Company pension scheme – Pensions Update | Issue 1/2018

The Pensions Update asks: Age 60 in the BAV?!

Interview with Dr. Lars Hinrichs, KPMG Law Rechtsanwaltsgesellschaft mbH

Pensions Update: In the BAV, the employee’s age plays a decisive role for the specific pension benefit. What are the current challenges in this regard in practice?

Lars Hinrichs: Currently in two respects: Companies with total pension commitments that provide for retirement benefits upon reaching the age of 65 must implement the BMF letter of December 9, 2016 in a timely manner and, if necessary, clarify in writing that these commitments for retirement benefits are dynamically based on the statutory standard retirement age (cf. see our Client Alert). Furthermore, in the case of pension benefits granted by the employer before the statutory standard retirement age, the question often arises as to whether such benefits can (still) be regarded as BAV benefits within the meaning of the BetrAVG. Case law bases the answer to this question on the age determined for the benefit.

Pensions Update: In which specific cases does the question arise as to whether such pension benefits constitute a BAV within the meaning of the BetrAVG?

Lars Hinrichs: Typically in the case of benefits provided by the employer to older employees after termination of the employment relationship over a longer period of time – often until retirement benefits are drawn for the first time. Such benefits are referred to in practice as pension, transitional allowance, early retirement allowance or retirement pension. All employee groups can be affected – from the executive board of the stock corporation, who receives such benefits due to non-extension of the employment contract until retirement through no fault of their own, to the employee within a staff reduction, to whom the employer promises benefits in the social plan agreed with the works council to bridge the gap until the first retirement.

Pensions Update: What specific requirements does case law place on age in order for a benefit to be considered as such under the BetrAVG?

Lars Hinrichs: Case law no longer requires a specific age. The BGH had initially required a minimum age of 63; in more recent case law, the BGH and the BAG have recognized benefits granted from the age of 60 as benefits under the BetrAVG. Correctly, the assessment must be made on the basis of all the circumstances of the individual case, which may result in the specific benefit also being subject to the BetrAVG if it is granted to the individual employee for the first time before the age of 60.

Pensions Update: How should practitioners deal with this case law?

Lars Hinrichs: Through a comprehensive paper trail. I.e. employers should in particular comprehensively and transparently document the purpose and scope of the promised pension benefits.

Pensions Update: Why is the classification of these benefits as those of the BetrAVG important?

Lars Hinrichs: For the employee with regard to the statutory insolvency protection: In the event of the employer’s insolvency, the PSV only steps in for pension commitments that include BAV benefits in accordance with the BetrAVG. On the other hand, only those benefits granted by the employer for (early) retirement are subject to the statutory health insurance obligation that include benefits under the BetrAVG. If the employer, as a credit institution or financial services company, is subject to the regulatory requirements of the Remuneration Ordinance for Institutions (Institutsvergütungsverordnung), the classification of the pension benefit is decisive for the classification as fixed remuneration or variable remuneration. If the BAV benefit is to be classified as variable compensation from a regulatory perspective, it is subject, among other things, to the regulatory cap between fixed compensation and variable compensation, which is generally capped at 100% for variable compensation.

Pensions Update: Are employees unprotected with regard to the employer’s insolvency risk if the benefit is not covered by the BetrAVG?

Lars Hinrichs: No. The employer can hedge the insolvency risk by means of insolvency protection under private law; for example, by means of a contractual trust arrangement (CTA) or a bank guarantee. The CTA, in particular, offers practical structuring options in this regard, which we will highlight shortly in a separate Pensions Client Alert.

ATLAS Pensions Assessment: Where do you stand with your BAV?

Low interest rate environment and legal changes tighten conditions for company pension plans (BAV). The Pensions Maturity Assessment developed by KPMG can be used to evaluate the maturity of existing pension systems and their implementation. Strengths, weaknesses and gaps become visible – in relation to your company as well as in comparison to other companies.

The BAV continues to be an important component of personnel policy in many companies. At the same time, legal requirements such as the EU Mobility Directive, the German Act to Strengthen Company Pensions (Betriebsrentenstärkungsgesetz) and labor court rulings are making the implementation of the BAV an ever greater challenge. For the most part, employers have long neglected the organizational character of their BAV and have instead focused ad hoc on accounting implications, or at best on the content of the design. Often, pension systems were closed without taking into account the increasingly important aspect of employer attractiveness. Deficits in the administrative processes of the pension systems and (further) legal risks have often remained unaddressed: Knowledge about the company’s BAV landscape is largely held in a decentralized manner. Content-related framework parameters for the implementation of FOT are often insufficiently documented. Despite long-term commitments, there are insufficient processes to ensure authoritative BAV knowledge within the company and its units. The resulting deficiencies in the supply systems themselves as well as in their administration entail considerable additional financial and time expenditure as well as dissatisfaction on the part of all parties involved. The potential of the BAV as an instrument for recruiting and retaining staff is not being fully exploited. Inherently avoidable litigation ensues.

Our performance

We collect data on the structures and processes of your BAV using our IT-based assessment tool. We then evaluate the data collected in seven dimensions: employer-financed provision, employee-financed provision, information and data processing, resources, communication, management and risk control, and BAV and HR strategy. In this way, you achieve a 360° view of your occupational pension system and an assessment of the maturity of the existing pension systems in your company and their implementation. Among other things, this reveals unused potential for implementing the BAV in such a way that it becomes manageable and attractive for your company (again). At the same time, we show you – also in comparison with other companies – weaknesses and gaps that you can use for the legally compliant and administratively needs-based implementation of your BAV.

Your added value

We present the result of our analysis graphically. We rank the data for the maturity dimensions individually on a percentage value scale and additionally compare them with the data for the other parameters in each case. In addition, we compare your company’s values with those noted as best practice in our database as part of a benchmarking process. This results in an objective multidimensional picture that clearly shows where particular (process) risks exist, which specific strengths you can exploit in a targeted manner, where unused potential lies and where competitors are ahead of you.

Practical deepening in the workshop

Using new workshop methods such as “Pensions 360 degrees”, the results of the analysis are transferred into a company-specific concept (for more information, see https://atlas-uat.kpmg.de/business-assessments.html%2344891).

