR 254/07). If, on the other hand, the pension commitment is a “net equivalent commitment” and the pension beneficiary has no entitlement to the specific implementation method according to the content of the pension commitment, it is justifiable from an employment law perspective to make the change in implementation without the consent of the pension beneficiary.
The works council must be involved if the actions required for the continuation of the pension commitments affect the works council’s co-determination rights under Section 87 BetrVG. This is particularly the case if the pension commitments previously made via a support fund or a pension fund are to be taken over by another legal entity while retaining the implementation method. In this case, the works council has a right of co-determination pursuant to Sec. 87 (1) if the pension commitment is continued via its own pension fund or support fund. 1 No. 8 BetrVG with regard to the (legal) form, structure and administration of the provident fund (BAG ruling dated April 26, 1988, 3 AZR 168/86). The right of co-determination under Section 87 para. 1 No. 8 BetrVG, on the other hand, does not apply in these cases to the continuation of the pension commitment via a market-related pension fund or support fund (BAG ruling dated April 22, 1986, 3 AZR 100/83). In addition, the acquirer must examine in each individual case whether the actions required for the continuation of the pension commitment are subject to the works council’s right of co-determination under Sec. 87 (87) Sentence 1 of the German Stock Corporation Act (AktG). 1 No. 10 BetrVG.
If the pension commitment was based on a legal basis under collective law prior to the transaction (company agreement, collective bargaining agreement), the legal character of the pension commitment may change if the previous legal basis does not continue to apply after the transaction in view of the transaction structure. This may be the case, for example, if there is a legal basis in a collective agreement because the acquirer is not a member of the relevant employers’ association (in the case of association collective agreements) or does not conclude a recognition collective agreement with the relevant trade union on the previous legal basis in a collective agreement (in the case of company collective agreements). In the case of works agreements, if the business loses its identity under works constitution law as a result of the transaction (in particular in the case of transfers of parts of the business within the meaning of Section 613a BGB). In such cases, the previous legal bases shall apply in accordance with the provisions of Section 613a para. 1 p. 2 and 3 BGB continues. If, upon completion of the transaction, the employment relationship with a pension commitment based on a works agreement is integrated into an existing business of the acquirer where a works agreement with a pension commitment was already in place prior to the transaction, the works agreement shall, according to the case law of the BAG, have effect pursuant to Sec. 613a (1) of the German Labor Code (BAG). 1 sentence 3 of the German Civil Code (Bürgerliches Gesetzbuch – BGB) generally only applies to the vested rights earned by the employee after the transfer of the business, while the vested rights from the vested rights earned before the transfer of the business are generally determined by the provisions of the previous company agreement (BAG ruling dated July 24, 2001, 3 AZR 669/00).
Integration – The continuation of pension commitments in the acquirer’s holistic pension system
The acquirer has to take more action if he wishes to integrate the pension commitments existing in the target company (share deal) or in the business or part of the business taken over (asset deal) into the pension systems already in place at his company. In this case, the acquirer must regularly carry out a further legal analysis before determining the requirements for action, the core of which is to assess the legal (in)possibility of the desired integration. In the starting point, a distinction must be made as to whether the integration must already be triggered due to a collision of the relevant legal bases for the pension commitments taken over on the one hand and for the pension system already existing at the acquirer on the other hand, or whether the acquirer must carry out further independent actions for the integration. The first case can typically (only) occur in the case of an asset deal, while independent modification measures are typically required if the pension commitments existing with the seller (can) initially continue to apply unchanged with the acquirer.
In practice, the acquirer can and will generally only achieve effective integration for the pension commitments of active employees. In the case of an asset deal, this already results from the fact that the scope of the pension obligations assumed is limited exclusively to the group of active employees, and in the case of a share deal, it results from the restrictive requirements regarding changes to the content of pension commitments of members or beneficiaries who have left the company with a vested pension entitlement in view of the statutory prohibition of compensation set out in Section 3 of the German Company Pension Act (BetrAVG).
This applies in any case to pension commitments granted on the basis of an individual legal basis (individual commitment, collective commitment, company practice). Changes to these pension commitments to bring them into line with the pension systems in place at the acquirer – Group-wide – generally require the consent of the employee. The validity of the consent is generally not subject to any further requirements – within the general limits of immorality (Section 138 of the German Civil Code) or voidability due to threat or deception (Section 123 of the German Civil Code). In particular, the employee may also agree to an arrangement that worsens his (previous) pension level. By way of exception, consent to such a deterioration is invalid if the consent is given in connection with the termination of the employment relationship (e.g. as part of a termination agreement); in this case, the consent and the waiver of the future pension entitlements included therein in the amount of the entitlement in accordance with the previous pension commitment generally violates the prohibition of severance pay pursuant to Section 3 of the German Occupational Pensions Act (BetrAVG) (BAG ruling dated August 14, 1990, 3 AZR 301/89). In practice, the employees benefiting from the previous pension commitment generally agree to a deteriorating regulation at best if the deterioration of the future pension level associated with the integration is compensated for in another way (for example, by an increase in individual other remuneration components).
If the previous pension commitment is based on an overall commitment and a works council has been elected in the target company, integration can also be achieved without the consent of the individual employee by concluding a corresponding works agreement if (1) the overall commitment contains an opening clause for a works agreement, (2) the new arrangement is not less favorable overall for the employees concerned than the previous pension commitment when viewed collectively, and (3) – in the event of a deterioration in the modified legal framework conditions associated with the integration – meets the requirements of proportionality and protection of legitimate expectations in accordance with the three-step theory developed by the BAG in this regard (for details of the requirements, see our article in Pensions Update 02/2015 “Modification of company pension schemes: Labor Law Opportunities and Risks” (https://kpmg-law.de/docs/Pensions_Update_Sommer_2015.pdf#page=7).
Pension commitments existing on the basis of a legal basis under collective bargaining law (collective agreement, works agreement) shall also generally continue to apply unchanged in the case of a share deal after the transaction date. If the pension commitment is governed by a (general) works agreement, it may be possible in individual cases – under restrictive conditions – to replace it by a group works agreement existing in the acquirer’s group of companies. The modification of the company agreement for the (Group-wide) standardization of the pension systems must meet the requirements of proportionality and protection of legitimate expectations in accordance with the three-step theory of the BAG. If the works council refuses to change the pension commitment, the employer can bring about the change in the works constitutional conciliation procedure. If the conciliation committee procedure does not lead to the desired result – in particular because integration into the existing (group-wide) pension system would lead to a deterioration in the (future) pension level and the result of the conciliation committee procedure falls short of the required integration status – the employer cannot bring about the modification of the pension commitment by means of an individual agreement, as this requires the consent of the works council (Sec. 77 (4) Sentence 2 BetrVG) and the works council would then generally not be permitted to grant this consent.
As a rule, in all cases of modification by means of a company agreement, integration will only be considered for the pension entitlements that can be earned after the transaction has been completed, while the pension entitlements earned up to the date of completion in accordance with the previous pension commitment will continue to exist as vested rights.
If the pension commitment is based on a legal basis under collective law, the possible direct replacement of the existing pension commitment by a legal basis under collective law already existing at the acquirer due to a collision depends on whether the regulation existing at the acquirer (in particular if this is determined in a (general) works agreement) is also intended to cover the force of an employment relationship transferring to the acquirer and the replacement satisfies the requirements of proportionality and protection of legitimate expectations in accordance with the three-step theory developed by the BAG. This applies both in the case where the previous company agreement continues to apply under collective law after the date of execution (Sec. 613a (1) sentence 1 BGB) or – in particular in the case of a transfer of part of a business – in accordance with Sec. 613a (1) BGB. 1 sentence 2 BGB is incorporated into the individual employment relationship.
If a direct replacement cannot be effected in accordance with the above legal principles, the acquirer shall conclude an independent collective-law agreement with the competent works council (or, in the case of a legal basis in a collective agreement, with the competent trade union) in order to integrate the pension commitment into the acquirer’s integrated pension system. The scope of the permissibility of the modified regulation is again assessed according to the principles of proportionality and the protection of legitimate expectations in accordance with the three-step theory.
The continuation of the pension commitments taken over in the course of the acquisition in line with requirements and, above all, the effective integration of the pension commitments intended by the acquirer depend on the legally effective application of the labor law framework conditions to be observed for the pension system. The labor law framework is ideally already in the due diligence for the company acquisition and at the latest in the post-transaction phase in the sense of a holistic project planning. At the same time, the assessment under labor law is based on a strategic and economic decision by the employer on the future continuation of the pension commitments and their possible integration into the overall pension system – the labor law component establishes the legal rules and instruments for modifying the pension system, but does not replace the final objective for the further implementation of the pension commitments.