Acquiring a business: The work begins after the deal is done

When acquiring a business or part of a business, the purchaser also takes over the existing company pension arrangements there. As a rule, these must be continued unchanged, at least in the first step. The associated administrative requirements can pose significant challenges for the acquirer. Nonetheless, mastering this task quickly is crucial – for the company and for the employees taken on.

Upon the acquisition of a business or part of a business, the employment relationships of the employees concerned are transferred to the purchaser. This also includes the commitments to company pension benefits (BAV). Apart from the not too frequent case that the BAV is regulated under collective law both by the seller and the acquirer, the pension arrangements taken over are to be continued unchanged – at least initially. This involves administrative effort – which can be small if only a few and simple pension plans are involved, but can also be arbitrarily burdensome if the pension landscape at the seller was already complex and/or the prevailing regulations and financing vehicles there differ significantly from what the acquirer already offers its employees.

Therefore, the first step is to identify which obligations and contracts need to be observed. This concerns

• both employer-funded commitments and commitments funded by deferred compensation of employees,
• all implementation channels, i.e. direct commitments, support funds, direct insurance, pension funds and pension funds,
• in the case of direct commitments, any existing refinancing vehicles, i.e. primarily reinsurance policies and trust models.

What to consider in the first 100 days?

In order to ensure the smooth administration of the assumed pension obligations, a number of key questions need to be answered and appropriate activities undertaken:

Regarding funding vehicles:

• Can the financing vehicles in place at the seller be continued unchanged?
• If so, do the policyholder characteristics or memberships (e.g. in intercompany provident funds or trust models) have to be transferred to the acquirer for this purpose?
• If no, does a new provider need to be selected? For compliance reasons, is a formal RFP required for this? Are there, for example. out of the purchase contract, special requirements to be considered in the selection?

In terms of internal expertise and IT platforms:

• Is it ensured that the seller has provided all relevant information and documents? Are these available to employees in the HR, Finance and Payroll departments? May additional information need to be requested from the vendor? Has a plausibility and completeness check of the documents received been carried out?
• Are HR, Finance and Payroll staff sufficiently familiar with the specific requirements to ensure smooth and error-free administration of the adopted benefit arrangements? Is employee training necessary?
• Do the HR and payroll systems (e.g. SAP HCM) need to be adapted and, if necessary, supplemented?

Regarding the processes:

• What processes are required to manage the acquired supply systems? What deadlines (e.g. for employee decisions on deferred compensation) must be observed?
• Which external service providers are to be involved (e.g. administrators, experts)? Will the providers selected by the seller continue to be contracted or are there already appropriate service companies for the acquirer’s pension plans that will also cover the pension systems now acquired in the future? Were the affected companies informed comprehensively and in good time?
• Who is responsible for the administration of the new supply systems or for which of the necessary administrative processes? Have appropriate interfaces been set up?

Why are the first 100 days crucial?

The questions listed must be dealt with promptly – after all, there are enough “stumbling blocks” that can mean additional costs and risks:

• As long as the required financing vehicles are not implemented at the buyer, the assets to be transferred according to the purchase agreement may not be transferred to the buyer. Ex. assets can only be transferred from a trust existing with the seller to another trust.
• If funding vehicles are set up late, the contributions defined in the pension plans taken over cannot be paid in on time – and in some cases the payment of contributions cannot easily be made up at a later date. This concerns e.g. Support funds that only allow current contributions, but also investment vehicles where contributions are invested on the capital market and the return is decisive for the amount of the pension benefits.
• If processes and responsibilities are not adequately defined, the pension provisions required for the annual financial statements may not be available on time and/or may be incomplete or subject to errors.
• If information on the pension plans taken over is incomplete or if the employees of the HR department of the acquirer lack the relevant knowledge, this can lead to incorrect benefit calculations in the event of a pension claim and thus to the transfer of incorrect pension or capital amounts to the employees taken over.
• Last but not least, inefficient processes in the administration of the adopted supply arrangements can lead to the unnecessary commitment of resources – which are then lacking elsewhere.

And after 100 days?

When dealing with the tasks outlined above, there is often not enough time to comprehensively grasp the details of the supply systems taken over and the associated risks and cost drivers. Nevertheless, the financial, labor law and tax risks of the new supply landscape should be analyzed as quickly as possible and possible adjustments to the existing regulations should be examined. In cases where pension plans already exist at the acquirer, the aim should be to harmonize the two systems in the medium term. KPMG is happy to support them in the tasks outlined – from project management and technical support to staff training. Contact us.

HGB accounting for pension obligations assumed for consideration

As a rule, companies assume pension obligations – either as part of a corporate transaction or by agreeing to assume debt. In return, the acquiring company receives financial compensation from the previous employer, which usually differs from the scope of the obligation under the HGB. How should the acquired pension obligation be accounted for in such cases? This question was recently addressed by the Pension Committee of the German Actuarial Association (DAV). The following statements summarize the main messages of the results report adopted at the end of October 2017.

In its updated “Stellungnahme zur Rechnungslegung: Handelsrechtliche Bilanzierung von Altersversorgungsverpflichtungen (IDW RS HFA 30 n.F.)” of December 16, 2016, had revised its comments on obligations assumed for consideration. For this reason, the DAV working group has now also addressed the issue.

According to the IDW statement, the acquired pension obligations are to be recognized in equity by the acquiring company. In other words, the obligations are to be carried as liabilities at the amount paid to the acquirer for the acquisition; however, at least the commercially necessary settlement amount according to the German Commercial Code is to be carried as a pension provision. Acquisition gains may not be recognized either at the date of addition or at subsequent reporting dates.

The DAV’s report on the results now presented in this regard initially relates only to pension obligations, but also applies mutatis mutandis to comparable obligations due in the long term (e.g. from partial retirement or early retirement agreements). As the assumption of pension obligations for consideration is often only part of a broader (corporate) transaction in the context of a company acquisition, no explicit consideration can often be attributed to the assumption of the pension obligations. In these cases, the question of an initial and subsequent valuation of the obligations assumed that deviates from the usual valuation under commercial law does not arise due to the lack of quantifiability of their “acquisition price”, and the obligations are recognized at the settlement amount required under commercial law in accordance with Section 253 HGB. In all other cases, the DAV Working Group believes that the following aspects are relevant. It should be noted that the DAV results report reproduced here merely provides information on the current status of the discussion within the DAV, but does not represent a legitimate professional position of the DAV and, in particular, does not have any generally binding effect.