The first insurance companies have announced that they will discontinue their traditional life insurance business. What do alternative life insurance products look like?
The low interest rate environment of recent years and the regulations of the new supervisory law Solvency II, which have been in force since January 1, 2016 and require higher equity backing for lifetime guarantees, are having an impact on the business of life insurance companies to date. As a result, the first providers no longer want to offer traditional life insurance policies, whose benefits are calculated on the basis of a legally prescribed maximum actuarial interest rate. It is still uncertain whether this will also apply to occupational pensions.
A few providers have already developed new “innovative” life insurance products. The main difference compared with traditional products is that the calculation of the insurance benefit is not based on a guaranteed interest rate. As a rule, only the sum of the contributions paid is guaranteed at the start of the pension, and more rarely also in the event of premature death. Against the backdrop of the requirements of the German Occupational Pensions Act, according to which the employer may “only” issue a defined contribution plan or a defined contribution plan with a minimum benefit in addition to a defined benefit plan, the innovative products should be reviewed on a case-by-case basis with regard to the employer’s possible obligation to make additional contributions.
Other differences between innovative and traditional life insurance products include the fact that the actuarial assumptions are no longer guaranteed for the entire term of the contract, including the pension phase. Instead, at the start of the pension, the calculation bases valid at that time (in particular interest rate, mortality) are applied. Individual products are also based on the performance of a specific stock index or participate in the performance of individually selected individual funds or predefined investment strategies.
The above – non-exhaustive list – shows the diversity of the products. This goes hand in hand with a lack of transparency, for example on the distribution of contributions: it is questionable which contribution is “set aside” to secure the maintenance of contributions and which part is invested in the innovative component. At the same time, this leads directly to the fact that it is hardly possible to compare different products and insurance companies. is possible. This complicates the consultation and ultimately the client’s decision for a competitive product.
The courts have also been active in other areas of occupational pension provision in recent months. Our case law section deals with rulings by the BAG (1) on the adjustment test of pension benefits pursuant to Section 16 of the German Occupational Pensions Act (BetrAVG) in group-related situations with profit and loss transfer and control agreements, (2) on the deteriorating replacement of a pension commitment from an overall commitment by a company agreement, and (3) on the determination of pensionable income when fixed compensation and variable compensation are granted. This section of case law is rounded off with guiding principles of the BAG from recent rulings on, among other things, the effectiveness of late termination clauses, which at the time of the editorial deadline for this issue have (so far) only been published in press releases.
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 calculation pass-through means that an employer who is not itself economically able to adjust the company pensions must nevertheless adjust the pension benefits if the economic situation of the other group company permits this. In this regard, case law generally requires a concurrence of attribution and internal liability (cf. only BAG Urt.
v. 29.09.2010, 3 AZR 427/08). The BAG recognizes such concurrence if a control and profit and loss transfer agreement exists between the group companies on the adjustment date and the economic dependence of the controlled company on the controlling company is so complete that its economic situation does not count for legal purposes (BAG ruling dated October 26, 2010, 3 AZR 502/08), or if a group company undertakes to fulfill the obligations of the pension debtor under the pension commitments in a legally binding manner on the basis of another commitment to the pension debtor (BAG ruling dated October 26, 2010, 3 AZR 502/08). v. 21.10.2014, 3 AZR 1027/12, see our discussion in Pensions Update 02/2015: http://kpmglaw.de/docs/Pensions_Update_Mai_2015.pdf#page=8). For the former group of cases, the BAG previously allowed the mere existence of the profit and loss transfer and control agreement to suffice for attribution; according to the BAG’s previous view, the control element contained in such an agreement gave rise to the irrebuttable presumption that the controlling company could access the assets of the controlled pension debtor at any time and thus influence the economic performance of the pension debtor without restriction and without taking into account the interests of the pension debtor. This interpretation of the law by the BAG has recently been criticized by the higher courts (see only OLG Frankfurt judgment dated January 26, 2015, 16 U 56/14).
In its decision of March 10, 2015 (3 AZR 739/13), the BAG took up this criticism and corrected its previous case law.
In the case underlying the decision, the plaintiff received an unchanged company pension since the onset of the pensionable event in 1999. A profit transfer and control agreement existed between his Group employer as the pension debtor and the Group parent company. The pension debtor ceased operations in 1999 and subsequently closed almost every financial year with a loss, which was offset by the parent company on the basis of the profit and loss transfer and control agreement. The pension debtor consistently failed to adjust the pension beneficiaries’ company pension benefits, citing its losses. In his action, the plaintiff sought an adjustment of his pension benefits with reference to the existing profit transfer and control agreement.
The BAG dismissed the action. The mere existence of a profit and loss transfer and control agreement does not give rise to an irrebuttable presumption of reckless access by the controlling group company to the pension debtor. Rather, the concrete realization of the risk situation to be recorded in this respect in the control agreement for the utility debtor is required. If, on the other hand, instructions from the controlling company that disregard the pension debtor’s own interests have not been issued, or if issued instructions have not led to a deterioration in the economic situation of the pension debtor in a way that precludes an adjustment of the company pension, there is no reason, according to the current opinion of the BAG, for a calculation to be carried out.
However, the BAG imposes a comprehensive burden of explanation and proof on the pension debtor in the event of an intended (partial) suspension of pension benefits with regard to the existing profit and loss transfer and control agreement:
If the employer is unable to meet this burden of proof, the BAG is of the opinion that the employee’s assertion regarding the realization of the risk situation is deemed to have been admitted.
Conclusion: The modification of the case law on pass-through liability in the case of a profit and loss transfer and control agreement provides group employers with sustained negative economic results with options for the capital-improving (partial) suspension of the adjustment of company pension benefits in accordance with Section 16 of the German Occupational Pensions Act (BetrAVG). At the same time, the ruling by the BAG on the lack of risk realization of the control element from the profit and loss transfer and control agreement on the part of the employer requires careful preparation of the relevant argumentation and documentation during the adjustment review.
Adjustment of pension benefits: No hypothetical transfer prices in the case of intra-group transfer price agreements and the “mere” reduction in personnel as an unsuitable sole indication of the employer’s lack of economic performance (BAG Judt. v. 10.02.2015, 3 AZR 37/14 and v. 21.04.2015, 3 AZR 729/13)
For legal practice, the BAG clarified in its rulings of February 10, 2015 (Verrechnungspreis I) and of April 21, 2015 (Transfer Pricing II) the treatment of intra-group transfer pricing agreements and a “mere” reduction in the workforce as (alleged) arguments by the employer for its lack of ability to adjust pension benefits.
In the two cases underlying the rulings, the operating business activities of the respective employer exclusively or predominantly comprised the provision of intra-group services on the basis of transfer pricing agreements concluded for this purpose. The Group companies involved had agreed the transfer price arrangements with the relevant tax office in each case. In the Transfer Price I decision, the transfer price agreement provided for a transfer price above the market price, which resulted in the employer consistently achieving a positive annual result in each of the adjustment-relevant periods. The employer rejected the adjustment of the pension benefits on the grounds that the transfer price agreement in the specific amount had been determined solely for the purpose of managing intercompany benefit flows in line with requirements and that it would have consistently generated a negative result for the year if the market price had been applied. In the Transfer Price II decision, the transfer price was below the market price and the employer consistently achieved a negative annual result in the adjustment-relevant period. The employer refused to adjust the pension, citing these negative annual results. The plaintiff employee sought an adjustment on the grounds that if a transfer price in line with the market had been applied, the employer would have consistently achieved a positive annual result in the period relevant for the adjustment. The BAG clarified in both decisions that the transfer pricing agreements actually implemented in the adjustment-relevant period are decisive for the assessment of the pension adjustment; this is in any case the case if the transfer pricing agreements are agreed with the tax office in each case. Hypothetical transfer prices should not be taken into account.
In the Verrechnungspreis I decision, the employer had also based the suspension of the adjustment on the facts that it had carried out extensive staff reductions in the adjustment-relevant period in order to optimize costs and that any pension adjustment to be carried out would have resulted in further staff reductions. The BAG did not follow the employer’s argumentation. In the Transfer Price I decision, it clarified that the economic situation of the employer is characterized by its earning power as a whole and that therefore a reduction in the number of jobs does not in itself say anything about the economic performance of the pension debtor. In particular, the employer cannot refuse to adjust the company pensions solely on the grounds that an obligation to adjust the company pensions would result in (further) job cuts. In the opinion of the BAG, the reduction in jobs carried out in order to optimize costs is merely an indication of the pension debtor’s lack of economic capacity, which the pension debtor must substantiate by providing a concrete explanation of the other framework parameters (cf. see the article in Pensions Update 03/2014, http://www.kpmg-law.de/docs/Pensions_Update_03.pdf#page=2).