In cases where the consideration paid for the assumption of the obligations – explicitly or as part of a purchase price allocation – does not correspond to the settlement amount in accordance with Section 253 HGB, the pension provision to be recognized as a liability upon assumption (“initial measurement”) is derived from the consideration received.

The HFA describes two basic ways to do this. On the one hand, the accounting method preferred by the HFA provides for the pension accrual to be recognized in the amount of the consideration received for the assumption of the obligation, i.e., not following a valuation in accordance with Section 253 HGB. Alternatively, the HFA opens up the possibility of recognizing a pension provision for the obligations assumed in the amount of the settlement amount required under German commercial law (i.e., in accordance with Section 253 HGB) and of forming an additional separate liability item to the extent that the consideration received (monetary assets) exceeds the settlement amount required under German commercial law for the obligations assumed. For this purpose, the HFA expressly mentions the possibility of creating deferred income, whereby, for example, the following items may be recognized in the balance sheet the formation of an other provision is also conceivable.

From a valuation perspective, the alternative approach has the advantage that the entire obligation portfolio can also be closed out at subsequent reporting dates and measured uniformly in accordance with commercial law principles. In order to avoid acquisition gains, only the question of the valuation of the additional liability item is then decisive.

Subsequent measurement

While the recognition of the assumed obligation in equity at the date of addition is essentially a question of accounting recognition, the avoidance of acquisition gains over time is directly linked to the question of the measurement of the assumed obligation at subsequent reporting dates. In this context, the DAV paper distinguishes between an exact continuation and a lump-sum update of the valuation approach of the acquisition.

Exact update

In the view of the DAV Working Group, it is permissible under commercial law if the valuation approach on the basis of which the consideration for assuming the obligation was determined is continued unchanged for the obligations assumed. However, this is quite complex, as this approach requires a separation of the obligations assumed and a differentiation from the obligations already existing at the date of acquisition at the acquirer’s or subsequently acquired entitlements and claims.

The working group is critical of a dynamic interpretation of the valuation approach, for example an ongoing adjustment of the interest rate at subsequent reporting dates to the prevailing market conditions at that time (for example, in line with an IAS 19-compliant interest rate determination). Similarly, the admissibility of adjustments to other valuation assumptions (such as biometric assumptions or a pension or salary trend linked to inflation expectations) is considered questionable. In other words: If e.g. an amount determined in accordance with IFRS principles would be paid for the acquisition, the acquired obligation portfolio would still have to be measured in accordance with IFRS principles, but the assumptions selected for the “purchase price” would always be retained.

Flat rate update

In order to avoid the expense associated with the exact update described above, a “lump-sum” update can be selected. The DAV paper proposes various options for this. All these variants are based on the assumption that the results of an exact extrapolation will approximate the settlement amount according to HGB over time. Therefore, the difference between the consideration paid for the obligations assumed and the settlement amount under German GAAP is released to income on a lump-sum basis over a specified period of time. To determine this period, the DAV proposes the following alternatives:

• Duration: The duration of the obligations assumed is determined once at the time of addition (and is not adjusted thereafter).
• 15 years: The duration of 15 years assumed in accordance with the simplification option (Section 253 (2) sentence 2 HGB) is used.
• 10 years: If a discount rate based on current market interest rates is used to calculate the acquisition consideration, this rate and the HGB interest rate (10-year average interest rate) will equalize within ten years (or a period of seven years for comparable obligations due in the long term) if the accounting conditions remain unchanged.
• Other periods: If there are circumstances that make another period appear appropriate, this may also be used.

If the HGB average interest rate approaches the discount rate for the acquisition consideration more quickly than expected at the time of addition, the working group is of the opinion that it is not objectionable if the recognition of the difference carried as a liability is accelerated and the scheduled period is shortened to this extent.

In any case, the DAV results report recommends appropriate consultation with the auditor before applying a specific approach.

Further acquisition during the update period

If the obligations are taken over by another company (e.g. by way of a further transfer of business) or transferred to a pension fund during the extrapolation period, so that the pension accruals have to be reversed, the remaining part of the difference carried as a liability must also be derecognized. The acquisition gain from the original acquisition transaction is thus realized and to this extent reduces the expense from the new transaction.

A pure defined contribution plan – right now?

In our roadshow on BAV, participants asked in several events with a view to the Company Pension Strengthening Act whether they could set up a pure defined contribution plan for their employees as of January 1, 2018, or at least prepare to set it up. An interesting question that spoke from the heart of many guests.

The desire to set up a pure defined contribution plan is understandable – after all, it offers a number of advantages for the employer. The benefit payable to the employee or his or her surviving dependents in the event of a pension claim is based solely on the contributions made and the return on these contributions; there is no minimum benefit, however defined, which could give rise to an obligation on the part of the employer. In addition, the defined contribution plan is implemented via an external provider and involves a manageable administrative burden for the employer.

Obstacles to the immediate introduction of a pure defined contribution scheme

However, a pure defined contribution plan requires a basis in a collective agreement; it must also be implemented via a joint institution of the collective bargaining parties. Employers and employees not bound by collective agreements are also to be given the opportunity to participate in the pure defined contribution plan and the institution created for this purpose.

If a company wants to offer its employees a pure defined contribution plan, this always requires the existence of a relevant collective agreement. As of January 1, 2018, no such agreements had been reached between the collective bargaining parties. It is assumed that the first defined contribution plans will exist by the end of 2018. This means that a pure defined contribution plan can probably be set up at the beginning of 2019 at the earliest.

Furthermore, the question naturally arises as to whether the then existing collective agreement is at all relevant for the interested company, i.e. whether it is a collective agreement that is relevant geographically, professionally and personally for the respective employment relationship. In this context, it should also be borne in mind that there are definitely sectors of the economy for which there are no collective agreements at all. At least for the time being, the possibility of a pure defined contribution plan is therefore likely to “come to nothing” for the employers affected by this.

“Parking” of contributions earmarked for pure defined contribution?

Now, a company that expects a corresponding collective bargaining agreement for its industry could consider promising its employees a pure defined contribution plan as early as 2018 and “parking” the promised contributions in another form of financing until the defined contribution plan is established by collective bargaining. Apart from the fact that it is currently impossible to predict for which collective bargaining areas a defined contribution system will be introduced and when, such an approach is also out of the question for tax reasons. After all, in some time the contribution for a longer period would have to be transferred to the defined contribution plan – and the resulting amount would in all likelihood exceed the tax limits provided for this, thus representing taxable income for the employees, at least in part.

What then?

Even without using the pure defined contribution plan, there are ways to set up a company pension plan with only minimal risks for the employer and without affecting the balance sheet. So why not use such approaches – and at the same time agree that as soon as there is a relevant defined contribution plan, future contributions will be paid to this institution? It should also be borne in mind that the pure defined contribution plan does not only have advantages – the “old world” of occupational pensions also continues to have its raison d’être. The respective advantages and disadvantages must be carefully weighed up.

The colorful new world of the Company Pension Strengthening Act is here – what applies even without implementation?

The Company Pension Strengthening Act (BRSG) came into force on January 1, 2018 to pave the way for a fundamental reform of the BAV. It includes a wide variety of amendments to the Occupational Pensions Act, the “core” of which is the concept of pension provision in the social partner model with the participation of the parties to the collective bargaining agreement. After informing you at our roadshow about the labor law issues arising from the implementation of the BRSG and, in particular, the replacement of “old world” pension systems by “new world” ones, we would like to summarize in this article which regulations already apply by operation of law and also without implementation of the new design options by the collective bargaining parties.

1. Core contents of the BRSG that must be implemented

The BRSG introduces a major innovation into the regime of occupational pension law, which is characterized by the basic idea of the employer’s obligation to fulfill the pension commitments it has made, namely the liability privilege of the collectively agreed pure contribution commitment for certain implementation channels, Section 1 (1) of the BRSG. 2a BetrAVG n.F.. The employee bears the risks of the investment. Guarantees are prohibited in order to achieve the best possible returns for the volatile “target annuity”. In addition, it is now possible to implement mandatory deferred compensation in an option system if the employee does not actively object. Both types of commitment require a basis in a collective agreement.

As long as these collective agreements on the BAV have not yet been concluded, the new types of commitment cannot yet be applied by the parties to the employment contract (leaving aside the question of applicability also for non-tied parties under sections 20 (2), 21 (3) and 24 BetrAVG n.F. as “shall provisions”). An analysis of the practical and legal consequences and the development of needs-based design options for existing pension systems are only possible for the companies with a view to the concrete tariff structures.

2. Accompanying tax framework for pension arrangements via DV, PF and PF (§ 3 No. 63 EStG):

However, the central innovations “pay and forget” and “opt out” are flanked by various regulations that also apply directly by law to existing systems. These are primarily the improved tax framework for the allocation of the applicable implementation paths:

In the future, up to 8% of the respective contribution assessment ceiling (BBG) of the statutory pension insurance West can be paid tax-free into a direct insurance, pension fund or pension fund. In return, the option of making tax-free contributions of up to EUR 1,800 p.a. will no longer apply to pension commitments made after December 31, 2004. If at least one insurance premium was previously taxed at a flat rate in accordance with Section 40b of the German Income Tax Act (EStG) in the version valid until December 31, 2004 (max. EUR 1,752 p.a.), this flat-rate taxation can be continued; the above-mentioned maximum subsidy amount of 8% of the BBG West is reduced by the premium taxed at a flat rate.

Under social security law, it remains the case that only a contribution up to 4% of the BBG is exempt from tax.

The introduction of multiplication rules in Section 3 No. 63 of the German Income Tax Act (EStG) also makes the external implementation of the BAV significantly more attractive:

If, on the occasion of the termination of an employment relationship, contributions are made to a direct insurance, pension fund or pension fund, these remain free of wage tax up to an amount of 4% of the BBG West, multiplied by the number of calendar years (max. ten) in which the employment relationship existed.

For full calendar years in which the first employment relationship was suspended (e.g. child-raising periods, etc.), subsequent payments free of wage tax of a maximum of 8% of the BBG West, multiplied by the number of full years of suspension (max. ten), can be made.

3. Mandatory employer subsidy for deferred compensation

For employers, § 1a para. 1a BetrAVG n.F. for new deferred compensation agreed from January 1, 2019, the obligation to provide subsidies of a flat rate of 15% if the deferred compensation saves social security contributions. From January 1, 2022, this will also apply to existing pension systems. According to the wording of the law, this applies explicitly only to the direct insurance, pension fund and pension fund implementation channels. The subsidy can be waived by collective agreement in accordance with the general clause in Section 19 of the German Occupational Pensions Act (BetrAVG), as amended. If a subsidy is paid, it shall be recognized in the same way as the entitlement from deferred compensation in accordance with section 1b (1) of the German Income Tax Act. 5 BetrAVG n.F. immediately vested. It must be a case of deferred compensation in accordance with Section 1a of the German Occupational Pensions Act (up to 4% of the gross salary, for employees compulsorily insured in the statutory pension insurance Section 17 (1) Sentence 3 of the German Occupational Pensions Act); voluntary deferred compensation outside of Section 1a of the German Occupational Pensions Act is not covered.

In practice, various interesting questions arise regarding the subsidy, in particular whether the exclusion of the subsidy for the implementation methods of the direct commitment and support fund are objectively justified or how to deal with already existing subsidy regulations of the employer – when/if a crediting may take place? The possibility of offsetting the grants must be examined on a case-by-case basis. As a result of the BRSG, there is a need for action to adapt deferred compensation agreements and the related collective legal bases.