Conclusion: In its transfer pricing decisions, the BAG rejects a Rosin theory. For the assessment of the economic performance of the employer for the pension adjustment, the lived practice is decisive and the economic situation of the pension debtor must be determined, taking into account the balance sheet and tax law options actually used for the depiction of the earnings situation. The BAG thus rejects the approach often chosen by pension debtors of using hypothetical options for the presentation of the economic situation, which the pension debtor has, however, deliberately not chosen in the (tax) balance sheet presentation of its business activities. In practice, it is also helpful to note that a mere reduction in the number of jobs carried out in order to optimize costs cannot in itself constitute an indication that the pension debtor lacks economic capacity.
Replacement of occupational pension commitments on the basis of an overall commitment by a company agreement – modification of the case law on the possibility of replacement (BAG ruling dated March 10, 2015 3 AZR 56/14)
The effectiveness of the modification of an individual pension commitment – above all for a cost-optimizing reduction of the benefit level – by means of a collective agreement (and here above all by means of a works agreement) generally requires the fulfillment of two prerequisites (cf. for more details, see the article “Modification of occupational pension schemes: Opportunities and risks under labor law” in Pensions Update 02/2015: http://www.kpmg-law.de/docs/Pensions_Update_Sommer_2015.pdf#page=7):
The effective implementation of the replacement of the individual pension commitment by a company agreement generally requires the consent of the employee. Exceptionally, the BAG permits a replacement without the employee’s consent if the pension commitment contains a reservation regarding the possibility of replacement at a later date by means of a collective agreement (works agreement). In its previous case law, the BAG required that such an opening clause be expressly included in the individual pension commitment, both for an individual contractual commitment and for a commitment based on an overall commitment. (BAG ruling dated April 26, 1988, 3 AZR 277/87). In the past, this case law significantly restricted the modification of legacy pension commitments (“Versorgungsordnung”) issued by employers with generously endowed pension volumes, especially in the 1970s, as they usually did not contain such an opening clause. In particular, employers who had concluded pension plans without opening clauses relatively late or even not at all for new entrants in the past were only able to counter the recent significant increase in pension provisions in the low-interest environment with very limited countermeasures.
In its ruling of March 10, 2015, the BAG had the opportunity to reconsider its previous case law on the (lack of) severability under collective bargaining law of overall commitments without an explicit opening clause. The subject of the decision was the 1976 pension scheme of the former Karstadt AG (VO 1976), which the Company had issued to its employees joining the Company in the period from 1976 to 1982 by way of a general commitment. The VO 1976 provided, among other things, (retirement) pension benefits amounting to 18% of the last pensionable income plus 1% of the pensionable income for each full year of qualifying service rendered after fulfillment of the qualifying period, up to the maximum amount of 30% of the pensionable income. The 1976 Regulation did not contain an explicit opening clause. A company agreement (BV 1982) concluded in 1982 to replace the VO 1976 contained a modified calculation method for the pension benefits. The BV 1982 included a lower benefit level for certain groups of employees with a pension commitment under the VO 1976. The plaintiff employee asserted the invalidity of the replacement of the VO 1976 by the BV 1982, inter alia, with the argument that the VO 1976 could not be effectively replaced by the BV 1982 under collective law due to the lack of an opening clause.
The BAG did not follow this argumentation (anymore). In an amendment to its previous case law, it now generally permits the replacement of an overall commitment under collective bargaining law by a subsequent works agreement. This is based on the argument that the provisions of the company pension plan set out in an overall commitment are designed for a longer, indefinite period of time and are therefore exposed from the outset – also recognizable to the beneficiaries – to a possible need for change in the future. Only if, according to its wording, the overall commitment is to be based exclusively on the pension conditions applicable at the time of its issue does the overall commitment exceptionally (continue to) require an express opening clause for the effectiveness of the replacement under collective law without the participation of the employee.
Conclusion: The change in the case law of the BAG is extremely helpful for practice. Employers can now counteract the considerable economic burdens – resulting in particular from the low-interest environment – from old comprehensive commitments without an opening clause by means of an amending works agreement, taking into account proportionality in accordance with the three-step theory of the BAG. The group of cases determined by the BAG for the necessity of the opening clause, i.e., that the overall commitment is limited to the pension provisions applicable at the time of the commitment, is likely to be rare in practice.