4. Introduction of a BAV subsidy for low-wage earners

From 2018, a BAV subsidy amount will be introduced for low earners. This subsidy amount can be claimed in addition to the Riester subsidy; in particular, an entitlement to Riester allowances is not reduced or these are offset against the BAV subsidy amount. A prerequisite for the subsidy amount to be granted is that the employer pays (i) at least EUR 240 (ii) in addition to the contractually agreed salary and any previous employer contributions (iii) to a pension fund, pension fund or for a direct insurance policy in the calendar year for a contract for occupational retirement provision for which the acquisition costs of the distributor are not retained at the expense of the initial contributions (so-called “zillmerization ban”): In this case, 30% of these costs (up to a maximum of EUR 144 p.a.) may be withheld from the employee’s income tax. Contributions from deferred compensation are not eligible due to the above-mentioned requirements. In addition, the granting of the BAV subsidy is linked to the fact that the current taxable salary of the employee concerned does not exceed the following amounts (depending on the salary payment period fixed in the employment contract) at the time of the premium payment:

• 73,34 EUR for daily,
• 513,34 EUR with weekly,
• 2,200.00 EUR with monthly or
• EUR 26,400.00 for annual salary payment period.

Only the circumstances at the time of the premium payment are decisive for the possibility of claiming the subsidy; subsequent changes are not taken into account.

5. Reduced crediting of pensions to assistance for subsistence and to basic benefits

As a result of the amendments to Section 82 of Book XII of the Social Code (concept of income), benefits from occupational pensions are offset to a lesser extent against assistance for subsistence and basic benefits in old age and in the event of reduced earning capacity.

6. Facilitated adjustment test obligation – flap the 5th: retroactivity(?)

The amendment of the escape clause in Section 16 (1) in response to the requirements for the applicability of the facilitated adjustment tests for pension funds identified by the BAG when implementing the EU Mobility Directive at the end of 2015. 3 No. 2 BetrAVG caused legal disputes with regard to the question of its retroactive effect. In its ruling of December 13, 2016 (3 AZR 342/15), the BAG expressly ruled out retroactive effect. The addition to Section 30c (1) initiated on the occasion of the BRSG. 1a BetrAVG n.F. now attempts to undermine this and stipulates that the simplified adjustment generally also applies to adjustment review periods that lie before January 1, 2016. It remains to be seen whether this legal retroactivity will hold up in the event of further judicial review.

7. Insolvency protection: continuation of reinsurance policies

By § 8 para. 3 BetrAVG n.F., pension beneficiaries are granted the right under certain circumstances in the event of the insolvency of their employer to demand a transfer of the policyholder position and continuation of the congruent reinsurance policy taken out on their life with their own contributions instead of the claim against the Pensions-Sicherungs-Verein.

If you require further information on the implications of the BRSG, please do not hesitate to contact us.

Current labor law jurisprudence

In recent months, case law has continued to play an active role in the further development of occupational pension plans (BAV). In this issue, our case law section deals with decisions (1) on the treatment of early retirement benefits as BAV benefits under social security law, (2) on the effectiveness of the exclusion of a sponsoring company’s claims for repayment against a group support fund, (3) on the scope of the offsetting of other pension benefits against BAV benefits pursuant to Section 5 para. 2 BetrAVG and (4) on the effectiveness of a distance clause for surviving dependents’ benefits.

In its ruling of July 20, 2017, the BSG decided that benefits from a direct commitment, which an employer pays to employees after they leave the employment relationship initially with a bridging function for an unlimited period even beyond retirement, are only to be regarded as pension benefits subject to contributions under the statutory health insurance scheme pursuant to Section 229 of the German Social Code, Book V from the time of retirement, at the latest from the time they reach the standard retirement age. With this ruling, the BSG has abandoned its previous case law, according to which only temporary transitional benefits with a transitional function cannot be regarded as pension benefits subject to contributions within the meaning of Section 229 of the German Social Code, Book V.

In the facts underlying the decision, the plaintiff employee, who was born on February 1, 1943, was employed by the employer granting the pension commitment until June 30, 1998. The employment relationship ended for operational reasons on the basis of a termination agreement at the end of November 30, 1998. In the termination agreement, the employer promised, among other things, a monthly company pension of DM 1,327.55 from the age of 55 in accordance with a company agreement (BV Versorgung) in place with the employer. In fact, as of December 1, 1998, the employee received a “company pension” in accordance with the BV Versorgung. Contributions to the statutory health insurance fund were not paid on this. Since February 1, 2008, the employee has been receiving a retirement pension in accordance with the BV Versorgung. The defendant health insurance company assessed health insurance contributions against the plaintiff for the period from January 1, 2005 to January 31, 2008. This was done on the grounds that the company pension included pension payments within the meaning of Section 229 of the German Social Security Code (SGB V).

The employee filed a lawsuit to have this contribution notice rescinded.

The BSG upheld the complaint. The company pension does not include pension benefits within the meaning of § 229 SGB V. To justify this, the BSG first continues its established case law on the purpose-related distinction between transitional benefits not subject to Section 229 of the German Social Code, Book V, and company pension benefits subject to contributions under Section 229 of the German Social Code, Book V, according to which pension benefits typically aim to provide for the employee in old age, after he or she has left working life, while transitional benefits are intended to have a wage-replacement function as compensation for the loss of a job or to bridge unemployment until retirement.

The BSG sees the age of the employee at the start of the benefit as a decisive indicator for the delimitation: the characteristic of a pension payment is to be denied if the age cannot typically be regarded as the start of retirement. In continuation of its previous case law, the BSG denies an age of 55 as a typical age for the start of retirement. In its previous case law, the BSG had also required as an essential criterion for the classification of the transitional benefit as remuneration not subject to contributions under Section 229 of the German Social Code, Book V that the benefits be granted for a limited period until the start of retirement. The BSG abandons this requirement in this ruling. Transitional benefits granted for an indefinite period are now also not to be subject to any obligation to pay contributions under Section 229 of the German Social Code, Book V for the period between the initial granting of benefits and the employee reaching the relevant age for old-age pension benefits.

Conclusion: With this ruling, the BSG continues to develop its case law on the treatment under social security law of benefits granted by the employer to its employees on the occasion of a termination of the employment relationship for operational reasons to bridge the gap until the (company) retirement pension. The clarification that transitional benefits linked to the main purpose of bridging/(partial) assumption of the job risk by the employer do not include pension benefits subject to contributions in accordance with Section 229 of the German Social Code, Book V, which the employer grants for an indefinite period in accordance with the relevant pension scheme, is welcome in practice. Employers should especially consider this clarification for current and future volunteer programs as part of comprehensive workforce reduction programs.

2. effective exclusion of a sponsoring company’s claims for repayment against a group relief fund (BAG judgment dated March 21, 2017, 3 AZR 619/15)

In its ruling of March 21, 2017, the Federal Labor Court (Bundesarbeitsgericht – BAG) decided that a group relief fund can effectively exclude in its articles of association claims for repayment from individual sponsoring companies with regard to the cover funds contributed to finance the pension commitments if the articles of association provide for the segmented fund assets to be distributed to other institutions providing pension benefits via an indirect implementation path of the company pension scheme in the event that the sponsoring company’s membership is terminated.

In the facts underlying the decision, the plaintiff employer, as the sponsoring company, had transferred cover funds amounting to more than EUR 2 million to the defendant group relief fund to finance pension benefits. The defendant was to provide the cover funds to employees of the employer entitled to benefits in the event of a claim in accordance with a defined benefit plan. On the occasion of the accession of the plaintiff as the sponsoring company, the parties concluded an agreement which provided for the conclusion of reinsurance policies by the defendant for the pension commitments for the use of the cover funds.

The defendant’s articles of association specified as its exclusive purpose the management of a provident fund that granted voluntary, one-time, repeated or ongoing benefits in accordance with its benefit plan to beneficiaries in the event of need for assistance, disability or occupational incapacity, and old age. The Articles of Association contained comprehensive provisions on the exclusion of claims for repayment by the sponsoring companies on the transferred cover funds. It also determined that the defendant should be definitively enriched by the contributions of the sponsoring companies. A claim for repayment by the sponsoring companies was excluded both with regard to the transferred cover funds and the resulting income. In the event of the liquidation of the defendant, the articles of association stipulated a distribution of the cover funds to the beneficiaries or, alternatively, a transfer to a pension fund or an individual support fund; even in this case, the assets of the defendant were not to be distributed to the sponsoring companies.

The defendant invested approximately EUR 1 million from the cash assets allocated to the plaintiff in interest arbitrage bonds. The bonds subsequently defaulted. The plaintiff then demanded that the defendant pay out the amount of EUR 1 million, citing a claim for repayment under the agency agreement between the parties regarding the implementation of the pension commitments via the defendant.

The two courts of first instance upheld the action. This was on the grounds that, in addition to the membership of the plaintiff as the sponsoring company of the defendant, an agency agreement had existed between the parties for the implementation of the pension commitments. The plaintiff could claim a surrender of the cover funds transferred to the defendants in accordance with the statutory provisions on agency agreements (Sections 675, 667 of the German Civil Code). The exclusion provisions for claims for restitution contained in the defendant’s Articles of Association did not preclude this claim for restitution, as the Articles of Association did not contain any provisions on the agency agreement.

The BAG overturned the judgment of the second instance and dismissed the action. The defendant’s Articles of Association contain effective provisions on the exclusion of claims for restitution which would take precedence over a claim for restitution under the agency agreement pursuant to sections 667 and 675 of the German Civil Code (Bürgerliches Gesetzbuch – BGB). For the priority of the provisions of the Articles of Association over the claim for surrender arising from the agency agreement, which is not regulated in the Articles of Association, no explicit regulation of the exclusion of claims arising from the agency agreement is required. The provisions of the Articles of Association are to be regarded as all-regulatory in order to be able to comply with the tax law framework relevant for the provident fund.

Conclusion: Employers should carefully analyze the provisions of the articles of association on the retransfer of assets when selecting a support fund to implement the BAV; especially in the event of termination of membership as a sponsoring company, which becomes relevant, for example, in the event of a change in the implementation path (e.g., to a direct commitment). In general, an all-encompassing exclusion of recovery claims determined in the Articles of Association should not be accepted.

3. scope of offsetting other pension benefits against BAV benefits in accordance with section 5 para. 2 BetrAVG (LAG Düsseldorf judgment dated June 2, 2017, 6 Sa 111/17)

In its ruling of June 2, 2017, the Düsseldorf Higher Labor Court (LAG Düsseldorf) decided that a crediting of pension payments from other sources against BAV benefits pursuant to Section 5 (5) of the German Social Security Act (BAV) is not permissible. 2 of the German Company Pension Act (BetrAVG) is only possible if at least 50% of the pension payments to be offset have been financed by the employer. Eligible pension benefits may also include pension payments from previous employment relationships, provided they were (co-)financed by the other employer.

In the case decided, the parties disputed the amount to which a pension to which the plaintiff employee was entitled from a pension insurance policy, which he financed in part from his own contributions, could be offset against the company pension owed by the defendant employer. The plaintiff was employed by the defendant from 1973 to 2009. He had already been insured under a supplementary pension insurance policy with a civil servants’ insurance association (“BVV-Versicherung”) from his previous employment since 1965. The parties continued the BVV insurance after the commencement of the employment relationship until the end of 1986; with the defendant assuming 2/3 of the contributions and the plaintiff 1/3.

Effective January 1, 1987, the parties agreed on a modification of the BVV, which provided for a waiver of contributions to the BVV insurance at the end of 1986 and, for the period from 1987 onwards, a BAV benefit in accordance with the applicable law on the pension scheme for civil servants and judges in the Federal and State Governments (Civil Servants’ Pension Act). The agreement also contained an offsetting clause that determined offsetting of other pension benefits in the following manner:

“[…] To partially relieve you of the above pension obligations, the pension and survivors’ benefits that you or your dependents will receive from your employee insurance will be offset against the retirement pension or survivors’ benefits. […] Likewise, the pensions that you or your dependents will receive from your supplementary company insurance schemes and/or from your previous company pension scheme will be offset against the retirement pension or survivor’s pension. […]”

In connection with the waiver of contributions to the BVV insurance, the defendant requested the plaintiff not to continue the BVV insurance with own contributions during the further term of the employment relationship, even at a later date. The plaintiff initially complied with this request; however, he continued the BVV insurance with his own contributions from 1997 onwards. The plaintiff did not inform the defendant about this.

After the occurrence of the benefit case, the defendant granted an old-age pension, which it reduced by the share of the BVV insurance based on the personal contributions made by the plaintiff until the end of 1986. For the qualifying period from 1973 to 1986, 1/3 of the BVV insurance benefits were based on the plaintiff’s own contributions; if the insurance contributions paid by the plaintiff since 1997 are included, more than 50% of the BVV insurance benefits were based on the plaintiff’s own contributions.