Interpretation of a pension scheme with regard to the determination of the pensionable remuneration (BAG ruling dated August 4, 2015 3 AZR 479/13)
Employers who grant their employees defined benefit plans with final salary-related pension benefits are often exposed to disputes with the employees concerned about the concrete calculation of pension benefits if the regulations on the relevant benefit parameters in the pension commitment are unclear or very differentiated.
This was also the experience of the employer in the case underlying the decision of the BAG of August 4, 2015: It had promised its employees final salary-related pension benefits in a pension commitment concluded as a company agreement.
According to the company agreement, pension benefits were to be determined on the basis of the average gross pensionable income earned in the last 12 months of the employment relationship. For the calculation of pensionable income, the company agreement distinguished four groups of persons:
According to the most recently agreed employment contract, the plaintiff (former) employee received an annual income as a fixed salary and, in addition, a variable remuneration amounting to a maximum of 20% of the annual income. The employee left the employer prior to the occurrence of the pension event. After termination of the employment relationship, the employer informed him of the vested pension rights earned from the pension commitment, which he calculated on the basis of a classification of the employee in person group 3 in accordance with the company agreement and for which he (alone) took the fixed salary into account. In the lawsuit, the employee claimed the calculation of his pension benefits on the basis of his classification in person group 4 in accordance with the company agreement. The two courts of lower instance upheld the action. The BAG did not follow this assessment, but determined a calculation of the pension benefits on the basis of the employer’s classification in person group 3. It justified its legal opinion by stating that, according to the wording of the company agreement, person group 4 only covers those persons with whom the employer has agreed a total (target) salary from the outset, which already takes into account the achievable variable remuneration with a specific EUR amount. Such a direct inclusion of the variable remuneration in the total salary had not been recorded in the employment relationship of the plaintiff employee, since he had (only) been promised a fixed salary in absolute terms.
Conclusion: With regard to the interpretation of the specific performance parameters in the company agreement at issue, the decision can be chalked up to a case-by-case decision. However, it vividly shows that employers should take great care in formulating the specific benefit parameters for the promised benefits when drawing up pension commitments – especially in the case of defined benefit commitments. This is particularly the case if the commitment is made in a company agreement. This is because works agreements, as collective agreements, are interpreted by the labor courts in the same way as laws and are subject to unrestricted interpretation control in all court instances. In case of doubt, employers should use the simplest possible calculation formula when linking pension benefits to the employee’s (last) income, for example, by referring exclusively to the last fixed salary received. Otherwise, there is a risk of conflicts and associated – especially in the case of a large number of affected employees – costly legal disputes about the specific performance parameters.
Hot off the press – The most recent case law of the BAG in guiding principles:
In its session on November 12, 2015, the Bundestag adopted the draft law on the implementation of the EU Mobility Directive (2014/50/EU, EU-MobRL). Adoption followed the second and third readings of the bill after the Committee on Labor and Social Affairs (as the lead committee), the Finance Committee and the Budget Committee had discussed the bill in detail following the first reading in the Bundestag on October 15, 2015. The Federal Council approved the law at its meeting on December 18, 2015.
The final version of the law largely follows the federal government’s draft of October 8, 2015. It contains, for the effective adjustment of the pension entitlements of retired pensioners, the case catalog already determined in the draft law with a possible flat-rate annual adjustment of 1% as well as an effective adjustment of the entitlement in the same way as the adjustment of current benefits vis-à-vis pension recipients. In this respect, the employer can already refrain from the adjustment if he is not in a position to adjust the current benefits in accordance with § 16 BetrAVG due to his economic situation (cf. see our report in Pensions Update 01/2015: http://www.kpmglaw.de/docs/Pensions_Update_Mai_2015.pdf).
In the final stages of the legislative process, the legislature added an amendment to the Act on the Modernization of Financial Supervision of Insurance Companies. With this adjustment, a non-insurance pension fund will also be possible during the pension withdrawal phase as of 2016. In this case, the pension fund does not provide a guaranteed pension even after the start of the pension. Instead, the pension is linked to the return on invested capital; the pension fund can thus pursue a riskier investment policy with the chance of higher returns. In this case, the pension commitment must provide for a minimum pension, which is determined at the beginning of the payment phase and for which the employer is liable. The collective bargaining parties must agree to the pension commitment being implemented in this non-insurance form. An ordinance authorization contained in the Act allows the Federal Ministry of Finance to issue more detailed provisions in connection with the minimum pension.
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