In his claim, the plaintiff claimed an unreduced pension with regard to his own contributions to the BVV insurance. The offsetting clause specified in the employment contract was invalid. It violates § 5 para. 2 sentence 2 of the German Occupational Pensions Act (BetrAVG), according to which retirement benefits may not be offset against pension benefits if at least half of them are based on contributions by the employee.

The Düsseldorf Higher Labor Court dismissed the action. The defendant had rightly credited to the pension benefits the portion of the benefits from the BVV insurance that was based on the personal contributions made by the plaintiff until 1986. The crediting clause stipulated by the parties in the employment contract was effective. In particular, ineffectiveness does not result from the statutory prohibition of offsetting under Sec. 5 (5) of the German Stock Corporation Act (AktG). 2 p. 2 BetrAVG. According to its wording, the prohibition on offsetting covers all personal contributions made by the employee to the individual pension commitment until the benefits fall due. However, such a consideration of all own contributions would be inequitable for the employer if the employee – as in this case the plaintiff – can arbitrarily bring about the prerequisites of the prohibition of crediting by continuing an already non-contributory BAV commitment with own contributions.

Accordingly, the statutory prohibition on offsetting can only apply to the employee’s own contributions paid to a BAV that is implemented as an original pension commitment during the current employment relationship. In contrast, the statutory prohibition on offsetting does not take into account personal contributions that the employee originally makes to build up further pension entitlements after a contribution exemption. Finally, the fact that the BVV insurance had originally been promised to the plaintiff by his previous employer did not prevent the crediting. Pension benefits from such pension commitments may be offset in any case if the employer has made this pension commitment – in particular in accordance with Section 4 (4) of the German Income Tax Act. 2 No. 1 BetrAVG – and continued it during the employment relationship.

Conclusion: The ruling of the Düsseldorf Higher Labor Court – which is correct in its result and its careful reasoning – vividly illustrates the scope and limits of the statutory prohibition of crediting under Section 5 (5) of the German Income Tax Act. 2 sentence 2 BetrAVG. If, in the course of the employment relationship, the employer grants the employee various BAV commitments which, in detail, provide for offsetting reservations for other pension benefits and are also financed, at least in part, by the employee’s own contributions, the employer must, when granting the pension benefits, carefully examine whether it can grant pension benefits taking into account Section 5 (5). 2 sentence 2 of the German Occupational Pensions Act (BetrAVG). It should be noted that, from a legal point of view, the Düsseldorf Higher Labor Court (LAG Düsseldorf) can only be interpreted by means of a teleological reduction of Section 5 (1) of the German Civil Code (Bürgerliches Gesetzbuch). 2 p. 2 BetrAVG, i.e. by a purposeful restriction of its wording. Employers must therefore carefully analyze the pension commitments in question when specifically assessing any offsetting of other pension benefits.

(4) Even an age gap clause that provides for survivor benefits only if the surviving spouse is no more than 15 years younger than the deceased need not be impermissible age discrimination. (BAG ruling dated February 20, 2018 – 3 AZR 43/17)

The ruling of the BAG of February 20, 2018 dealt with the question of the admissibility of an age gap clause in the context of the granting of an occupational surviving dependents’ pension. In the present case, the plaintiff claimed a widow’s pension from the Pensions-Sicherungs-Verein (PSaG) as the insolvency insurance institution. The man had been promised a survivor’s pension by his employer, which required that the age difference between the spouse and the beneficiary did not exceed 15 years. Consequently, the survivor benefits of the plaintiff, who was 18 years younger than her deceased husband, were not covered. The widow considered this provision of the pension scheme to be discriminatory due to unequal treatment on the grounds of age and filed a lawsuit. While the action was rejected at first instance, the Cologne Higher Labor Court (LAG) upheld it. However, the defendant’s appeal was successful.

The BAG ruled that the exclusion of the company surviving dependents’ pension in the case of a large age gap does not contain any age discrimination in violation of the AGG. First of all, the age gap clause constitutes direct discrimination on the grounds of age in accordance with sections 1 and 3 (3) of the German Civil Code. 1 AGG. However, this discrimination was justified according to § 10 AGG. The employer’s financial risk in providing for the surviving dependents of its employees would be effectively limited by the age gap clause. This represents a legitimate interest of the employer which does not lead to an excessive impairment of the interests of the pension beneficiaries. With an age gap of more than 15 years, the joint life stage of the spouses is designed for the survivor to spend part of his or her life without the pensionable spouse. With regard to the age gap of more than 15 years, only those spouses whose age gap to the spouse significantly exceeds the usual gap would be covered by the exclusion.

Conclusion: The decision of the BAG brings an important clarification on the effectiveness of the exclusion of the survivor’s pension in case of a large age gap of more than 15 years under the application of the AGG. The effectiveness of the distance clauses in the event of a smaller age difference remains open (subject to the reasons for the ruling not yet being available). In view of the now very finely structured case law of the BAG on the admissibility of a limitation of survivors’ benefits, such clauses must always be carefully drafted.

Federal Cabinet approves 2018 social security calculation parameters

On 27.09.2017, the Cabinet approved the Ordinance on Social Insurance Calculation Sizes 2018.

With the Ordinance on Social Insurance Calculation Parameters 2018, the relevant calculation parameters of social insurance have been adjusted in accordance with the development of income in the past year. The income trend in 2016 on which the 2018 social security calculation figures are based was 2.42% in the federal territory (old federal states 2.33%, new federal states 3.11%).

The determination of the respective income development is based on the change in gross wages and salaries per employee excluding persons in work opportunities with compensation for additional expenses (“one-euro jobs”).

Expiry of the transitional period of the Mobility Directive

The Mobility Directive of 30.04.2014 pursues the goal of improving the free movement of employees in the member states of the European Union as well as reducing obstacles in the area of occupational pension schemes that may arise when employees change jobs across borders. With a view to the expiry of the transition period on January 1, 2018, we have compiled the important new regulations for you.

If an employee leaves the employment relationship prematurely without a pension event having occurred, the entitlement financed by the employer is in principle only maintained on a pro rata basis if the vesting periods have been observed (Section 1b (1) BetrAVG). Under the old BetrAVG, the pension commitment had to have existed for at least five years and the employee had to have reached the age of 25 when leaving the employment relationship. These deadlines have now been shortened: for pension commitments made as of 01.01.2018, a (uniform) deadline of three years applies with regard to the duration of the commitment and the completion of the 21st year of life on leaving the company.

Preservation of vested rights

The new German Occupational Pensions Act (BetrAVG) prescribes the dynamization of pension entitlements in that the development of these entitlements is to be based on the value of the entitlements of active pension beneficiaries or on the development of the pensions currently being paid out. According to § 2 para. 5 of the German Occupational Pensions Act (BetrAVG), in the event of termination of the employment relationship, the pension entitlements are to be calculated in accordance with the applicable pension commitment using the assessment bases at the time of departure (change block). A new prohibition of discrimination with regard to the value of a vested pension entitlement has been introduced. An employee who leaves the company may not be disadvantaged compared to employees who remain active with regard to the value of their vested pension rights.

Extended information requirements

The obligations of the employer or the pension provider to provide information in Section 4a of the German Occupational Pensions Act (BetrAVG) are more extensive than was previously the case. An automatic regular mode of providing information will not be introduced. Instead, the employee must request information in each case. A “legitimate interest” is no longer required as of 01.01.2018. The following information must also be provided under the new law:

• whether and how an entitlement to a company pension is acquired (Sec. 4a (1) No. 1 BetrAVG nF);
• Amount of the achieved and attainable entitlement to retirement benefits (Sec. 4a (1) No. 2 BetrAVG),
• Effects of the termination of the employment relationship (Sec. 4a (1) No. 3 BetrAVG) and
• Development of the entitlement after termination of the employment relationship (Section 4a (1) No. 4 BetrAVG).

Settlement of small entitlements

Provision may be made for severance pay in the event of termination of the employment relationship if the value of the severance pay does not exceed a certain threshold. The employer may also settle low-value rights and pension entitlements without the employee’s consent by making a one-off, appropriate lump-sum payment in order to avoid unnecessary administrative expense (Section 3 (2) BetrAVG). The settlement of a pension entitlement only requires the consent of the employee if, after termination of the employment relationship, the employee establishes a new employment relationship in another member state of the European Union and notifies his former employer of this within three months of termination of the employment relationship (Section 3 (2) sentence 3 BetrAVG).

Personal, material and temporal scope of the new regulations and transitional provisions

From a geographical point of view, the scope of the new regulations is generally limited to international situations. In principle, they do not apply, for example, to situations in which the employee changes employer within the Federal Republic of Germany. However, the legislator may deviate from this principle and extend new regulations to such domestic situations (cf. e.g. Sec. 3 (2) Sentence 3 BetrAVG).

The material scope of the Directive applies only to retirement pensions and not to invalidity and survivors’ pensions. Nevertheless, the implementation is the same for all supply cases.

The temporal scope of application is derived from Section 30f of the German Company Pensions Act (BetrAVG). According to this, the shorter vesting period of the revised version only applies to commitments made on or after Jan. 1, 2018. During a transitional period, the more favorable period, calculated from January 1, 2018, will also apply to older commitments (Section 30f (3) BetrAVG). The prohibition of discrimination shall only apply to periods of employment after December 31, 2017 and shall furthermore not apply to pension plans that were closed before May 20, 2014.

Discount rates as of December 31, 2017

The pension provision recognized in the balance sheet is largely determined by the discount rate. The following comments deal with the current status of accounting interest rates under HGB and IFRS at the end of 2017.

For valuations of pension or similar long-term employee benefits, identical valuation assumptions are usually used for HGB and IFRS, with the exception of the discount rate. Whereas the discount rate under IFRS (IAS 19) is a reference date value, an average value is used under German GAAP.

§ 253 para. 2 HGB prescribes a market interest rate for the measurement of pension obligations that is appropriate to the term of the obligation, calculated as an average over the last 10 years and published monthly by the Deutsche Bundesbank. Other provisions with a remaining term of more than one year (e.g. partial retirement or anniversary obligations) are to be measured using a 7-year average interest rate. Furthermore, there is a simplification rule (widely used in our experience) that a 15-year average remaining term of the obligations may be assumed (irrespective of the actual remaining term). The interest rates as of December 31, 2017 for a remaining term of 15 years are:

• 10-year average: 3.68 %
• 7-year:average: 2.80%.

The corresponding comparative figures as of December 31, 2016 were 4.01% and 3.24%, respectively. Viewed in isolation, the lower discount rates lead to an increase in the amount of the obligation. For an average sample portfolio, the decrease in the 10-year average interest rate by 23 basis points compared to the previous year results in an increase in pension provisions of around 5% (excluding inventory effects and other valuation assumptions).

IFRS Interest rate

In accordance with IAS 19.83, the IFRS discount rate is generally determined with matching maturities on the basis of the market yields of high-grade corporate bonds applicable at the reporting date. As IAS 19 leaves some discretionary scope here (e.g. selection of the underlying bonds or different extrapolation methods), there is not one IFRS discount rate, but regularly a certain range of permissible interest rates, whereby the respective discretionary decisions are always subject to the general consistency requirement. As of December 31, 2017, KPMG calculated a value of around 1.9% for an average mixed portfolio (i.e., approximately half obligations to pensioners and non-pensioners) in Germany. The IFRS interest rates determined by KPMG at the end of 2017 are therefore only slightly above the level of the previous year. For valuations as of December 31, 2017, only relatively minor effects from the change in the discount rate are therefore typically expected.

Outlook for tax interest rate – Submission to the BVerfG on Section 6a of the German Income Tax Act (EStG)

For tax valuations of pension obligations, an interest rate of 6% is still specified in Section 6a EStG. Only time will tell to what extent the question submitted to the Federal Constitutional Court by the Cologne Fiscal Court in October 2017 as to whether the discount rate of 6% for determining pension provisions for tax purposes can still be regarded as constitutional will possibly bring new movement in this regard. Possible effects relate, among other things, to the severance payment pursuant to Sec. 3 para. 5 BetrAVG, the transfer value pursuant to § 4 para. 5 BetrAVG as well as the settlement value within the framework of the pension equalization proceedings. We will inform you about current developments in due course in a client alert.